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.
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
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.
Win The Book
You can buy this book on Amazon right now for less than $10, or, if you're a bit of a cheapskate like Andrew and I, you can win the book right here. John Wiley and Sons sent me three copies of this book to review, and I'm going to pass them on to you, dear readers within the next couple of weeks. The first person to respond to me via email (editor [insert “at” symbol) whitecoatinvestor.com) WITH one of three special codes will get a copy of the book. Unfortunately, none of the codes will be put out on the website. One will go out in the monthly newsletter, one will go out in the RSS feed, and one will come out in a tweet. Sign up for all three to maximize your chances of winning.