We are inundated all day by opinions of friends, family members, frenemies, colleagues, bosses, television commentators, newspaper columnists, radio hosts, political leaders, and ex-banker bloggers all making more or less ridiculous arguments in favor of their worldview.
We may frequently sense that they’re wrong, but we can’t quite put our finger on the flaw in their argument.
I gather from his Preface to the book and his website that he’s a computer programmer, and that he works for the folks who make the Firefox internet browser.
The brilliant trick Almossawi accomplishes – via clever illustrations and a pithy style – is to invite the unsuspecting and easily-distracted into reading a pretty serious critique of illogical thinking. As he writes in the Preface, a good way to improve is to look at bad examples of the thing you’re trying to do. In his review of bad arguments, we can see more clearly mistakes we and others make.
Take an hour to read it. You may find yourself taking notes and vowing to think and reason a little more clearly.
For the really easily distracted, here’s an even pithier list of Almossawi’s bad arguments, for which he provides good examples and clever pictures:
Argument from Consequences – appealing to wishes or fears, without due consideration of the logic of the argument
Straw Man – Exaggerating someone else’s claim in order to ridicule or dismiss
Appeal to Irrelevant Authority – Trusting the wrong source of authority
Equivocation – Changing the meaning of a word in the middle of an argument
False Dilemma – Creating only two possibilities to choose from, when in fact there are more than two choices
Not a Cause for a Cause – Connecting non-causally related events
Appeal to Fear – Similar to Slippery Slope, and possibly False Dilemma
Hasty Generalization – Too little data or sample size to make conclusions
Appeal to ignorance – No evidence for opposite view, therefore positive view of argument, ignoring burden of proof problem
No True Scotsman – General but unproved/unprovable claim about a category of things
Genetic Fallacy – Argument devalued or defended because of its history or origins
Guilt by Association – Linking argument to some unappealing association, or sharing an attribute with another group that is to be avoided
Affirming the Consequent – Using the false logic of “If A then C. Observing C, then A.” In other words, the wrong direction of causality
Appeal to Hypocracy – Countering a charge with a charge that is not logically connected
Slippery Slope – Saying acceptance will lead to a sequence of events. Related to Appeal to Fear, False Dilemma, Argument from Consequences
Appeal to Bandwagon – “All the cool kids” are doing something
Ad Hominem – Attack the person’s character
Circular Reasoning – Assume the conclusion in one or more premises
Composition & Division – Composition – the argument that a whole must have attributes because its parts have that attribute; and Division – the smaller part will take on the characteristics of the whole
The Millionaire Mind by Thomas J. Stanley did not win the acclaim of its predecessor The Millionaire Next Door, but I consider it an equally valuable resource for personal financial education.
As with The Millionaire Next Door, which I reviewed earlier, Stanley conducts a type of ethnographic study of multi-millionaires, surveying them on attitudes, life experience, purchasing behavior, and habits of mind.1
A number of these insights stuck with me throughout the years, a good indication to me that Stanley’s got quite a bit to offer.
Small Business Owners
Many millionaires own their own businesses, and they typically either started it or continued a family-owned enterprise. Further, their businesses often lack the prestige of professions celebrated in the popular press.
Stanley takes pains, for example, to highlight the story of Mr. Richard, a junk-yard operator worth over $10 million, with an annual salary above $700,000. Avoiding the prestige professions is not only an accident, Stanley argues, but a strategy to avoid competing with other very smart people. Stanley returns frequently to this theme of wealth accumulation through entrepreneurship, which, of course, I believe in myself.
Not the best students
Interestingly, Stanley claims that his cohort of millionaires tends to be made up of people who received Bs and Cs in high school and college – but who found a vocation, after their school years ended, at which they excelled.
The traditional A students, he points out, tend to seek out competitive, prestigious professions such as law and medicine that require a flawless educational transcript. Many lawyers and doctors earn generous salaries but frequently do not join the ranks of multi-millionaires. There can be a huge difference at the high end of wealth creation between a good salary and ownership of a profitable business.
This makes sense, as of course the less you pay for everything – from your car to your morning coffee – the more you have left over in net worth. On the other hand, much of the Advertising Infotainment Industrial Complex is dedicated to convincing us that the more you have, the more you need to show what you have, through a fancy watch2 or a second home, or by hiring Rod Stewart for your 60th Birthday.
Other insights
Stanley describes other characteristics of multi-millionaires. They tend to be long-term married (and only once), they tend to have iconoclastic ideas (somewhat), they show courage and respond well to setbacks, they seize business opportunities that others did not see, and they tend to reduce their borrowing once they’ve achieved some financial success.
All sounds like reasonable advice to me.
Post read (8603) times.
Once again a scientist versed in the scientific method could easily critique his approach. He sent out surveys to a randomly selected number of households in certain zip codes likely to have millionaires. From there he received 733 completed responses from households with at least $1 million in net worth. Problem #1 – Survivorship bias. Just because these folks have a $1 million+ net worth, doesn’t negate the fact that many other people, or even a majority of other people, with exactly the same characteristics, are not millionaires. We can’t know how powerful the effect of these variables are without a study designed with a ‘control group’ to correct for survivorship bias. Problem #2 – Methodological tautology. Stanley targeted particular zip codes on purpose. He then makes comments about the types of neighborhoods millionaires live in, such as the fact that many millionaires live in older, well-established neighborhoods. That’s probably true, but you can’t make a scientific correlation between neighborhoods and millionaires if you picked the neighborhoods first! Nevertheless, I still think Stanley’s insights have the ring of truth, if not the scientific gold standard of proof. ↩
“You never actually own a Patek Philippe, you merely look after it for the next generation.” Also, it even tells time! Similar to, although not quite as well as, a digital watch that is essentially free at this point. Or like the free time-keeper that comes with your mobile communication device. ↩
His stated purpose is to appeal to innumerates with enjoyable and illuminating examples of everyday, as well as fanciful, uses of mathematics.I enjoyed the book, and some Bankers Anonymous readers would as well.
The problem: only the numerate will read the book.All innumerates – the intended audience – will put the book down by the 3rd paragraph of the first chapter.
Probability and Coincidences
Paulos provides a valuable example of the stock market promoter who sends out a newsletter to 32,000 potential customers, predicting a specific upward or downward movement in a stock.At the end of 6 such random predictions, this promoter will have been right 6 times in a row to approximately 500 astonished people.At this point, the promoter can offer a $500 subscription to those remaining 500 people.If they pay up, he pockets $250,000.
A variation of this classic example is explained well in Nassim Taleb’s Fooled by Randomness as well, and should be kept in the forefront of the minds of everyone who interacts with the Financial Infotainment Industrial Complex.
Just as coin tosses of a completely fair coin frequently run in hot streaks in seemingly improbable ways, many of the patterns we think we see in financial markets are more noise than signal.
Pseudoscience
Pseudoscience will fool people who don’t have numbers fluency.Seemingly improbable ‘coincidences’ turn out to be less miraculous with a little bit of math.Highly unlikely events become highly likely – given enough chances.
I appreciate that Paulos repeats a great piece of wisdom my college advisor once told me: Any system of orthodox thought ,like Freudian psychology or Marxism, which cannot be criticized – without exposing oneself to counterclaims of ‘neuroses’ or ‘class-blindness – is a pseudoscience.
Real systems of thought, however powerful, are open to criticism from the outside.It’s a simultaneously humbling but empowering idea.No system of thought, however powerful, is without its weaknesses.
A useful book – but who will read it?
Paulos fills his book with examples of how we can be easily misled about numerical scale.
I find this is true in personal finance – not understanding the incredible scalable power of compound interest, for example, or in public finance – not grasping the power of large numbers when it comes to the national debt.
Innumeracy is probably most fun for people who already understand 95% of the math Paulos uses.The book then becomes for readers a confirmatory exercise in ‘Look at me and the math I already understand,’ rather than fulfilling his stated purpose of ‘More people should be relatively numerate and I’m going to make that case, at the same time helping innumerates get started on a better math path.’I don’t see his supposed intended audience – innumerates – making it through from start to finish.
I’m not making this critical argument about a book that came out 25 years ago in order to point out a flaw in something few people have read.What I’m doing in reviewing Innumeracy is thinking out loud (ok, in print) about the problem I face with personal-finance writing.Namely, how do you convince an audience of smart-but-non-finance folks that:
A. They should want to understand finance better for their own good, and
B. They should read my stuff to help them get started down the learning-finance path.
I fear that my personal finance writing attracts people already comfortable and fluent with financial topics, seeking confirmation of their relative sophistication.“Look at me, I understand finance and I read stuff by a former Wall Streeter still in recovery from his finance profession,” readers may say, rather than, “I’m an educated but non-finance person eager to get started in better understanding my world through a financial lens.”
Obviously I want both kinds, or rather all kinds, of readers.But my highest value-added proposition, in terms of a personal finance book, is for the non-expert reader.
Reviewing Innumeracy, which, in my opinion, fails in its stated goal, reminds me of the challenge ahead.
Suggestions on this present conundrum, from all kinds of readers, are welcome!
Nickel and Dimed – On Not Getting By In America, by Barbara Ehrenreich. Want to understand what it’s like to be part of the structurally poor in America? No? Well you won’t ever see it depicted in mainstream media, but here’s a good place to start.
The Death And Life Of Great American Cities, by Jane Jacobs. This classic on urban planning policy from 1960 struck me as entirely relevant today. Jacobs writes convincingly on low-income housing policy, the problem with parks, the benefits of walkable cities, the importance of mixed uses, the essential nature of diversity in great cities.
Cities and the Wealth of Nations, by Jane Jacobs. By switching the economic unit of analysis from nations to cities, Jacobs offers still-relevant insights into development, inequality, currency regimes, and the decline of empire.
The Making of Donald Trump by David Cay Johnston. A review of thirty years of Trump’s businesses practices, associates, and personal style, from a Pulitzer Prize-winning journalist who covered him over the years. I wouldn’t say I was surprised by the revelations, but the details are important. Not a book about ‘inequality’ per se. But not entirely unrelated to the theme either, in the broadest sense.
Capital In The Twenty-First Century by Thomas Piketty. Sets the standard on data collection on wealth concentration in rich countries. Has a mathematical model that suggests ossification of aristocracy may be in our future, unless addressed through tax policy.
Words and Money, by Andre Schiffrin. A French-American from the traditional publishing world explains why for-profit behavior by media companies – in publishing, movies, book-selling, newspapers – are hurting society. Some proposed solutions which sound very European.
The Price of Inequality, by Joseph Stigliz. I started out sympathetic to his politics but his style of argumentation – hammer, hammer, hammer – is tedious. Also made me more in favor of inequality, because I’m a contrarian cuss.
On Personal Finance
The Automatic Millionaire by David Bach. A surprisingly well-done book on what may be simplest first two principles of investing: First, you DO have enough to invest. And the second principle: You HAVE to do automatic deductions. Peace and Plenty, by Sarah Ban Breathnach. The worst personal finance book I’ve ever read, by the narcissistic, materialistic, unreflective author of Simple Abundance, a popular book from the 1990s endorsed by Deepak Chopra and Oprah Winfrey.
Why Smart People Make Big Money Mistakes, by Gary Belsky and Thomas Gilovich. The authors translate Behavioral Economics research with memorable anecdotes and illustrations to help us understand why we make sub-optimal personal finance decisions.
The Four Pillars of Investing by William Bernstein. At this point a personal finance classic. Great writing, great reviews of all the big ideas, great guidance to what we should all be doing with our investment money.
The Delusions of Crowds by William Bernstein. Bernstein anticipated 2021 and nailed it with this historical review of both religious and financial nuttiness that we humans are apt to repeat over and over again.
The Richest Man In Babylon, by George Clason. “Babylonian” fables written in the 1920s that retain timeless wisdom about of thrift, savings, skepticism, and self-reliance.
Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth, by T. Harv Eker. Some interesting points to make on psychological limitations we may have about money, along with cognitive behavior techniques to overcome those limitations, but unfortunately told by a seminar-upselling jackass.
The Way To Wealth, by Benjamin Franklin. A greatest-hits of memorable aphorisms about thrift and industry by the founding father Benjamin Franklin, in his persona as Poor Richard.
Think and Grow Rich, by Napoleon Hill. This personal finance classic offers ‘the secret’ to getting wealthy, and has inspired the world’s Dale Carnegies, Tony Robbins, Guy Kiyosakis. The ‘secret’ is not so hidden, and the prose is cheesy, but I’m willing to concede that the book could put you in the right mind-set for building wealth.
The Psychology of Money, by Morgan Housel. The best living finance writer with an instant classic of behavioral finance.
Investing Demystified: How To Invest Without Speculation And Sleepless Nights, by Lars Kroijer. A former hedge funder offers a simple, low-cost way to construct an effective global portfolio, keeping in mind the efficient market hypothesis (you don’t have an edge!) and the efficient frontier theory of portfolio construction.
A Random Walk Down Wall Street, by Burton Malkiel. The classic that launched the index fund market and popularized the efficient market theory. And its surprisingly interesting to read. You should read this!
Behavioral Investment Counseling by Nick Murray. Another Murray classic, directed at advisors, to convince them that client behavior matters more than anything, and therefore how an advisors time, effort, and talent should and should not be allocated.
Innumeracy: Mathematical Illiteracy And Its Consequences, by John Allen Paulos. An interesting and entertaining book on the importance of mathematical literacy, although I don’t think one of the intended audiences – innumerates – would ever read it.
Stocks For The Long Run, by Jeremy L. Siegel. A classic in which Siegel present the 200+ years of data to show the overwhelming advantage of stocks over ‘safe’ investments when it comes to building wealth.
If Your Money Talked What Secrets Would It Tell, by Gary Sirak. Sirak offers real-life illustrations of his 8 Principles of Money, based on his career as a financial advisor for the last 30 years. He also argues persuasively that most of our trouble with money is caused by our own personal beliefs about money. The Millionaire Next Door – Surprising Secrets of America’s Wealthy, by Thomas J. Stanley and William Danko. An influential (at least in my life) best-seller on the difference between having wealth and displaying wealth, and solid ideas on how to accumulate wealth.
The Millionaire Mind, by Thomas Stanley. Attributes of wealthy folks, such as their frugality, monogamy, purchasing habits, entrepreneurship. The Only Investment Guide You’ll Ever Need, by Andrew Tobias. Funny and Useful, it’s a personal finance guide that actually lives up to its hyperbolic name.
My Vast Personal Fortune, by Andrew Tobias. Funny, quirky, and revealing anecdotes on real estate and advertising. Features Tobias’ obsession with auto-insurance.
Mathematics Standard Level for the International Baccalaureate, by Alan Wicks. I didn’t actually review this book, but just referred to it in my discussion of compound interest. The International Baccalaureate is how I learned about “Sequences and Series,” the mathematics behind compound interest. Also, this was written by my high school advisor and math teacher, so you should buy it!
The Contrarian: Peter Thiel and Silicon Valley’s Pursuit of Power by Max Chavkin. The first review in my series on our new billionaire philosopher kings. Peter Thiel has made some brilliant investments. He is also not a good guy. It’s his “nazi curious” leanings that make me particularly nervous.
The House of Morgan, by Ron Chernow. Fascinating history of the origins of JP Morgan, Morgan Stanley and Deutsche Bank (which absorbed the UK’s Morgan Grenfell). Even does much more in a few short chapters on recent history to explain how Goldman Sachs “came to rule the world,” than does Cohan’s book by that title.
Money and Power – How Goldman Sachs Came to Rule the World, by William Cohan. Cohan doesn’t answer the question in the title, and he cherry-picks a series of embarrassing episodes from Goldman’s history to offer it up as a scapegoat. The one useful section is his chapter on the mortgage department, in the years just prior to Crisis of 2008.
The ChickenShit Club:The Justice Department and Its Failure to Prosecute White-Collar Criminals, by Jesse Eisinger. Eisinger explains in detail why nobody went to jail as a result of the mortgage crisis, with specific focus on the weakening of the Justice Department’s will to aggressively prosecute individuals and companies after the Enron/Arthur Anderson debacles. The Intelligent Investor, by Benjamin Graham. My kids will be reading this when they get old enough, because, 65 years later, it’s still fresh, and it will still be fresh in another 15-20 years.
The Hard Thing About Hard Things, by Ben Horowitz. Horowitz led his company through harrowing crashes and extraordinary success. He describes the painful decisions and gut punches of being CEO during the bad times. The latter-half of the book is less interesting, but the first part is intertwining and useful.
Systems of Survival – A Dialogue on the Moral Foundations of Commerce and Politics, by Jane Jacobs. This isn’t about Wall Street, but rather about two interdependent systems of survival. Guardians (government functions) and Commercials (business functions) work well together but operate by separate precepts. Each has its own internally consistent moral code, but the breach and mixing of precepts can lead to monstrosities. I love this book as it practically explains everything you need to know about Left-Right/Democrat-Republican/Government-Business debates.
Flash Boys: Not So Fast by Peter Kovac. In insider from the high frequency trading world explains how Michael Lewis got so much wrong in his book Flash Boys.
Boomerang – Travels in the New Third World, by Michael Lewis. The silliest of Lewis’ Wall Street books, but nevertheless entertaining cultural snapshots of countries in the 2008 Crisis.
The Big Short – Inside the Doomsday Machine, by Michael Lewis. Funny and accurate review of the 2008 Crisis, in which Lewis does what no other journalists did – he makes the short-sellers the heroes.
Liar’s Poker, by Michael Lewis. The original classic. Start your Wall Street reading here, about Lewis’ short stint as a bond salesman, at Solomon Brothers, in the mid-1980s.
The Lean Startup by Eric Ries. Redefining the metrics of startups, and a whole new way of thinking about them. Don’t start a company, instead start a series of experiments to test your business hypothesis.
Where Are The Customers’ Yachts? by Fred Schwed. I had not expected this to be as funny as it was. Somehow, it turns out I dig 1940s financial humor, with some sly lessons on how Wall Street really works.
The Green And The Black, by Gary Sernovitz. Funny, informed, complex – A great overview of the implications of the shale revolution, aka the fracking revolution in the United States.
Too Big To Fail, by Andrew Ross Sorkin. Should be titled “Too Connected to Criticize” as Sorkin protects his present and future sources – the Wall Street CEOS of 2008 – from any criticism or real analysis of their responsibility for 2008.
Black Swan – The Impact of the Highly Improbable, by Nassim Nicholas Taleb. Taleb explains how the unexpected tends to shape everything, and our models never see the unexpected before it’s too late. Also, his timing on this book, right before the 2008 crisis, was awesome.
Fooled by Randomness, by Nassim Nicholas Taleb. Taleb’s first book blasts the traditional Wall Street world-view with his empirical skepticism and brash, take-no-prisoners, style.
Fiction
The Lives Of Animals, by J. M. Coetzee. A challenging, only semi-fictional philosophical exploration of the moral relativity of animals, compared to humans. Are we perpetuating an unthinking Holocaust on animals? Accompanying essays help flesh out the ideas. The Pickup, by Nadine Gordimer. A novel exploring the immigrant and emigrant experience, and maybe, the impossibility of true understanding between people. The Mystery of the Invisible Hand by Marshall Jevons. Two economists write this series of murder mysteries in which an economist applies economic theory to catch the criminal. This one takes place in San Antonio TX so I had to read and review it.
Capital, by John Lanchester. This book review, by Michael Lewis, contains great observations about English writing, and English attitudes towards capitalism.
A Conspiracy of Paper by David Liss. Explore 18th Century London stock markets just prior to the crash of the South Sea Company, as proto-private eye Benjamin Weaver investigates stock fraud and the death of his father. Fun stuff!
The Earl Next Door: The Bachelor Lords of London by Charis Michaels. American heiress Piety Grey battles scheming relatives and a literally falling-down London townhouse, while navigating the romantic pull of the Trevor Rheese, the Earl next door who thinks he just wants to live alone, unencumbered by responsibility for others.
Undermoney by Jay Newman. A prescient novel about Deep State power brokers, mercenaries, murderous kleptocrats in Russia and New York City. Newman somehow has the chops to describe their world in a way that feels like he knows what it’s like. Also, Newman is a bad ass hedge funder, so definitely has experienced some of this first hand.
Going Going by Naomi Shihab Nye. I reviewed this young adult novel in part because it takes place in my neighborhood and in part because it gave me a great excuse to discuss some meditations on what makes for a good city, and a good life.
The Turtle of Oman, by Naomi Shihab Nye. We brought this young adult novel on a trip to Big Bend National Park, which happens to be the perfect place to experience Oman. My older daughter and I enjoyed this tremendously.
The Way We Live Now, by Anthony Trollope. A book review by a friend, of a favorite book and favorite author, featuring the 19th Century British Bernie Madoff.
Theory of Knowledge
An Illustrated Book of Bad Arguments, by Ali Almossawi. Almossawi’s online book is a pleasurably illustrated taxonomy of terrible logic, of the kind we so often hear from political pundits or members of the Financial Infotainment Industrial Complex.
An Illustrated Book of Bad Arguments
Risk Savvy, by Gerd Gigerenzer. Ultimately disappointing book that has some points to make about the limitations of building complex risk models for highly complex systems. But too much seems to be culled from presentations to rooms full of doctors, or something, and I was bored. I’d prefer to go with Nate Silver any day.
Dark Age Ahead, by Jane Jacobs. One of my favorite authors, with a title that made me need to read it. Jacobs has a theory of what will break civilization apart, and its all plausible.
Help, Thanks, Wow by Anne Lamott. Not really related to finance or even theory of knowledge. Just a meditative book that struck me as important to read and review. I highly recommend it if you need a good cry.
The Signal and the Noise: Why So Many Predictions Fail – But Some Don’t, by Nate Silver. Silver argues that applying Bayesian probabilistic thinking to a wide range of complex phenomena like sports betting, weather, earthquakes, Texas Hold ‘Em Poker, and politics help us understand the present and forecast the future far more than most legacy models we work with.
Snowden betrayed the US and the intelligence community for a higher cause. I find his arguments utterly compelling. We are not thinking hard enough about the implications of the new surveillance society and surveillance marketplace.
Tobias delivers solid personal financial advice, but in a playful tone.
He enlivens an entire chapter on saving money – the world’s dreariest subject – with anecdotes about his own fetishistic ways to scrimp.[3]
In the chapter about beginning to invest, Tobias delivers the punch-line early on: Trust No One, while offering fairly hilarious ways in which his younger, more gullible self, failed to head his own good advice.
In the stock-investing chapter, he hits the essential notes which readers of my earlier posts and reviews will know by now:
Tobias made money early in his life – through best-selling books and then more significantly through best-selling personal finance software – so he managed to quickly accumulate a lifetime’s worth of successful and unsuccessful investment experience. He spins his unsuccessful experiences into memorable and hilarious ‘How-Not-to-Invest’ stories throughout the book.
Tobias suggests three versions of a Cookie Jar Experiment, which over a month can viscerally and intuitively teach the magic of compound interest to your kids.
Version One. Offer your kid $1 on day one, and put it in the cookie jar. Offer to add 10% per day in interest growth on that original $1. Thereafter – Day 2: $1.10 in the jar, Day 3: $1.21, Day 4, $1.33. After a month you’ve got $17.45 in the jar, which shows how powerful 10% compounding can be, even if you begin with just $1. Tobias suggests you probably won’t continue the experiment to the end of Month 3 ($5,313) or Month 6 ($28 million) but of course, that’s up to you and your own resources. While ‘real life’ doesn’t let you compound that quickly on a daily basis, the experiment lets you demonstrate the amazing power of compound growth. [NOTE: I have since done this experiment with my oldest daughter, which I wrote about here. And then a follow-up post on the same topic here, as this allowance experiment is even better than I first realized.
Version Two. Between your two kids, you offer the same deal, with a twist. If one of them is willing to skip the first three days of interest accrual, they can get something desirable like a chocolate bar. After they finish fighting over the chocolate, you run the experiment for two months. The kid who went hungry has $304, while the ‘lucky’ kid who got the chocolate only has $228 in the Cookie Jar at the end of 60 days. Lesson: Start saving early because it’s the earliest accruing period that matters the most.
Version Three. Run the same experiment, but use the interest rate associated with many credit cards, like 20%. Start adding money to the $1 at a 20% growth rate and label this ‘Credit Card’ growth. On day 19 the ‘credit card’ account has grown to $32, versus the $6 that the original savings at 10% per day grew to. If you run the comparison all the way to day 35, the difference is $590 for the credit card account versus $28 for the ordinary 10% growth account. The key to this version is pointing out that some people scrimp and save and achieve some growth on their savings, while others pay huge amounts to credit card companies.
I taught a personal finance course last Spring, for bright college students, and I plan to do the same next Spring. One of my frustrations was with the textbook we used, a dry-as-dirt tome written by CPAs, seemingly for CPAs. My co-teacher and I ended up hardly ever referring to it, because how can you expect anyone to read such a thing?
Unless I can come up with something better real soon, the students will get assigned Tobias’ book. I think it’s all they need.[4]
[1] It doesn’t actually pain me to say this. I use that turn of phrase to capture the sense of the Oscar Wilde aphorism “Every time a friend succeeds, a little something in me dies.” And Tobias is not a friend, but rather, I am jealous because I’m attempting to write a personal finance book, and Tobias has done such a good job with his.
[3] He apparently carries Crystal Light powdered packets when he travels to save on beverages, buys canned goods by the pallet at Costco, rarely accelerates his car (to save on gas), checks his bank statements for errors every month, and has substituted cubic zirconium for diamonds in any jewelry purchases he ever made. In a related story, his net worth is above 99% of the people reading this right now.
When I started Bankers Anonymous, I decided I would not spend any time on “How to Invest” books, because I believed the whole genre unworthy of serious consideration. Instead, I would consider “How Not to Invest” books as decidedly more fruitful variations on a theme, warning readers about pitfalls and snake oil pitches in the books-on-investing world.
Since then, I’ve edged closer to reviewing on this site what most people would consider “How to Invest” books.
Jonathan Clements’ 25 Myths You’ve Got To Avoid If You Want To Manage Your Money Rightbarely qualifies under my original restrictive criteria for books I can review. But because he engages in a contrarian-style debunking of conventional investment wisdom – which I like – I’m going to offer him, and me, amnesty from my original rule.
What fun are personal blogging rules if you don’t break them, anyway?
Clements wrote the “Getting Started” personal finance column for the Wall Street Journal for many years, honing his writing chops for years on these topics. Clements published 25 Myths in 1998, just 3 years after Nancy Dunnan’s laughably anachronistic Your First Financial Steps, but by contrast his advice retains its freshness well past the ‘sell by’ date.
Each chapter tackles a conventional wisdom myth of personal investing with a mini-section titled “Where We Go Wrong,” followed by another mini-section titled “The New Rules.”
While admittedly some of these myths are really straw men – few people who’ve ever thought about the topic actually embrace the old myth being debunked – Clements’ method for teaching on the topic works well. Myth, Mistake, New Rule. Wash, Rinse, Repeat.
In sum, I recommend this book.
In the spirit of providing value-added services for Bankers Anonymous readers – value-added or your money back! – and because these are all thoughts worth thinking, I provide Cliffs Notes for Clements’ book.
Myth #1 – You can have it all
Reality – Few of us mortals can simultaneously pay off debt, save for an emergency fund, purchase a home, maximize retirement accounts, never carry a credit card balance, pay for college, and still have something left over beyond rice and beans every day. At least in the short run, you have to prioritize and make hard choices. Fair enough.
Myth #2 – Get a good job and you’ll be set for life
Reality – Nobody has job security anymore, pensions are few and far between, and few people spend all their working years with the same employer, or even in the same industry. This seems even truer today than it was when this book came out in 1998.
Myth #2 – Stocks are Risky
Reality – In the long run, not really. In the long run, bonds and money markets are risky because after taxes and inflation, they offer no real return. This is among Clements’ most controversial statements, and I couldn’t agree more, despite the fact that he published his book before both the tech crash of 2000 and the credit crunch of 2008. In fact, myth #3 is where I decided this was a book worth reading, as it agrees on this point and others quite closely with one of my absolute faves, Simple Wealth, Inevitable Wealth.
Myth #4 – You can’t go wrong with IBM
Reality – This myth is short-hand for the idea that any one company’s stock offers immunity from investing disaster and, despite the headline, Clements really focuses on Microsoft as the heralded ‘blue-chip’ of the 1998 time-period. In reality, any single company can go horribly wrong, and most individual investors would do better to focus on sector-investing in the equity markets, rather than stock-picking.
Myth #5 – You can beat the market
Reality – We are all the market, so ‘beating’ the market is both mathematically implausible for the majority of us, as well as empirically rare, and a red-herring of an investment goal. For me, this myth ranks as the biggest lie perpetrated on us by the Financial Infotainment Industrial Complex. The goal should not be to ‘beat’ the market, but rather to be exposed to the market, to achieve market returns.
Myth #6 – Your investment will make 10 percent a year
Reality – Here’s a bit of an anachronism from 25 Myths since few people in 2013 expect 10% returns from the stock market on a consistent basis. If Clements wrote this book in 2013 he’d have to make the myth: “Your investment will make 5 percent a year” just to make it a plausible straw man. On the other hand, memories are short, and we’ll have to forgive investors entering the field after 2009 for outlandish expectations. Don’t look now, but the damn market just more than doubled in the last four years. Pretty soon folks will think that’s the new normal. Double my money in just 4 years! Sweet!
Myth #7 – You can’t go wrong with mutual funds
Reality – Sector mutual funds can be terribly undiversified, expenses can be outrageously high, some investment managers still sell “load” funds, and minimum investment sizes can keep people out of the market, to name just a few flaws of mutual funds, broadly understood.
Myth #8 – You can find the next Magellen
Reality – Again, an anachronism. People under 40 don’t think of Peter Lynch’s fund –The first $billion mutual fund and easily the most famous mutual fund of the 1980s – when they think of investment rock-stars. Legg Mason’s Bill Miller overtook that crown in the 2000s, and hedge fund managers largely replaced mutual fund managers as the sexy geniuses touted by the Financial Infotainment Industrial Complex. Soros, Robertson, Jones in the 1980s and 90s, Tepper, Ackman, Loeb, Cohen, Einhorn, Eisman, Paulsen in the 2000 and 2010s. The point, however, is that few of us can realistically pick those winners before they were rock stars. Once they are rock stars, you’re either purchasing lagging returns (an error!), or you can’t actually get into the fund (quel domage!)
Myth #9 – Index funds are guaranteed mediocrity
Reality –Index funds outperform most actively managed funds over the medium to long run, mostly due to the latter’s higher fees and higher portfolio churn.
Myth #10 – Nothing’s safer than money in the bank
Reality – Clements recommends money market funds, with check-writing capabilities, as a higher-yielding opportunity than savings in a bank. At this point in the interest-rate cycle (zero return either way!), and with the unfortunate experience of money market funds ‘breaking the buck’ in 2008 without a government bailout, I’m less inclined than Clements to point out the advantages of money market funds over money in a bank. But, whatever.
Myth #11 – If you need income, buy bonds
Reality – To quote Clements: “Investors love bonds. It’s what you would call a sado-masochistic relationship. Bonds suck investors in with their fat yields, then bludgeon them with inflation, taxes, defaults, early redemptions and more. Yet folks keep coming back for more…What do I think? I think bonds stink.” The irony here is that I wholly agree with Clements despite two important situational facts: 1. I am a bond guy by training and fixed-income oriented in my investment outlook 2. At the time he published his book, bonds easily offered 6.5% US government-guaranteed yield, which any total-return-oriented equity investor would probably kill for today.
Myth #12 – Hedge your bet with hard assets
Reality – Clements points out that hard assets like real estate, precious metals, art, and collectibles should only reasonably return the rate of inflation over the medium and long run. Despite my arguing in favor of home ownership as a particularly advantageous hard asset investment, I agree with his expectations-setting of price appreciation when it comes to hard assets.
Myth #13 – You should own a balanced portfolio
Reality – In this context, Clements means ‘balanced’ as a 60/40 split between stocks and bonds. Clements points out, rightly, that many individuals would benefit from a more equity-oriented mix, and the specific 60/40 traditional blend doesn’t work for everyone. Fair enough. Although to pick a fight with him and myself at the same time: While 60/40 may not be the answer to everybody’s needs, there are also much worse ways to allocate your investments. Any individual investor should probably deviate meaningfully from 60/40, but if you were to mandate an allocation that everybody has to follow, 60/40 isn’t a terrible place to start. It’s not right for me, for example, but it wouldn’t completely screw me up either, as much as other potential allocations might. To pick another fight, only with Clements this time, he’s overly proscriptive and enamored with zero coupon bonds for investors. I get where he’s coming from, but I certainly wouldn’t send any individual out to buy zero coupon bonds today.
Myth #14 – You need a broker
Reality – Discount/low-service/online brokerages may be just fine for the do-it-yourself generation, even more true now than it was when 25 Myths first came out. Clements wisely points out, and I concur, that a good investment advisor offers timely hand-holding when the shit inevitably hits the fan in your stock portfolio. Their value-added is to get you to do nothing, because you made a reasonable plan, and now you need to be tied to the mast, and not allowed to sell out your equities at the bottom. That is the true value of an investment advisor.
Myth #15 – Keep six months of emergency money
Reality – Few people can do this, and credit cards, home equity lines, or even non-retirement equity accounts may serve this purpose for many people and under many conditions.
Myth #16 – Debt is dangerous
Reality – Of course it is dangerous. But it may be better than the alternative of not using debt, such as never owning a car, never going to college, always renting your home, or keeping too much cash earning zero return. He points out the advantages available in stock margin accounts (too scary for me!) and home equity lines of credit, which I highly endorse under certain scenarios.
Myth #18 – You can’t beat the mortgage tax deduction
Reality – Clements argues correctly that having a large mortgage ‘for the deduction’ is not clever but asinine. You end up spending $1 to save 15 cents. “Spend to save” is such a large part of our advertising and consumption culture that I’m not surprised the Financial Infotainment Industrial Complex has convinced so many of us of this ‘wisdom,’ but still.
Myth #19 – Invest in your house
Reality – Houses can be huge money pits, in which we convince ourselves that spending money on the structure for consumption purposes may be mistakenly considered an ‘investment.’ As Clements points out, the home improvement industry brags:
you might recoup 95% of the cost of a minor kitchen remodeling, 91% of a bathroom addition, 83% of a family room addition, 77% of a bathroom remodeling, and 72% from adding on a deck.
Reality – Trading up in terms of house size or price ‘as soon as you can’ can cost you somewhere between a lot to everything, as anyone with a pulse, watching the 2008 credit crunch, realizes.
Reality – Apparently this must have happened back in the 80s and 90s as a tax dodge. I never hear about anyone doing this nowadays. Maybe the parents I know are just poorer than the New York City-based parents Clements interacted with. Or maybe parents today learned too much from the 1980s, and Studio 54, and how a lifetime of parental investments can be snorted through your child’s nose. Anyway, in case you’re tempted, Clements doesn’t recommend this.
Myth #24 – Max out your IRA every year
Reality – Clements wants you to know that retirement-account funds are semi-permanently locked up, they change the eventual taxable nature of your retirement income to capital gains, you might have tax hassles, and you still pay taxes upon death. I suppose he’s right, but for most of us it’s still a worthy aspiration to max out our IRA. It’s unlikely, but you might miss out on a Mitt Romney type situation if you don’t max out your IRA – especially a self-directed IRA – and Roth IRAs have special powers on which Clements does not elaborate. So I mostly disagree with Clements on this ‘myth.’ Let’s move on.
Myth #25 – One day, kids, all of this will be yours
Reality – Estate planning takes a lot of work, and it is available to folks who invest a lot of time and some money in the project. He urges careful organizing, talking as openly as possible with heirs, and remaining alert to the opportunities for giving tax-free. Fair enough. I’m not there in my life yet to have done much thinking about this, beyond paying an attorney to prepare a simple will.
When I started Bankers Anonymous, I decided I would not spend any time on “How to Invest” books, because I believed the whole genre unworthy of serious consideration. Instead, I would consider “How Not to Invest” books as decidedly more fruitful variations on a theme, warning readers about pitfalls and snake oil pitches in the books-on-investing world.