" Basic Rule Number Seven 'And what is number seven?" "It is the ability to evaluate risk and reward," said rich dad. "Give me an example," I requested. "Let's say your two basic investment plans are in place. Your nest egg is doing well and you happen to have, let's say, an extra $25,000 you can invest on something more speculative." "I wish I had $25,000 right now," I commented dryly. "But tell me more about evaluating the risk and reward." "So you have this $25,000 that you can more or less afford to lose-which means that if you lost it all, you would cry a lit- tle but you could still put food on the table and gas in the car and save another $25,000. Then you begin to evaluate risk and rewards of the more speculative investments." "And how do I do that?" "Let's say you have a nephew who has an idea for a 142 Rich Dad's Guide to Investing hamburger stand. The nephew needs $25,000 to start. Would this be a good investment?" "Emotionally, it could be, but financially it would not be," I replied. "Why not?" asked rich dad. "Too much risk and not enough reward," I replied. "On top of that, how would you get your money back? The most im- portant thing here is not return on investment. The most im- portant thing here is return of investment. As you said, security of capital is very important." "Very good," said rich dad. "But what if I told you that this nephew has been working for a major burger chain for the past 15 years, has been a vice-president of every important as- pect of the business, and is ready to go out on his own and build a worldwide burger chain? And what if for a mere $25,000 you could buy 5% of the entire company? Would that be of interest to you?" "Yes," I said. "Definitely, because there is more reward for the same amount of risk. Yet it is still» high-risk deal." "That is correct," said rich dad. "And that is an example of an investor basic, which is to evaluate risk and reward." "So how does a person evaluate such speculative invest- ments?" I asked. "Good question," said rich dad. "That is the rich level of in- vesting, the level of investing that follows the investment plans to be secure and comfortable. You're now talking about acquiring the skills to invest in investments that the rich in- vest in." "So again, it is not the investment that is risky; it is the investor who doesn't have theadequate skills that makes the investment even higher risk." The Basic Rules of Investing 143 The Three Es "Correct," said rich dad. 'At this level, the level at which the rich invest in, the investor should have the three Es. And the three Es are: 1. Education 2. Experience 3. Excessive cash "Excessive cash?" I asked. "Not just extra cash?" "No, I use the words 'excessive cash' for a reason: Investing in the investments of the rich takes excessive cash, which means you can truly afford to lose and still profit from the loss." "Profit from the loss?" I asked.