Control over Your Emotions

Warren Buffett often says, “If you cannot control your emotions you cannot control your money.”

In the late 1990s a friend's wife said to me, “As a close friend, you're aware that we've recently made a lot of money. We've never had so much money. But now I'm terrified that we are going to lose it all.” By the end of 2001 they had indeed nearly lost it all. What they were afraid would happen, did, in fact, happen. Their fear of losing became a self-fulfilling prophecy.

Rich dad said, “Money is an emotional subject. If you cannot control your emotions, your emotions will control your money.” He also said, “When it comes to money, many people are financial hypochondriacs.”

In the fifth grade, I began to read books on the great seagoing explorers such as Columbus, Magellan, Cort ? z, Cook, and others. It was because of their stories that I believe I wound up at the U.S. Merchant Marine Academy, at Kings Point, New York. Although I went into the Marine Corps after grad uation from Kings Point, my love of the sea has never left me.

Recently, I read one of the best books I have ever read about life on ships, In the Heart of the Sea: The Tragedy of the Whaleship Essex, written by Nathaniel Philbrick. The book is based upon a true story about the whaling ship Essex. In the early 1800s, the Essex sailed from Nantucket, twenty-five miles off the coast of Cape Cod, Massachusetts, around South America and out into the middle of the Pacific Ocean near the equator. It was supposed to be a voyage that would last two to three years. Unfortunately, the voyage came to a sudden end when a giant sperm whale rammed the ship and sank it.

If this story sounds familiar, it is because Herman Melville's Moby-Dick was taken from the true story of the Essex. Having read both books, the story of Moby-Dick pales in comparison to the real tale of what happened to the crew of the Essex after it sank. In fact, the story of Moby-Dick ends after the ship is rammed; the story of the Essex begins after the ship is rammed.

As the Essex slowly began to sink, the crew of approximately twenty men climbed onto the three smaller whaleboats. Once provisions were trans ferred from the Essex to the whaleboats, the captain and the crew had to de cide what they would do next. One option they discussed was simply raising their sails and letting the wind blow them to Tahiti, an easy trip they esti mated would take about a week.

Suddenly one of the crewmen said, “But the Tahitians are cannibals!” That was all it took. With that frightening thought, the mood of the crew in the three whaleboats changed and they decided it was best they sail and row back to Chile, even though it was much farther away and it meant traveling against the wind. They chose Chile because they were familiar with Chile and felt they would be safer there than with the “cannibals of Tahiti.” So off they sailed, straight into the wind.

More than ninety days later, one of the small whaleboats was sighted by another whaling ship from New England. As the captain of the whaling ship pulled alongside, he saw a man who looked like a skeleton in the bow of the boat and another man, just as skeletal, in the stern. In the middle of the boat was a pile of bones, the bleached bones of their fellow crewmembers. The men of the Essex had become what they were afraid of. Their fears had be come a self-fulfilling prophecy.

The story of the Essex is much more than a gruesome story of cannibal ism, it is also about a weak captain and a group of people who let their emo tions do their thinking. It is about a group of men letting the thought of security determine their future. Instead of sailing to Tahiti, they chose to sail back to what they felt familiar with, even though professionally they knew that sailing back to Chile was almost impossible.

It is also a story of assumptions. Remember assumptions from earlier in this book? Well, no one ever questioned the sailor who made the comment that the Tahitians were cannibals. All of the men were from New England. None had ever been to Tahiti. No one simply asked, “Have you ever been to Tahiti?”

Soon after the Essex tragedy, both Hawaii and Tahiti became paradise for whalers from all over the world. As a young boy, after reading about the great times whalers had in Tahiti, I used to dream of one day sailing a ship to Tahiti, a dream that came true in 1967. In fact, it was my dream of sailing to Tahiti that most inspired me to go to school in New York. In 1967 I sailed from Hawaii to Tahiti as a student on board an oil tanker. Instead of finding canni bals, I found a paradise far better than that of all my youthful dreams. I still dream of Tahiti and the beautiful people I met there.

For my wife, Kim, and me, investing is paradise. Investing means freedom, wealth, and security. While there is risk in investing, as there is risk in sailing to Tahiti . . . the risk and the alternative are worth it. Sadly, many people take investment advice from so-called investment professionals who themselves have never been to paradise. Instead, many people assume that the people advising them know what they are talking about.

The underlying point is that when it comes to money, too many people allow their emotions to do their thinking for them. Our emotions are powerful forces . . . and emotional thoughts have the power to become selffulfilling prophecies if not controlled. If you are to become captain of your own ark, one of the most important controls is the control over your emo-tions. Once I heard my friend's wife say, “I'm terrified that we are going to lose it all,” I then knew her emotions had taken over her life. Even though they had more than enough money to live in paradise, they never made it. Instead their fear determined their fate, and indeed they nearly lost it all.

In explaining this phenomenon to his son and me, rich dad said there were three levels of controlling thought. They are, lower, middle, and higher thought. He said, “When someone is speaking from their lower levels of thought, they often say things such as ‘investing is risky' or ‘what if I lose'—they are speaking from their lower level emotions.” Rich dad explained further by saying, “When it comes to money, most people never get out of the lower levels of thought.” As usual, I did not fully understand what he meant, but as I grow older, I notice that many people are stuck in lower levels of thought, especially around the subject of money. I have dear friends who live in fear of investing, taking risks, and losing money. They cannot seem to shake these thoughts, and in some cases these thoughts become self-fulfilling prophecies. Some of these friends have millions of dollars in the bank, living as cheaply as possible, living in fear of losing that money. In many ways they have lost—simply because they live like they do not have any money. They live like they have lost it.

Teaching us how to get out of lower levels of thought, rich dad said, “If you decide that you do not want these lower level emotions to run your thinking, you need both the middle level as well as the higher levels to pull you out.” He was saying that it was our middle mind—the rational mind— that needed to learn the technical financial skills required. For example, when I was afraid of investing in real estate, rich dad suggested I take a course on real estate investing. By following that advice, my rational mind overcame my emotional mind and off I went to a weekend course on real es-tate investing. After the course, my fears were still there but at least I felt better prepared to undertake the learning process that lay ahead. In 1973, that real estate course cost me $385 but over the years I have made millions of dollars from taking that seminar.

Now, this is where the higher mind comes in. In spite of the fact that I have looked at thousands of potential real estate investments, have done nearly a hundred real estate transactions, and I consider myself successful at real estate investing, my lower mind's doubts and fears still kick in. My wife, Kim, and I are about to close on over $10 million worth of real estate this month alone. The nervousness and doubt from my lower mind are still with me. This is where the higher mind comes to the rescue. Because I have gone through the process of finding, buying, selling, and managing property so many times, when the fears of my lower mind act up, it is my higher mind that takes control. It comforts the doubts and fears of the lower mind and tells my middle brain to begin searching for the new information, advice, or education that my lower mind needs to feel more secure. Most noninvestors do not have the technical skills in the middle mind, or the years of experience of the higher mind, to pull them out of the powerful grip of the emo tions of the lower mind . . . so ultimately their lower mind runs the show. This is one reason why financial education is so important. Because once you learn about finances, you can rely upon your middle mind to break the grip of fear and doubt of your lower emotional mind. When I look back upon my life, it was my rich dad playing Monopoly with me, and supplementing the game with real-world advice and experience, that helped me overcome those doubts and fears that we all have.

After he finished college, Warren Buffett invested $100 in a Dale Carnegie course. Reflecting on his investment he said, “I did not take the course to prevent my knees from shaking when public speaking . . . but to do public speak ing while my knees were knocking.”

Kim and I invest even though we have fears and doubts. It is the chal lenges offered by our own personal fears and doubts that make investing so exciting. In other words, we do not let our lower mind run our lives. We use our doubts and fears to make our lives better.

The reason that $385 real estate course in 1973 was so important was because the course and my rich dad's prior financial education provided the bridge to my higher mind. Even though I know that any piece of real estate can turn from an asset into a liability quickly, it is my higher mind that keeps me stable and thinking clearly through the challenges of being a professional investor.

Being skipper of your own ark does not mean you are free of doubts and fears. Being human means that we all have those doubts and fears. In fact, you would not be a good skipper if you did not have those worries. But if you are going to be a good skipper, you will need the help of your middle mind and your higher mind in guiding your ark, especially if you want to get through the rough seas that lie ahead and still get to paradise.

As a young boy, I saw the movie Mutiny on the Bounty with Marlon Brando. I can still remember the scene where the Bounty pulls into a harbor in Tahiti and several outrigger canoes approach the ship, filled with beautiful Tahitian maidens, smiling, waving, and shouting “Hi sailors.” I know it wasn't possible back then, but if the crew of the Essex had seen that movie, instead of deciding to sail to Chile, they would probably have said, “Who cares about the cannibals? Let's go to Tahiti.” That's the power of a little education.

It takes very little financial education to save money. As rich dad said, “I could train a monkey to save money.” Similarly, it takes very little financial education to diversify. The reason most people save, and if they invest, they diversify, is because they lack the proper financial education of their middle mind. If they had that financial education they might be more will-ing to venture out into the real world outside the chicken coop and find a world filled with opportunity and abundance. They will also find a world of crooks and liars . . . but after Enron, we know crooks and liars are also found inside the coop. The point is, without that financial education to their middle mind, staying inside the safety of the coop, saving money and diversifying their mutual funds, is the smart thing to do and often the only thing they can do.

Many people inside the coop think it's smart is to be debt free. Early in my life, rich dad pointed out that there was good debt and bad debt. He said, “Good debt is debt that makes you rich and bad debt is debt that makes you poor.” The reason so many people inside the chicken coop think debt is bad and being debt free is smart is because in their world, the only kind of debt they know is bad debt. So again, in their world, being debt free is smart.

If you are going to be the captain of your own ark, you will need to know the difference between good debt and bad debt. As students at the Merchant Marine Academy, we studied ship design extensively. One of the things we were taught was that small boats did not need ballast and big ships did. Ballast is, of course, the weight put in the bottom of the ship, so that the ship will remain upright. For example, when large sailing ships went from Europe to the New World of America, most of the ships went over empty. If they did not put ballast in the holds of those ships, they would have capsized. A favorite form of ballast in the good old days of sailing ships was river rock. That is why today, wherever sailing ships tied up in America, you can still find piles of river rock, which came over from Europe in the bottom of sailing ships.

Obviously, once the ship arrived in America, the river rock ballast was taken out and the cargo bound for Europe took its place.

The point is if you build a tiny ark, let's say an ark the size of an eight-foot rowboat, you do not need any ballast. In a small boat, the less ballast the better. But if you are to build a big ark, ballast is always a factor. In the world of the B and I quadrants, the science of using debt as leverage, i.e., good debt, is an important science. If you build a small ark, being debt free or ballast free is smart and you do not need to learn the science of managing good debt. In a small ark, any kind of debt is bad debt.

Early in my life, rich dad taught us how to borrow money rather than get out of debt. His reasoning for teaching us to be borrowers was so that we would someday be able to manage big arks. One of the most important lessons he taught us was that if you are going to acquire bad debt, a financial education or financial statements were not required. He said, “If all you want is bad debt, the banker will not require you to have a financial statement. All you need to buy a home, car, or receive a credit card is a simple credit application. But if you want good debt, debt that makes you rich, the banker will require you to have a financial statement. Before letting you have good debt the banker first wants to see your financial report card—your financial statement—to find out if you are smart enough to handle good debt.”

I now more fully understand and appreciate rich dad's lessons on the differences between good debt and bad debt. I know that bad debt comes at higher interest rates. If a person does not have a financial statement, the banker assumes the person is not financially educated and naturally charges a higher rate of interest for the risk of loaning money to someone without much financial training. Yet, if I come in to borrow money for a business or investment real estate, he will require a financial statement. In this case, the banker wants to see your financial report card before he risks lending you money at a lower interest rate.

The same is true for people who save money. If you lack a solid financial education, the banker will pay you the lowest interest rate possible. If you are financially savvy, there are many programs that will pay far higher interest rates. An example of this is the 2 percent taxable interest versus the 7.75 percent tax free interest I wrote about in an earlier chapter. In other words, the fear of the lower mind is also very expensive to people who save. So if you want to be the captain of a big ark, you need to know the difference between good debt and bad debt as well as good interest and bad interest.

Diane Kennedy, CPA, my tax strategist, and a Rich Dad's advisor, makes the following point. Referring to the CASHFLOW Quadrant she says, “If you live in the world of the E and S quadrants, you do not need financial statements.”

Continuing, she says, “If you live in the world of the B and I quadrants, financial statements and a good financial education are mandatory.” And she does emphasize the word mandatory. She also adds, “Many times, a financial statement is required by law in the B and I quadrants. In most instances, the law does not require them for people in the E and S quadrants.”

The point is that ERISA and its subsequent amendments resulted in millions of people moving from the E and S quadrants into the I quadrant . . . but without the proper financial education. Because they lack this financial education to their middle mind, millions of people have become financial prisoners, held hostage by the doubts and fears of their lower mind.

Some people are not good investors because they are too well educated and become trapped in a world of analysis paralysis. They live in what rich dad called The World of What If . . . what if this goes wrong, what if that goes wrong. In the world of investing, the term can't pull the trigger often refers to someone who knows all the answers, but just cannot bring themselves to put money on the table. They come right up to the brink of investing but their lower mind overpowers their middle mind and they do not go through with the investment and enter the real world. These people are best staying with the pat formula—invest for the long term, dollar cost average, and diversify, diversify, diversify. Their fear and doubt are in control.

Warren Buffett says, “If you have to go through too much investigation, something is wrong.”

It was the financial education I received from rich dad starting at the age of nine that helped me control the fear of investing. I still have fear but through education and experience I was able to start building my ark. One of the biggest surprises in my life was to finally become financially free. I had always thought that once I had enough money I could retire, sit on my ark, and take life easy. In 1994 at the age of forty-seven I finally completed the ark. Then I found out how boring life was just sitting on my ark and that is why in 1996 I created the board game CASHFLOW 101.

In 1997 Rich Dad Poor Dad, the first in the Rich Dad series, was published with the assistance of my business partner, Sharon Lechter, who took my notes and transformed them into a book. Today we are busier than ever, sometimes longing for those days of boredom sitting on the ark, but nonetheless, I am grateful for the opportunity to be productive and contributing to society again. I created CASHFLOW to share the lessons I have learned from my rich dad and from real-life investments I have made. Some have been very successful and others have been failures. But most importantly, it teaches the vocabulary of money. Best yet, by simply playing it, your fears about money and investing will start to disappear.

John was a middle manager who realized he could be downsized at any time. His boss was in control of his financial security. Rather than wait in fear, he kept his daytime job and began to learn a second profession.

Always in love with health more than medicine, in his spare time he went back to school to become a naturopathic doctor. A few years later he began his practice and soon made enough money to quit his job. Today he still knows he will work all his life, the difference is he is doing what he loves and no one can fire him. He saw the future, took control of his emotions, and took control of his financial future.