Millionaire Teacher – Book Notes

The Nine Rules of Wealth You Should Have Learned in School

by Andrew Hallam (2nd Edition)

Main Takeaways

1. The dog on a leash analogy for the stock market. The stock prices are like a dog on a leash held by its owner. The owner is analogous to the “real” economy (business profits per share). The stock prices can only deviate so far from the economy. Invest more when people are scared and the dog is trailing and invest regularly when the dog is ahead.
2. Saving money is a prerequisite to investing. This is a book on investing. The book is pointless if you can’t get yourself to save enough to invest automatically each month/year. If you are not there yet, focus on saving money and increasing your income. It would be like someone reading a book on different gym routines when they are not ready to go to the gym regularly.
3. Bonds and stocks are inversely correlated. When stock prices increase, bond prices tend to decrease and vice versa. This is why rebalancing at least once per year is key. Let’s say you settle on 80% stocks, 20% bonds for your asset allocation. If stocks are doing well, then they will most likely take more than your initial 80% allocation. You can sell some of those hot stocks to buy bonds that aren’t so well to get back to your 80-20. Congratulation! You have just sold high and bought low.
4. Invest like Buddha. Don’t act on news and your friends’ predictions. Stay the course. Invest regularly without considering the market conditions. You will take advantage of dollar-cost averaging. If you invest the same amount regularly, you’ll automatically buy more shares when the prices are low and fewer shares when the prices are high. Be honest with yourself, if you don’t think you have the discipline to stick to your plan, consider a robo-advisor. Wealthsimple is the one I use since they have a great app and low fees.
5. Gold is a terrible long-term investment. 1$ of gold in 1801 would be worth 54$ in 2016. In contrast, 1$ invested in the US stock market in 1801 would be worth 16.24 million in 2016 (page 216). Gold can outperform stocks and bonds in the short term but are nowhere near in the long term. Furthermore, buying physical gold comes with many other complications. Keep it simple.

Book Notes

Rule 1 – Spend Like You Want to Grow Rich

1. The Millionaire Next Door
   • Most of the million-dollar homes are owned by non-millionaires (page 8)
   • 90% of millionaires live in a home worth less than a million dollars
   • In 2009, the median price paid for a car by millionaires was 31 367 US dollars (page 12)
   • 80% of the millionaires surveyed were first-generation rich (self-made) (page 20)
     • Adults who receive financial help from their parents are typically less wealthy than those who did not in the same income bracket. Too much help can be a financial crutch.
     • Giving money promotes weakness and dependence. Teaching money lessons and cheerleading the struggle promotes strength, independence, and pride. (page 34)
2. The 4% Retirement Rule (page 9)
   • Withdrawing 4% from a diversified-balance portfolio with low costs has been shown to be sustainable for retirees.
   • Example (S&P 500) :
     • Initial portfolio at retirement = 500000$
     • Withdraw 4% every year for 25 years.
     • Total withdrawn amount = 1325394$
     • Portfolio value after 25 years of being retired = 1855686$
3. How to Buy a Car (page 14)
   • Most of the depreciation of a car happens in the first year. Let someone else take the hit.
   • Shop with specific criteria. Used-car salesmen are sharks (page 15)
     • Japanese car, stick shift, original paint so damage and rust were not covered, less than 80000 miles (80000*1.6=128000 km), less than 3000$.
     • Note that the age of the car does not matter if the criteria above were met
4. Mortgage Payments Rule of Thumb
   • Double the interest rate and figure out if you could still afford the payments. (page 20)
5. How Badly Do You Want to Be Rich?
   • Andrew Hallam, the author, rode his bike 70 miles every day for the commute to school although he owned a car. Being cheap definitely helps with growing wealthy. He would not recommend this to anyone. (page 23)

Rule 2 – Use the Greatest Investment Ally You Have

Preparation is everything. Noah did not start building the Ark when it was raining.

Warren Buffet – Millionaire Teacher (page 28)

Your salary is likely to rise over the course of your career. Don’t get caught in the hedonic treadmill of elevating your lifestyle. If you make an extra 1000$ in one year, invest half of it and save the other half for a special occasion (Guilt free spending). That way, you’ll get rewarded twice for it. (page 35)

Rule 3 – Small Fees Pack Big Punches

1. Passively Managed Funds Outperform Most Actively Managed Funds in the Long Term
2. Warren Buffet has instructed people to invest his wealth in index funds when he dies. (page 46)
3. If actively managed funds did not cost any money to run and if advisers worked for free, the investor’s odds of finding funds that would best the broad-based index would be close to 50-50. (page 51)
4. Most say 80% of index funds outperform actively managed funds over a 10 year period. However, most analyses do not take into account the survivorship bias of active funds. (page 52)
   • Survivorship Bias = The statistics only reflect the funds who performed well enough to survive
5. Actively managed funds tend to be less tax efficient since they trade more often and the investor gets taxed every year whereas selling less often results in more compounding. (page 55)
   • The average actively managed mutual fund trades every stock it holds during an average year. This is called a “100% turnover”.
6. Picking Morning Star’s top-rated mutual funds is still a worse strategy than indexing. (page 58)
   • Regression towards the mean permeates the stock market. You might as well match the mean with lower fees.
7. Small-Cap index funds could theoretically be a better strategy. However, most advisers recommend to keep things simple with a broad index that is more diversified and tends to have less risk. (page 62)
8. In 1993, the New York Times ran a 20-year contest comparing top active fund managers to the S&P 500. (page 68)
   • Mysteriously, the contest stopped after 7 years of embarrassment.
9. Canada is amongst the highest average cost of actively managed funds. (page 70)

Rule 4 – Conquer the Enemy in the Mirror

1. Dollar-Cost Averaging (page 83)
   • Invest the same amount each month. You will automatically buy more units when the prices are low and less when the prices are high.
2. Should you invest a lump sum or dollar-cost average? (page 84)
   • Studies suggest lump sums are better.
   • My current take on it would be to invest 80% of the lump sum and dollar-cost average the other 20%.
3. Most stock market large fluctuations (5+ % in a day) could not be traced to real-world events with hindsight. (page 89)
   • How could you infer in real-time without the benefit of hindsight to try to time the market.
4. Dog on a Leash Analogy for the Stock Market & the Economy (page 92)
   • Dog = Stock price, Owner = business earnings per share. The dog can only get so far from the owner who represents the economy.
   • Table 4.5 Shows the Tech Bubble top companies such as Amazon. (page 97)
     • 40000$ invested in 2000 in the top companies would leave you with 1140$ by 2002 due to the dot-com bust. (page 210)
   • 9/11 did not change the “real” economy (business earnings/owner) that much, it affected the beliefs about the economy (stock prices/dog). Thus, it was a great time for long-term investors since stocks were on sale with decently high confidence that the dog would catch up to the owner. (page 100)
5. Young people should pray for an awful long bear market. It is silly to want your investments to go up right away when invested for the long term in the entire market. (page 100)

Rule 5 – Build Mountains of Money with a Responsible Portfolio

1. Bonds & Rebalancing are Secret Weapons in Volatile Markets
   • Bonds are inversely correlated to stocks. When stocks are on sale (low price), you can sell some of your typically booming bonds (high price) to buy cheap stocks, and vice-versa.
2. The Original Couch Potato Approach (page 120)
   1. 50% US Market, 50% US bonds, rebalance once per year

Rule 6 – Sample a “Round-the-World” Ticket to Indexing

1. If you pay 9.99$ per trade, try to invest at least 1000$ at a time so you pay less than 1% in commission. (page 133)
2. Try to do a limit buy with a few cents more than the estimated price. (page 134)
   • Doing a limit buy lower than the current price may lead to less time in the market. Keep it simple.
   • Only place a trade when markets are open.
3. The Sleep Test (page 145)
   • If you have a pension with your job, you may be able to take on higher risk in your portfolio.
   • Only true if your psychology allows it (sleep test).

Rule 7 – No, You Don’t Have To Invest on Your Own

1. Robo-advisers Are Not Robots (page 162)
2. Invest like Buddha (page 162)
   • Buy once per month or once per year. Ignore all the rest.
   • Most people can’t sit under a tree and relax. They listen to the news and pull out.
   • If you can’t sit like Buddha and weather the storms, consider robo-advisors. It allows you to automatically put money away with only one decision in your whole life.
3. No One Can Predict the Direction of the Markets (page 166)
   • A study with 68 experts predicted the direction of the stock market. They were right about 46% of the time. Coin flippers probably would have done better in this case. (page 166)
4. The average low-cost robo-adviser portfolio is likely to outperform the average DIY ETF investor. (page 168)
   • Although DIY investors benefit from lower costs than robo-advisers, they won’t tend to invest as regularly as automatic payments with a robo-advisor.
5. It may be worthwhile to get a fee-only, full-service financial advisor. (page 170)
6. Andrew Hallam gave 50$ to four people to try to open index funds in Canadian banks. They all experience friction and were offered active funds with an average of 2.2.% MER. (page 174)

Rule 8 – Peek inside a Pilferer’s Playbook

1. Financial Adviser’s arguments & Tricks (page 190)
   • Index funds are dangerous when markets fall. Active funds will mitigate the losses.
     • Ask the adviser which year had the biggest decline? 2008.
       • How them to explain why the index funds still did better in 2008.
   • They’ll try to compare an active fund with a single index.
     •  Most won’t outperform an index + Bonds + rebalancing
   • Why settle for average when you be more than average?
     • Sure. But it doesn’t work. Show me the data.
   • We only pick the best funds (the ones that outperform the index)
     • Top-rated funds rarely last and sustain their results so it is too late to buy them
   • I can use knowledge of the economy to take advantage of markets.
     • Hedge fund managers are more knowledgeable than you. They are also better equipped and they still underperform.
2. William Bernstein Suggested Reading (page 194)
   • You will know more than 99% of advisers after reading those 2 books.
     1. A Random Walk Down Wall Street – Burton Malkiel
     2. A Common Sense Guide to Investing – John C. Boggle
3. Financial advisers earn on average 150K in the US. They are essentially sales people. (page 196)
4. Money tends to make us selfish. (page 197)
   • A study about monopoly showed that the richer you get, the fewer pencils you help pick up.
5. Pension funds typically don’t beat the index. (page 199)
   • Most of the money in pension funds tends to be invested in index funds.
6. Fidelity lost a lawsuit since it invested its employees’ money in a high-fee mutual fund. (page 200)
   • To lose a lawsuit, the evidence must be pretty clear that index funds are better.

Rule 9 – Avoid Seduction

1. Avoid Newsletters (page 212)
   • Why are they trying so hard to get your 9.99$/month if they have great returns?
   • 94% of newsletters went out of business within 15 years.
   • less than 10% of those newsletters beat the index over that period.
2. Avoid High-yielding Bonds (Junk Bonds) (page 213)
   • Companies in financial trouble give high yield and they might go bankrupt.
3. Fast-growing markets may not always be good investments. (page 214)
   • Still better to be more diversified.
4. Gold is a Terrible Long-term Investment (page 216)
   • 1$ of gold in 1801 would be worth 54$ in 2016. In contrast, 1$ invested in the US stock market in 1801 would be worth 16.24 million in 2016.
5. Hedge fund managers don’t have the rules and regulations that bank mutual funds managers have. (page 219)
   • Survivorship Bias Example = 20 people race and 17 people do not complete the race. The journalist calculates the average time of the three who finish the race and reports to represent the entire group.
   • Backfill Bias = Ignore the weaker funds and highlight the stringer ones
   • They still underperform the index.
6. Currency Hedged ETFs are no good. (page 223)
   • It mitigates a source of risk at the expense of potential returns since less money is compounding.
7. Backtests only tell you which strategy would have worked well in the past. (page 226)
   • It is not likely to repeat itself.
8. Small-Cap Stocks have higher expected returns but may not pass the sleep test and a diversified portfolio may be the best strategy for most people. Different opinions on this topic. (page 226)

Affiliate Links

1. Invest Automatically – Wealthsimple Invest Robo-Advisor
2. Build your own portfolio – Wealthsimple Trade
3. Save money and make a little – EQ Bank High-Interest Savings Account
4. Millionaire Teacher – Andrew Hallam
5. The Millionaire Next Door – Thomas J. Stanley
6. A Random Walk Down Wall Street – Burton Malkiel
7. A Common Sense Guide to Investing – John C. Boggle