Wednesday, April 4, 2012

Millionaire Teacher

Andrew Hallam’s book Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School is a colourful and entertaining guide for novice investors to keep them on the right financial path. However, the ninth rule was a curious departure from the strong message in the rest of the book.

The main thing that separates this book from others that offer similar advice is Hallam’s enthusiasm and vivid analogies, such as when he says that investing while you have credit card debt “makes as much sense as bathing fully clothed in a giant tub of Vaseline and then traveling home on the roof of a bus.” I’m not sure what that means, but it is entertaining.

“Worrying about the immediate future is letting the stock market lead you by the gonads.” Perhaps this explains why women have better investment results than men.

When it comes to spending, you “can’t be average” if you expect to become wealthy. Instead of looking to others’ actions to validate your own poor spending habits, you should think for yourself.

After quoting Warren Buffett and William F. Sharpe, Hallam says that “if a financial adviser tries telling you not to invest in index funds, they’re essentially suggesting that they’re smarter than Warren Buffett and better with money than a Nobel Prize Laureate in Economics. What do you think?” Because of most advisers’ conflict of interest, “asking your adviser how he feels about indexes is going to be a waste of time.”

Hallam is very hard on the financial services industry and financial media, which they mostly deserve. He calls the write-ups on the state of the economy that come with your investment statements “confusing economic drivel.”

On the need to own some bonds, Hallam says “only an irresponsible portfolio would fall 50 percent if the stock market value were cut in half.” I think this depends on the temperament of the investor. I agree that most investors need to use bonds to reduce volatility, but those who can stay calm as stock prices fall can make a different choice with savings they won’t need for many years.

As further evidence of the need for bonds, Hallam compares the Canadian Couch Potato Portfolio (rebalanced Canadian bonds, Canadian stocks, and U.S. stocks) to a portfolio with 100% Canadian stocks from the end of 1975 to the end of 2010. Starting with $100, the Couch Potato ends up with $3493, and Canadian stocks end at $3157. However, this is quite misleading. A 50/50 portfolio in Canadian and U.S stocks would have performed almost exactly as well as the Couch Potato portfolio. Further, bonds performed spectacularly well over most of this time period. I’m all for using bonds to lower volatility to allow investors to stick to their plans when the going gets tough, but there is no reason to expect that a portfolio that includes bonds will outperform an all-stock portfolio in the future.

“Gold is for hoarders expecting to trade glittering bars for stale bread after a financial Armageddon.” That gave me a chuckle.

Rule 9 is titled “the 10% stock-picking solution … if you really can’t help yourself.” This sets a tone that is consistent with the rest of the book, but the body of this chapter is much more enthusiastic about the benefits of stock picking. Hallam goes through all the arguments and techniques for trying to beat the market with individual stocks. A reader could be forgiven for thinking that the previous 8 rules were for chumps and the real way to make money is by using these methods to pick stocks. It isn’t until the final paragraph that Hallam admits that “odds are high that eventually most stock pickers will lose to market-tracking indexes.”

Apart from rule 9 about stock picking which seems oddly out of place, this book is useful for novice investors and is entertaining enough that some of them may actually read most of it.

2 comments:

  1. Thanks for your fine review Michael. The ninth chapter, however, doesn't discuss how to beat the market with individual stocks. The chapter is designed for those who MUST buy individual stocks, because they can't help themselves, but I suggested that they shouldn't invest more than 10% of their portfolio in individual stocks, stating that (on page 158) "you're not likely to beat the indexes". My second to last sentence of the chapter again, strongly reiterates that you won't likely beat the market with stock picking.

    Thanks again for the review. I enjoyed reading it.

    Cheers,
    Andrew Hallam

    ReplyDelete
  2. @Andrew: Thanks for the comment. I saw the contents of the Rule 9 chapter as ways to avoid losing too badly to the index, but I'm afraid that those who feel that they must buy individual stocks would view much of this chapter as ways to beat the index, even if this wasn't your intent. In any case, I enjoyed your book; your writing has an energy level that I can't match.

    ReplyDelete