It's a rare financial book that I read without finding anything to disagree with. Andrew Hallam's introduction to investing is one such book. It is titled Millionaire Teacher, The Nine Rules Of Wealth You Should Have Learned In School. I wholeheartedly recommend everything in it to you. When I saw the names of Burton Malkiel, Scott Burns, and Bill Bernstein on the back cover, I knew it was going to be good. The fact that he started it while in the hospital recovering from cancer makes it even better. Andrew was a hyperfrugal teacher who developed an interest in investing. When I say hyperfrugal, I mean he was commuting 70 miles a day….on a bike. But now he lives luxuriously because he did that for a few years. How did he do it? He saved a big chunk of his money right from day one, invested it in index funds, and avoided making any big mistakes. Want more details? Read the book.
Millionaire Teacher Provides An Introduction To Investing
If you are already saving 20%+ of your income toward retirement, and have a portfolio mostly composed of index funds, you're probably not going to get a lot out of this book. It would be very hard to read this book and then continue to invest in actively managed funds. In just 180 short pages, he gives a damning criticism of Wall Street's tactics, especially actively managed mutual funds.
The Nine Rules The Millionaire Teacher Outlines
Each chapter in the book explains one of the 9 rules.
1. Spend Like You Want To Grow Rich
The first chapter basically summarizes the principles found in Stanley and Danko's classic The Millionaire Next Door. I like how he focuses on the big pieces- your home and your transportation.
2. Use The Greatest Investment Ally You Have
He introduces compound interest and the benefits of starting early.
3. Small Percentages Pack Big Punches
This chapter contains the damning criticism of actively managed mutual funds, and explains the importance of keeping your investing expenses as low as possible.
4. Conquer The Enemy In The Mirror
This chapter is a solid summary explaining how to avoid behavioral mistakes in investing, especially buying high and selling low. When you expect the market to do something crazy every few years, you won't panic when it happens.
5. Build Mountains of Money With A Responsible Portfolio
Andrew introduces asset allocation, primarily favoring Scott Burn's “Couch Potato Portfolio” (50/50 stocks to bonds) or a simple 3-fund portfolio (1/3 Total Stock Market, 1/3 Total International Stock Market, and 1/3 Total Bond Market.)
6. Sample A “Round-the-World” Ticket To Investing
This was my favorite chapter in the book, and the one I learned the most from. Andrew has lived in several different countries, and takes the time here to explain how to invest in index funds no matter where you live. He goes into specific examples for US ex-pats, Canadians, Singaporeans, and Australians. While it's true there was little in this chapter I could apply to myself, much of it was new material to me, which is rare in an investing primer.
7. Peek Inside A Pilferer's Playbook
This short chapter explains some of the tricks of the trade of commission-based “financial advisers.” Pre-warned is pre-armed. There should be little new here for regular readers of this site. If you're still using an adviser you pay via commissions, you should be ashamed of yourself.
8. Avoid Seduction
This chapter is applicable to any investor, no matter how long you've been investing. He goes through lots of things that are simply “too good to be true”, such as investing newsletters, junk bonds, Ponzi schemes, emerging markets investing, gold, investment magazines, and hedge funds. Andrew quotes Voltaire:
“The best is the enemy of the good.” Investors who aren't satisfied with a good plan–like indexing–may strive fro something they hope will be “best.” But that path's wake is filled with more tragedies than success.
9. The 10% Stock-Picking Solution…If You Really Can't Help Yourself
In this chapter he discusses how to pick stocks, if you really must. Not surprisingly, he advocates value investing, a la Benjamin Graham/Warren Buffett. He suggests identifying great businesses with a simple, easy to understand business likely to maintain a durable advantage. Avoid tech stocks, look for low P/E ratios, ensure the business can raise prices with inflation, look for a low debt to profit ratio, demand a high return on capital, and look for signs of good corporate stewardship (reasonable executive pay, high insider ownership, and share buybacks only at market bottoms.) Once you've found this awesome business, you still need to only buy it at the right price. In the end though, he says this about his stock-picking prowess:
When you have found a business that you want to buy, analyze its price as if you were buying the entire business. The return you make can be highly dependent on the price you pay. But even with the best stock-picking tools, the odds are high that eventually most stock pickers will lose to market-tracking indexes, especially after facotring in transaction costs and taxes. It's fun to fight the tide. But you should invest the bulk of your money intelligently with a diversified account of indexes.
It's a rare financial book that I read without finding anything to disagree with, but Millionaire Teacher is a must buy.
WCI- LOVE your blog- read it weekly now. 4th year student here, planning for the future. I have a word document on my desktop of all the Vanguard accounts I want to invest in once I get started. Can you explain the difference between the dreaded actively managed funds and index funds? I currently am planning on investing in the Vanguard Target 2045 Retirement Account, Vanguard Wellington and Vanguard 500. Thanks!
@medstudent
that’s a pretty easy question to answer
actively managed – some dude or group of dudes is picking stocks and you are relying on his or their skillset to beat the market
index – you’re buying a big bundle of stocks like the s&p list of 500 stocks. Those only change occasionally if a company no longer qualifies as a top 500 company. No one is picking anything. When the stock market “goes up” like you see on TV, your stocks go up, when it goes down, they go down.
The main difference is that now you’re not paying this dude or group of dudes any extra fees because a computer is doing all the work. And the computer works for 1/10th to 1/20th of the price.. so for every $1000 you have invested, the dude takes $10-20, the computer takes $1-3.. every year.
So if you just had $1000 and never added to it and lets just say got no return after fees, the dudes would’ve taken about $300-600. The computer only $30-90.
Now imagine you’ve got like 500,000 in investments… that adds up pretty damn quick
The problem is that active fund managers and their sales associates try to convince you that they can beat the averages/indexes. Historically this has been very unlikely for them to do when you factor in cost for any extended period of time such that you would do well. You should go to bogleheads.org and look over the wikii there. It isnt necessarily intuitive that experts cant beat the averages but when you add it their costs its true the great majority of the time so might as well go with the indexes. You will more likely have more money in the end.
Hey MS2013-
You’d really benefit from reading Hallam’s book, if you’re not yet convinced of the value of index fund investing. Wellington has a great track record. That is not only rare, but also probably mostly because of its low costs. When costs are low, the hurdle that active management must overcome is easier to do. There are likely many active managers out there who can beat index fund returns BEFORE costs, but doing so after costs is so rare it probably isn’t worth looking for, especially when you consider the very significant risks of not doing so. Over the long run I’m essentially guaranteed to beat 80%+ of active managers in any given asset class by using a well-run, low-cost index fund. Why gamble that in hopes of picking the top 20%? Especially when I have to pull off the same stunt in 5-10 other asset classes?
What’s wrong with emerging markets investing? High volatility but also high CAGR historically. Certainly not for short term but why not 1/3 emerging, 1/3rd total stock, 1/3 bonds?
I don’t see anything wrong with investing in emerging markets. I hold a 5%+ slice myself. I’d be a little uncomfortable with a 33% slice. I was surprised to see Hallam lump it in with Ponzi schemes myself.
WCI – (and others)- Would love to get your 2 cents on the ‘all in one’ Retirement Index Funds, like Vanguard 2045, T Rowe Price 2045, etc. To me, the advantages are very low expense ratios (Vanguard has a 0.19% for these funds), it invests in index funds and adjusts your risk for you as you inch closer to retirement, making it attractive for the ‘set it and forget it’ type people who dont want to be too terribly hands on. Assuming you’re maximizing the obvious priorities, ie Roth, employer funded 401k/403b, I have a hard time seeing any problems with these type funds.
They’re fine in the right situation, but not very many people stay in the right situation very long. The right situation is when you do all your investing in one tax-protected account (or have that fund available to you in multiple accounts). Once you have a 401K that doesn’t have that fund as an option, or once you start a taxable account, they’re not so good. It’s also important to make sure you choose a fund based on its asset allocation matching your desired asset allocation, and not just choosing it based on a date. Another issue with them is that you can get admiral shares of the underlying parts of the TR funds, but there are no admiral TR shares. So once you have enough money, you can lower the ER by doing it yourself.
So they’re great for the set-it-and-forget crowd who only has a small Roth IRA, but once you have a more complicated or significantly bigger portfolio, they’re not so good.
Wow! Thanks so much for the great review of my book.
And my apologies for giving the impression that emerging market investing was like a Ponzi scheme–or for lumping the two of them in the same section of the book. It wasn’t my intention to suggest that emerging markets were bad. I was trying to suggest that people shouldn’t put all their eggs in emerging market baskets based on their high promises of future returns. Since we have kept data on emerging markets (since 1985) they have actually under-performed developed markets. And as I said at the end of this section: “whether the emerging markets prove to be future winners is anyone’s guess. They might. But it’s wise to temper expectations with historical realities, just in case.”
Keeping no more than 10% of a portfolio in emerging markets is wise, I believe.
Thanks again for such a great review and I hope your readers find the book useful.
Cheers,
Andrew
My retirement account 401K is self directed through my company but the Vanguard funds are not available through Merrill Lynch. Do you have any recommendations of funds that are close to these types?
What do you mean self-directed? You mean you have access to a brokerage account/window? If so, you can easily buy Vanguard ETFs. If you mean which Merrill Lynch funds are similar to Vanguard funds, I think you’re hosed. You might try listing out all available investments within your 401K including their expense ratios as a post on Bogleheads. You’re likely to get good advice on how to make lemonade out of a lemon of a 401K. Here’s a good link:
http://www.bogleheads.org/forum/viewtopic.php?f=1&t=6212
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