Rich Dad / Robert Kiyosaki Blog

May 10, 2009

Interview – Kiyosaki before the Dot.Bomb

Filed under: Interviews, Paper Assets — Tags: , , — ~ @ 3:30 am

Australian Broadcasting Corporation – LATELINE
http://www.abc.net.au/lateline/archives/s117538.htm
Interviewer: Chris Clark        Date: 10/4/2000

Who wants to be a millionaire?

It has been a rollercoaster ride for the past couple of weeks, but almost as fast as it goes down, the stock market bounces back up again. But how safe is the ride? Is a crash on the way?

———

CHRIS CLARK: So how should we read these market signals? What are the risks facing investors and the wider economy?

Robert Kiyosaki is the author of ‘Rich Dad, Poor Dad’, which was the No.1 selling non-fiction book in Australia last year. He’s back here promoting his latest one, ‘Rich Dad’s Guide to Investing’. Robert Kiyosaki claims to have already lost two fortunes — he’s now on his third — and he joins us from Cairns.

Robert Shiller also has a bestseller on his hands — his book ‘Irrational Exuberance’ is all about how this stock market boom is heading for bust. Last week, Professor Shiller was among a select group, including Bill Gates, who were invited to the White House to offer President Clinton their thoughts on the new economy. Robert Shiller joins us from Yale University where he’s Professor of Economics.

Roger Montgomery was still at school when the stock market had its last big crash in 1987. Now he runs his own company called Investor Advantage which develops and presents courses in trading and investing. His clients include the Australian Stock Exchange and the Sydney Futures Exchange.

CHRIS CLARK: Robert Kiyosaki, would rich dad be putting his money into this stock market at the moment?

ROBERT KIYOSAKI: I think he’d be very cautious right now. As you said earlier, the thing that concerns me right now is we have more new investors, young and old, and a new investor is anybody who has been in the market less than 10 years. We also have more borrowed money in the market. And the third thing you brought up that’s very accurate is that today, with electronics, we can now trade a trillion dollars in less than a split second, money can move faster, which means when the crash comes, if it comes, it will be faster, quicker and more devastating than we’ve ever seen before.

CHRIS CLARK: So what’s the word on the inside where you trade? What are people expecting out of this market? What are the rich people doing with their money?

ROBERT KIYOSAKI: Well, it is confusing for most of us. Most people know me as an author, but I’m also a partner in an adventure capital firm. What concerns us, I see very good companies come to market to float, but nobody is interested in them. What people are interested in are these highly speculative, no fundamentals, anything with a dotcom after it, people will throw literally billions after it. As an insider, I sit and wonder how is that thing floating because there really is no reason for it to float.

CHRIS CLARK: Okay, so what does that tell you about the psychology operating in the market at the moment?

ROBERT KIYOSAKI: They’re gambling. People are gambling at high speed right now, and what concerns me is people are gambling with borrowed money. That, plus the high speed of transactions today, is adding fuel to a very treacherous situation right now.

CHRIS CLARK: Robert Shiller, how do you explain the movement in the Nasdaq that I referred to earlier, these wild swings, enormous swings?

PROFESSOR ROBERT SHILLER, ECONOMIST, YALE UNIVERSITY: Well, the April 4 drop and then rebound in the same day is the kind of puzzle that has recurred in history many times. We never understand it. The puzzle was that there was no news. People imagine that markets respond to news, but in fact the market was responding to itself. Initial price declines cause more price declines.

CHRIS CLARK: So what are we talking about here, just a herd moving towards the exit and then back for no reason at all?

PROFESSOR ROBERT SHILLER: Well, the investors are inherently intuitive and confident.  Those that trade are overconfident. They have intuitive feelings that the market is going to drop. They judge the psychology of the day. At some point in the day, they got a different feeling. As strange as it may seem, that’s the kind of thing that drives the market on an unusual day like that.  CHRIS CLARK: Well, you’ve studied this sort of phenomenon in detail. You asked people after the ‘87 crash why they acted as they did. What sorts of lessons did you draw from that and what are the parallels to what we saw, say, last week on the Nasdaq?

PROFESSOR ROBERT SHILLER: The ‘87 October 19 crash was the biggest crash in history. I asked people to comment on the various news stories of the day, none of which seemed very important, and they thought they were all sort of important, but the most important news story that they commented on was the beginnings of the crash itself, and the price movements of the preceding week. It really clarifies that when you see big price movements, people are thinking about those above all else. Hence the kind of big price movement we’ve seen just now carries with it the possibility of generating more.

CHRIS CLARK: So what you seem to be describing is a market that is inherently unstable at the moment.

PROFESSOR ROBERT SHILLER: Right. I think the market is essentially a chaotic feedback loop — not all times. Obviously, it responds to fundamentals at normal times, but at extreme times like this, when high attention is focused on the market, we can see kind of self-fulfilling prophecies develop, and it creates major movement.

CHRIS CLARK: A chaotic feedback loop, Robert Kiyosaki, is that a good way of describing it at the moment?

ROBERT KIYOSAKI: I would agree wholeheartedly with Robert Shiller, it’s what’s called reflexivity, where the market just eats itself or builds itself.  I don’t think anybody knows what it feels like to make your call and have your broker say, “There’s no buyers, there’s no buyers.” You’re yelling, “Sell,” and they’re saying, “There’s no buyers.”It’s a terrible feeling.

CHRIS CLARK: So in ‘87, Robert Kiyosaki, did you lose in the crash of ‘87?

ROBERT KIYOSAKI: No, I didn’t. By that time I was a little bit smarter and I was outside of the market by then.

CHRIS CLARK: Is that your advice now then, get out of this market while you can?

ROBERT KIYOSAKI: I tend to say be prepared for whatever happens. My greatest concern, the people who are borrowing, I would say right now be prepared. Don’t have any more money in than you can afford to lose right now.

CHRIS CLARK: Roger Montgomery, you weren’t trading in ‘87, you were still at school, but I guess reading about it in the newspapers, watching it on television. What are you telling people now about the state of this market and how risky it is?

ROGER MONTGOMERY, DIRECTOR, INVESTORS ADVANTAGE: The biggest fallacy of the market, or in the market, is that it’s supposed to make sense. As far as I can see, it has never made sense.  One of the things that’s so unpredictable about the market is that it’s driven largely by investor sentiment. Fundamentals do play an important part in the long-term and ultimate direction of the market, but the short-term and intermediate price movements can often be based on expectations, and, again, the direction long term really is dependent on whether or not those expectations are met.

The expectation has been in the last few years that growth companies are the way to go, that companies with a dotcom, as Robert mentioned earlier, at the end of their name, that’s going to be the future. That’s absolutely right. There’s no doubt about it. We are communicating in a new way and it will be the future, but it does not mean that every single company that lists on an exchange with a dotcom behind it is going to survive.

CHRIS CLARK: Our impression is of a bunch of new investors, very young investors, people your sort of age, around 30 or so, who have enormous faith in that market. Is that what you’re finding out there at the moment, people coming up to you saying “what should I do, what should I get into?”

ROGER MONTGOMERY: Well, actually, in the recent weeks I’ve had a number of people approach me and say, “Look, Rog, last year was a terrific year, everything I bought went up.” And that reminded me of when I first started in the market, brokers were reminding me of ‘87 and saying, “Look, ‘87 was a terrific year, you just bought anything and it went up.” Last year was a little like that. Those same people have approached me and said, “Look, I really don’t know what to do. None of my stocks are up. They’re all down. When do I get out?”

That’s the big question, and it’s a question that can only be answered with an appropriate strategy. It’s a little bit hard to give advice after the event and after they’re losing money. But many people hold on to a stock when it’s losing money, they’ll hold onto it sometimes until it’s delisted or they’ll hold onto it for the rest of their lives until it gets back to a price that they got in at.

CHRIS CLARK: You’re largely talking about a market in which a high percentage of people seem to be gambling, then, Roger?

ROGER MONTGOMERY: That’s absolutely correct. There’s no doubt about it. If people don’t have a strategy before they invest and before they trade, and if they’re not properly educated before they get involved in any investment or security class, they are gambling. The whole point of having a strategy is to give the investor a statistical edge, an advantage. So, while they might still be gambling, the idea is that they’re the casino and they have the odds in their favour.

CHRIS CLARK: Now, Robert Kiyosaki, your books are all about encouraging people to make money, and to make money, you’ve got to take the risk. How many people actually follow your advice, though, do you think, and how many read your book and then rush headlong in?

ROBERT KIYOSAKI: I don’t advise anybody to head into it. The thing I’m saying to people is that if you are a sophisticated investor, you’ll make money in an up market, but you’ll make even more in a down market. So I agree with what Roger was saying, that education is more important today, more than ever before. But there’s good markets and bad markets and the good investor can do well in either one of them.

CHRIS CLARK: Roger Montgomery, you’d be familiar with Robert Kiyosaki’s books. Is that the sort of basis that you’d use to go about figuring out whether you wanted to invest in the stock market and how to do it?

ROGER MONTGOMERY: I think it’s important that people understand that markets don’t go up forever. Interestingly — let me tell you a very quick story. I had a call last year, when I was working for one of the biggest banks in the world, someone said, “Roger, those stocks that go up and down, do you have any that just go up?” That’s the level of understanding for some individuals in the marketplace. With that level of understanding, they’re throwing the money at the market. That’s completely, I guess, irresponsible, and it is irrational. I suspect that it’s part of the reason that the market has been driven to the high levels that we’ve seen it at in recent times.

CHRIS CLARK: Robert Shiller, let’s talk a little about where people are getting the money to invest, because I know you’re concerned about what we call margin lending, but, I mean, in a broadest sense, borrowing to invest. What’s happening in the States at the moment about that?

PROFESSOR ROBERT SHILLER: Well, the margin credit, which is loans made to buy stocks, have increased 87 per cent in the last year, and, of course, people buy stocks with other sources of credit which they now have, like credit cards, home equity loans, student loans. So a lot of people are getting themselves over their head.

CHRIS CLARK: Why the growth in margin lending?

PROFESSOR ROBERT SHILLER: Well, it’s because there’s a demand for it. The public wants to take part. People are not happy with just buying the stock market. It’s not enough for them. It’s this gambling mentality that was referred to a minute ago. They want to double their risk. That’s how you do it, you borrow 50 per cent of the money — double your risk.

CHRIS CLARK: You mentioned that margin lending has gone up something like 87 per cent in the last year in the US. But it’s true, is it not, that it’s still way below what we saw margin lending at in, say, the ‘29 crash? Why should we be worried about it?

PROFESSOR ROBERT SHILLER: The ‘29 crash occurred in a different institutional environment, where they didn’t have credit cards, they didn’t have home equity loans, student loans I suppose were harder to get. You can’t compare the numbers between now and ‘29, but you can note that the margin lending is at — extraordinarily high. Not since ‘87 has it been this high.

CHRIS CLARK: It’s not just through official channels, not just through brokers and through other financial institutions, but it’s people literally putting the house on the line?

PROFESSOR ROBERT SHILLER: What’s happened now, it used to be that the board of governors in the US would adjust margin requirements. When the market looked speculative, they would say, “Hey, wait a minute, we have to cool this down,” and they would raise margin requirements. That’s no longer done. Now, the market can do whatever — public figures seem to think the market has to be left on its own, with no moral persuasion or anything. The market has gotten out of hand.

CHRIS CLARK: Roger Montgomery, what’s the Australian experience, at least anecdotally? We know that it is going up here. The year on year increase, officially, is something over 60 per cent, not as hot as the States. What’s your experience out in the marketplace?

ROGER MONTGOMERY: People are pretty savvy these days. People are borrowing money through other means. The reason they do that is because in Australia, unlike the US, there are certain restrictions on what margin lenders are willing to lend money against. There are only certain stocks they’ll lend money against. Most of the speculative stocks aren’t included in those lists, and rightly so, because it would put the margin lender at a great deal of risk should there be a correction in the market.

CHRIS CLARK: Sure, but are we looking at investment here, where people are racking up credit card bills, taking personal loans? There’s nothing to stop me going to the bank and telling them I’m gonna use the personal loan for one thing and then putting it in the share market?

ROGER MONTGOMERY: No, that’s exactly right. In fact, on a flight down here this morning to Adelaide, I was sitting next to a colleague who’s also a commodity trading advisor, and he actually told me that a number of his clients have borrowed money against their house to invest in the share market — I shouldn’t say invest, to trade the market.

CHRIS CLARK: Well, would you advise anybody to borrow and then trade in this market at the moment?

ROGER MONTGOMERY: Look, let me say this, leverage is a useful tool. It can accelerate gains for people who want those gains. There’s no doubt about it. But there are high risks associated with leverage. People need to understand those risks before they get involved.

CHRIS CLARK: OK, Robert Kiyosaki, do you think there should be — people should be wary of this? Would you consider borrowing to invest in this stock market at the moment?

ROBERT KIYOSAKI: I agree with Roger, you have to be educated. But there’s something else going on in America — my neighbour’s portfolio went up by $2 million and he went out and bought himself a bigger house. So, because of his paper gains, and I restate the word ‘paper’, he’s going into debt with a new house and bigger cars. So that’s also going on. So this borrowing is an epidemic.

CHRIS CLARK: Robert Shiller, it’s one thing if people decide to blow their own money on the share markets, it’s another, of course, if they start borrowing other people’s money and losing that as well. What are the potential effects of a crash if so many people are borrowed so much? Could it affect the real economy as well as just the stock market?

PROFESSOR ROBERT SHILLER: Well, it has both distributional effects across people and it has macro effects. The distributional effects are that some people put all their savings in the market and they will, of course, have a tough time. The macro effects is it could affect consumer confidence and it could cause a major recession. There’s not much the Federal Reserve Board can do with monetary policy if confidence is gone. That can cause a serious recession.

CHRIS CLARK: Is there any way of heading it off? You’ve got a piece in the ‘Wall Street Journal’ today or tomorrow, I think, suggesting that margin lending restrictions be increased. What’s your idea?

PROFESSOR ROBERT SHILLER: Well, that’s right.  The government authority, the wise men who were appointed on our Federal Reserve Board, have kind of a moral obligation to speak their mind and do a little bit more than that. I think margin requirements are a little like warning labels on cigarettes or alcoholic beverages. A lot of people might think it’s OK for me to take these risky investments. We should see a statement from the Government that there’s a concern and that margin requirements are being increased because of this concern.

CHRIS CLARK: It’s at 50 per cent now, isn’t it? What would you increase it to?

PROFESSOR ROBERT SHILLER: Well, if the old fed were in charge, it would be 100 per cent today, I think. There would be no margin lending. I wouldn’t want to go that far. I’m just proposing an initial modest increase to, say, 60 per cent.

CHRIS CLARK: Robert Kiyosaki, can you save people from themselves? Would there be any point in increasing margin lending restrictions or will people go out and find the money somehow?

ROBERT KIYOSAKI: As you and I talked about it earlier today, I think the only way you become old and wise is start off kind of young and foolish. I started off young and foolish. So nobody could tell me when I was a lot younger. So I think people will get well educated in the next correction.

CHRIS CLARK: Roger Montgomery, what’s your view? Does Australia need to tighten up here? We talked about formal margin lending requirements here and the fact you can’t get loans on particular purchases. But That doesn’t cover all the credit card transactions and other ways of getting money, does it?

ROGER MONTGOMERY: No, absolutely not. People need to realise where we are in the market cycle. That’s part of the education process. I think it’s also part of the responsibility of the financial advisers, to make sure people understand what can happen in a correction, not only that, to make people realise that when interest rates are rising and the stock market is rising, it’s actually a very bearish sign for stocks. There was, I think, 13 corrections in the last 100 years that exceeded 33 per cent in the US and each one of those was preceded by rising interest rates. So, it’s a harrowing time in the market. There’s no doubt about that and people need to be very careful.

CHRIS CLARK: Robert Kiyosaki, are you concerned a crash could tip us into recession?

ROBERT KIYOSAKI: Well, What I say to people is that if you live to 75 years of age, if history is any guide, at 75 you’ll have gone through two recessions and one depression. The last depression was in 1930, or the beginning of it. So we’re 70 years into that right now, if history is any guide. So, I’d be concerned personally.

CHRIS CLARK: Robert Shiller, are people listening to you? When you go to the White House, do you find that there are a few more bears around and you’re not so outnumbered by the bulls these days?

PROFESSOR ROBERT SHILLER: Audiences are often apparently sympathetic. I don’t get hecklers. But there are a lot of people out there, I think they hear this but still have the impulse to plunge. There’s a psychological component that’s hard to describe. It’s dangerous to many people, especially younger people.

CHRIS CLARK: It looks like you might have a bull market in sales of your book anyway, at least.

Gentlemen, thanks very much for talking to us on Lateline tonight. We’ll talk to you after the crash.

ROGER MONTGOMERY: Thanks very much, Chris.

ROBERT KIYOSAKI: Thank you.

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1 Comment »

  1. […] Original post by ~ […]

    Pingback by Interview - Kiyosaki before the Dot.Bomb · Stocks.ExplainedHere.Com — May 10, 2009 @ 5:47 am


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