The year was 2000 - millions of Americans were losing trillions of dollars. Stock market kept going down, but they were not selling. Why not? Why hang on to a losing stock? One of the key reasons was their confusion about what they were doing. They thought they were investors - but in reality, they were traders. (Should you think we did much better then - we didn't - we went for the ride like everybody else).

As we are writing this, it's October 2007 - hundreds of thousands of Americans are losing their proverbial shirts in a down real estate market - even if they want to sell - there are no buyers. Why are they in such a dire position - because they thought they were investors - but in reality, they were traders.

Who is an investor, who is a trader? An investor is "someone who derives income from an investment - regardless of the fluctuations in value of the underlying asset" - whereas, if you are looking for appreciation of an asset - then you are a trader. This is a critical distinction - as an investor, you can ignore fluctuations in the price of an asset - you are getting paid to hold the asset. As a trader - you must not ignore such fluctuations - as a matter of fact, there are dozens of steps you must take to protect yourself from those fluctuation (as well as to take advantage of them). People who bought real estate to flip thought of themselves as investors - but they counted on price appreciation - that's what a trader does. If they understood this distinction, they could have hedged their trades (most professional traders do), or changed their strategy to take into account that Federal Reserve Board was doing its best to kill the real estate boom. "Don't fight the Fed" applies just as much to real estate as to Wall Street.

By comparison, Warren Buffet and Robert Kiyosaki are investors - neither suffered in the respective market crashes. Warren Buffet - a legend on Wall Street - is known for saying that he doesn't care if the Wall Street shuts down for 20 years - he is not bragging - he buys entire companies - replaces the management if necessary, and uses cash flow they generate to buy more companies. He is in control of his investments, and does not rely on the stock price going up - he collects the earnings of the businesses he owns regardless of what the stock market does.

Robert Kiyosaki makes his money investing in real estate - since he only buys properties with positive cash flow - he does not care about the downturn in the market - he is still collecting his money. As a matter of fact, after warning people for years not to buy real estate unless they REALLY knew what they were doing, he is now buying himself, and said openly that this is bargain hunting time.

As you read further, please keep in mind the distinction between trading and investing - we will return to it when discussing stock market, real estate, and other wealth generating vehicles.