" Rich dad again took his legal tablet and drew the following diagram: Reduce Risk Through Financial Literacy You Your Business Assets Liabilities Heal Estate Stock 158 Rich Dad's Guide to Investing 'A business has a financial statement, a stock certificate is a reflection of a financial statement, each piece of real estate has a financial statement, and each of us as an individual human being has a financial statement attached to us," said rich dad. "Every security and human being?" I asked. "Even my dad? Even my mom?" "Sure," said rich dad. "Everything-regardless of if it is a business, real estate, or human being-that transacts money has an income statement and balance sheet, whether or not they know it. People who are not aware of the power of a fi- nancial statement often have the least money and the biggest financial problems." "You mean like my dad is having right now," I said. "Unfortunately that is true," said rich dad. "Not knowing the simple difference between assets and liabilities, earned in- come from passive and portfolio income, and not knowing where they all appear and how they flow on a financial state- ment has been a costly oversight for your dad." "So when you look at a business, you look at the financial statement, not the price of its stock that day?" I asked, doing my best to move the discussion away from my dad. "That is correct," said rich dad. "That is called fundamental investing. Financial literacy is fundamental to fundamental in- vesting. When I look at the financials of a business, I look at the guts of a business. When I look at the financials, I can tell if the business is fundamentally strong or weak, growing or declining. I can tell if the management is doing a good job or wasting a lot of the investors' money. The same is true with an apartment building or office building." "So by reading the financials, you can tell for yourself if the investment is risky or safe," I added. "Yes," said rich dad. "A person's, a business's, or a piece of Reduce Risk Through Financial Literacy 159 real estate's financials will tell me much more than that. But a cursory look at a financial does three more important things." "And they are?" "For one thing, being financially literate gives me a check- list of what is important. I can look at each line and determine what is not being done right, or what I can do to improve the business and make things right. Most investors look at the price and then the stock's p/e, or price earnings ratio. The p/e of a stock is an outsider's indicator of the business. An insider needs other indicators, and that is what I will teach you. Those indicators are part of a safety checklist to make sure all the parts of the business are functioning well. If you are not financially literate, you cannot tell the differences. Then, of course, investing is risky for that person." 'And the second thing?" I asked.