However, the sophisticated investor still uses the advan- tages provided by the E-T-C analysis for his or her own fi- nancial portfolio. In Phase Four, we will discuss how the sophisticated investor applies these principles to obtain the maximum advantage provided by the law. Good Versus Bad In addition to the three characteristics of income Robert discusses, three other general principles distinguish a so- phisticated investor from an average investor. A sophisti- cated investor knows the difference between: Good debt and bad debt Good expenses and bad expenses Good losses and bad losses As a general rule, good debt, good expenses, and good losses all generate additional cash flow for you. For in- stance, debt taken to acquire a rental property, which has a positive cash flow each month, would be good debt. Likewise, paying for legal and tax advice are good expenses if they save you thousands of dollars in reduced taxes from tax planning. An example of a good loss is the loss gener- ated by depreciation from real estate. This good loss is also called a phantom loss because it is a paper loss and does not require an actual outlay of cash. The end result is a sav- ings in the amount of tax paid on the income offset by the loss. Knowing the difference between good and bad debt, ex- penses, and losses is what distinguishes the sophisticated investor from the average investor. When average investors hear the words "debt, expense, and loss," they usually 276 Rich Dad's Guide to Investing react negatively. Generally, their experiences with debt, ex- penses, and losses result in additional cash flowing "out of their pockets" instead of into their pockets. The sophisticated investor enlists the advice of account- ants, tax strategists, and financial advisors to structure the most beneficial financial organization for his or her invest- ments. He or she looks for and invests in those deals that include the E-T-C features that support his or her personal financial plan-the map he or she is following to become rich. How Can You Identify a Sophisticated Investor? I remember a story my rich dad once told me about risk. While part of it has been covered in other parts of the book, it is worth repeating here. The average investor views risk from a completely different point of view than the sophisti- cated investor. And it is this view 6f risk that truly differenti- ates the sophisticated investor. Why Being Secure Is Risky One day, I went to my rich dad and said, "My dad thinks that what you do is far too risky. He thinks that one financial statement is secure but you think that controlling only one fi- nancial statement is risky. It seems like such a contradiction in points of view." Rich dad just chuckled. "It is," said rich dad, continuing to chuckle. "Almost exactly opposite and contradictory." Rich dad paused for a moment to gather his thoughts.