Even though Eker offers some important insights, I can’t in good conscience recommend this.
First, the good parts
Eker digs in right away with the proposition that we are our own worst enemy when it comes to financial success. If saving money eludes us, or high-interest consumer debt burdens us, we probably need to do some soul-searching about our own relationship to money.
Did we learn from our parents that money was evil? Did some childhood experience make us likely to spend money beyond our means? Do we feel deep down that we do not deserve to be wealthy?
I’m not sure this applies in every case (some of us are just flat broke and its not psychologically-rooted) but I do think money brings out the irrational in everyone. Sometimes, money success requires us to overcome unconscious beliefs, or develop impulse-control via therapy, or to engage in Jedi-mind tricks to save money.
All of which is to say I think Eker has some important points to make about the relationship between our unconscious selves and our bank accounts.
Eker also has some interesting – totally unproven of course, but interesting[2] – things to say about how the attitudes of wealthy people differ from the attitudes of non-wealthy people. He’s not above platitudes and clichés, but as I recently wrote in another book review, many clichés turn out to be true and useful.
Finally, Eker employs a cheesy-but-probably-effective series of cognitive behavioral therapy methods to help people address their problem. He advocates matching a physical gesture to a stated intention. Something along the lines of touching your forehead and stating outloud: “I am the master of my financial destiny and I will maximize my wealth.”
Now, this is extremely easy to parody, and SNL did parody this type of thing, but if it works, then who’s laughing? I’ve got no problem with cheesy things that work.
And now, the bad parts
So that’s the good news, now for the bad news.
Eker is an insufferable jerk. In Chapter one, page one, we get to hear that he’s a multi-millionaire. Guess what he tells us on page two? He’s a multi-millionaire. Page five, yup, still a multi-millionaire. These are not the last times he mentions it either.
Also, did he mention that he offers live “Millionaire Mind Intensive Seminars” through his “Peak Potentials Training” company? Yes, yes he did.
In fact, he mentions it multiple times in every chapter.
On the inner flap, just above the small-print copyright and publishing information, Eker spells out the terms and conditions of a “Free” seminar available to purchasers of the book, a $2,500 value![3] And he mentions the “free seminar offer” on the back cover of the book. As much as Eker offers some useful platitudes, he loses me with the obvious up-sell.
Reading the book I can too easily picture Eker pacing a big ballroom, microphone in hand, spewing his carnival barker patter.
“I make millions of dollars through these 7 secrets to success, and you too can make millions of dollars if you learn these secrets. But in this $2,500 weekend class I can only tell you the first three secrets. So…
Once you sign up for my 1-week “Intermediate Class” for the low low price of $15,000 then I’ll reveal the next four secrets.
But of course that will only get you so far, so I highly recommend my further Expert class on the 10 Practices of Highly Compensated people, which will only cost you $1,500 per month.” You get the idea.
This book is really a long-form text-based infomercial for his in-person seminars.[4]
But hey, it’s a free country, I guess.
More than anything I see his patter about his multi-millionaire secrets to wealth as a kind of dog-whistling for credulous clients. If you’re the kind of person who can stomach his braggadocio and platitudes, you’re probably the perfect candidate to shell out healthy sums for his in-person, upsold, seminars.
[4] I gather from other reviews of the book online that this ‘free’ offer requires you to provide your email address and place a $100 deposit by credit card to reserve your spot. So, yeah.
One of the challenges of trying to teach and write about finance is figuring out the right balance between factual/rational information and psychological/irrational awareness.
We can all “know” the right ten things to do with our money, or we can all learn five correct financial math techniques as much as the next person – but money topics are so darned psychological that the math and rules and facts only get us so far.
Without some kind of intervention, or a very unusual upbringing, we’ll probably just continue our irrational path and unhelpful decisions anyway.
Gary Belsky – a finance writer – and Thomas Gilovich – a psychology professor – teamed up to write the translational text Why Smart People Make Big Money Mistakes and How To Correct Them to teach us the most common psychological or irrational choices we all make about money, all the time. I say translational because this book is really a popularization, or translation, of behavioral economics, pioneered by Nobel Prize-winning Daniel Kahneman and the late Amos Tvorsky.
Quick aside on the history of economics: Traditional mainstream economics posits that people are rational, that we make self-interested utility-maximizing decisions, and we can understand society and the allocation of resources based on that beginning assumption.
Now, if this assumption of mainstream economics were actually true in all cases, the task of teaching personal finance would be made so much easier. We could just tell people:
1. Here are the facts
2. Here is your self-interest
3. Now go forth and become a rational, wealthy, person.
Since most people are not wealthy, I’m going to go ahead and make the bold statement that the assumption of rational self-interest needs some tweaking.[1] And Kahneman and Tvorsky pioneered some of the most impressive tweaking in 1960s, which pioneering work became known as behavioral economics. It turns out most of us inject quite a bit of irrationality into our personal finance decisions, which partly explains why so few people are wealthy, or as wealthy as they ought to be.
Belsky and Gilovich’s excellent book translates this research into memorable anecdotes and examples and applies it to some of the most common financial mistakes we all make. Their theory, which seems extremely plausible to me, is that understanding the irrational choices we often make, and why we make them, will help us make better choices in the future.
Ubiquity of Overconfidence
Most of us tend to overestimate what we know and underestimate our ignorance of what we don’t know. I appreciated Belsky and Gilovich’s following test:
Name a high and low range for
a) The diameter of the moon in miles and
b) The weight of an empty Boeing 747 in pounds. Set the range so that you are 90% confident that the correct answer will be within your high and low range.
This seemed pretty easy to me. And I recommend you think of your range before checking the answer in the footnote.[2] Just do it now, I’ll wait….
Ok.
So I did this and I got it wrong. Maybe you did too. Belsky and Gilovich say most people do get it wrong, even though most people could set an extraordinarily wide range and get it “right.” Their point is that for topics about which we’re really not experts, we tend to be overconfident with our answers. The idea here, applied to investing, is that we all tend to think we know more than we actually know.
In a related story, have you noticed a lot of complete amateurs who buy individual stocks? (Yes, I’m looking at you. And me.)
How about my own related story? Back in the Spring of 2001 I was selling bonds for Goldman Sachs and I was quite a sophistical investor, let me tell you. I bought and sold securities for a living, had minute-by-minute access to financial data, and smart finance professionals all around me with whom I constantly exchanged investment ideas.
I had my eye on an amazing stock for an amazingly profitable company and I had some pretty good information about it. I spent quite a bit of time on my Bloomberg terminal (all that Street research at my fingertips!) researching their strongest points. Although they ran a traditional oil and gas pipeline network business, they were known to employ some of the smartest guys on the planet, including an internal emerging markets bond hedge fund that was a client of mine. I knew these guys personally. After visiting my clients at this company in Houston, I came away so impressed that I vowed to myself I would invest my next big bonus in their stock.
Fortunately for me, Enron imploded in the Fall of 2001 before I got paid.
We are all extremely susceptible to the power of suggestion, when it comes to finance, through the ‘anchoring effect’ of numbers.
When the rug salesman shows us a fine carpet and names his offering price, we naturally know that it’s a bit high. We adjust some percent discount that seems like a ‘tough’ negotiating position, say 40% less. We then eventually find a middle ground with the salesman around 80% of the original offered price. We feel clever for driving that hard bargain to produce 20% savings. The rug salesman feels happy because, in fact, he started the price at 10 times above his bottom line price. What did we know?
When my student in the Personal Finance class I teach this semester mentions that Best Buy stocks are suddenly down 27% on the day, and asks me if he should buy some for a trade, as happened to me a few weeks ago, all I can think is I should tell him about:
1. The ubiquity of overconfidence, combined with
2. The anchoring effect of the previous days’ Best Buy price.
In reality, he has no idea whether Best Buy is fairly valued today, yesterday, or three weeks ago. Nor do I. But it seems cheap. So did the rug.
Money Illusion – Nominal v. Real
This one happens all the time. Belsky and Gilovich provide a nice example, which I’ve paraphrased below.
Three different homeowners experience price changes on their homes purchased for $200,000 in different ways, in the year before they sell it.
For the first homeowner, Peter, one year of intense inflation raises the price of all assets in his country, by 25%. He manages to sell his house at an appreciated price of 23%, netting him $246,000 at the end of the year.
For the second homeowner, Paul, at the end of a year of unchanged prices (no inflation) in the economy he sells his house for the same amount, and nets $200,000.
Mary, the third homeowner, experiences a rapid deflation of prices by 25% in the economy, and sells her house for a 23% loss, netting $154,000.
Who is better and worse off?
Now you may be clever enough to know that Mary is the best-off of the three, as the purchasing power of her $154,000 is higher than the purchasing power of Peter’s $246,000.
On the other hand, in the real world, it’s extremely challenging for all of us to remain immune to the illusions of real versus nominal dollar values.
Mental Accounting
As psychologically complicated beings, we create different ‘mental buckets’ for certain pockets of money.
This pushes us off the rational financial path in a variety of dramatic ways.
Most of us have a difficult time saving money because we experience the removal of that money from our ‘spending bucket’ as a painful loss.
When we can manage to set up an automatic payroll deduction into a savings account or 401K retirement plan, by contrast, we never have the chance to feel that loss. The act of accumulating savings goes from being extremely hard to do to being simple and unnoticed, a mental jedi-mind trick that for many is the key to having a savings plan.
Jedi Mind tricks regarding Imperial Credits
Loss Aversion
Belsky and Gilovich point out that we tend to experience the pain of financial losses more dramatically than the pleasure of financial gains. This inequality of reaction leads us to be more ‘loss-averse’ in our investment choices than we should otherwise be, in a purely rational world. In other words, if we were not plagued by our loss aversion, many more of us would have a much greater portion of our investment portfolios in risky assets – such as stocks – rather than non-risky assets – such as bonds – as I’ve argued, from a purely rational standpoint, before.
It doesn’t make sense for your wallet or your rational self, but we act with our irrational instincts much of the time.
Belsky and Gilovich present a great deal more examples of ways in which we all fall prey to illogical, irrational, thoughts and actions when it comes to finance. I highly recommend their excellent translation of Nobel Prize-winning research into actionable steps for improving our personal financial situations.
[1] No, nobody said anything about twerking. Now get your irrational mind out of the gutter.
[2] Moon diameter: 2,160 miles. I guessed a range of 4,000 to 40,000 miles. Oof. Empty Boeing 747 weight: 390,000 pounds. I guessed a range of 10 to 100 tons, or 20,000 to 200,000 pounds. Oof again. What did you guess?
[3] Or as Ygrette would say: “You know nothing, Jon Snow.”
McKinley’s book builds on the following, true, premise: kids and parents of young children rarely have much money. But the advantage they do have actually trumps money: They have time.
Time is the key ingredient to successfully exploiting the magic of compound interest. Enough time, plus a compounding return, makes anyone a millionaire.
And while we parents of young children generally feel unable to set aside savings on a monthly basis, McKinley rightly points out that we really could do it, if we decided to prioritize a little bit of savings over a little bit of luxury.
Painful, Powerful Prioritization Process
On the issue of eeking out savings to put away for our children, I appreciate his suggested step called the “Painful, Powerful Prioritization Process,” which is to fill out a monthly budget and then for each item in the non-priority column say out-loud to yourself “Spending $143 per month on my cell phone is more important to me than sending my child to college.” Or “having my nails done professionally means more to me than making my child financially independent.” [1]
As someone in complete agreement with McKinley’s premise, naturally I enjoy this book. A few of his specific techniques deserve special mention.
Roth IRA
I’ve written about this before, but the topic deserves repeating. The inter-generational tax-free wealth machine you can create simply and cheaply with the Roth IRA is almost too good. As McKinley writes, and I wholeheartedly agree:
I can’t emphasize strongly enough how potent an investment tool the Roth IRA is. There is virtually no other investment vehicle that is as flexible, available, and convenient, and that offers the potential for growth over the long term without incurring federal taxation!
Creating retirement accounts for minors
McKinley employed his infant daughter as a ‘model’ for marketing and promotional materials for his book, and he includes a picture of her in the introduction. He paid his daughter $2,000 for her trouble, giving her earned income that year.
Fortunately his infant daughter did not have the ability to blow her $2,000 in earnings on upmarket juice boxes and Ermenegildo Zegna cashmere-silk blend snuggly blankets, so McKinley opened up a $2,000 Roth IRA for his daughter.
As McKinley points out, many parents of small children have the opportunity to employ our children, pay them a “fair” wage, and then shepherd those annual earnings into a retirement account. [2]
Once our kids are teenagers, and have the ability to earn money outside of the house babysitting or doing chores for neighbors, those earning too can be funneled into a retirement account. Did seventeen year-old Johnny already blow his summer restaurant dishwasher job’s paycheck on frivolous things? It’s not illegal, if you as a parent have the extra money, to fully fund Johnny’s IRA that year, up to the amount of his earnings.
Because these retirement accounts created for our children may grow unimpeded for 50 years or so, until their retirement, the power of compound interest really helps.
One summer’s $5,000 in dishwashing earnings, growing for 50 years at 7% annual rate, becomes $147,285. That’s not millionaire status for one summer’s work in a smelly kitchen, but it ain’t nothin’ neither.
401K wisdom
McKinley drives home the point we all need to teach our kids – heck, we all need to teach ourselves – that almost nothing beats 401K participation. Especially when we’re young and poor.
Stop me if you’ve heard this one before, but the time to fully fund your 401K plan is during your first job, while you’re still in your twenties – when you can least afford it. I’m sorry, but it’s true.
Worker A, who funds his plan for his first ten working years – say age 22 to 32 will come out ahead of worker B, who skips the first ten years but funds his plan in equal annual amounts for the thirty years following age 32 – assuming an even annual compound return. It ain’t fair, but it’s simple math.
Estate Planning
I know the least about this area, but I learned quite a bit in the Chapter titled “Protecting your child’s wealth from your child.” The two goals seem to be a) reduce your tax bill, and b) do not give too much, too soon, to kids. Since McKinley’s a financial planner, and I’m not, I’ll assume his advice is solid for folks for whom this is an issue.
While I endorse this book, I have a few quibbles as well.
Assumed rate of return
The compound interest formula…
[which you’ll remember is FV = PV *(1+ Y)^N where:
FV = Future Value (how much money you’ll eventually have)
PV = Present Value (how much money you’ll start with)
Y = Yield, or Rate of Return, or Interest Rate (all equivalent ideas, usually expressed in annual terms)
N = Number of compounding periods (for example, number of years)]
…depends a great deal on what you assume Y, or rate of return, will be. McKinley wrote Make Your Kid A Millionaire in the sweet, innocent, days of the early 2000s so perhaps may be forgiven for assuming a 10% return whenever he shows the power of compound interest.
Were he to write this book today, I suspect McKinley would assume a more modest 5-7% return on risky equities over the long run. I know I would, even though this makes millionaire status less achievable. Unfortunately “Help your kid build a healthy six-figure nest egg!” has less of a ring to it.
Zero coupon bonds
In his chapter on setting aside funds for kids but retaining control over the money, McKinley suggests investing in zero coupon bonds. This strikes me as both overly complex for most people, as well as a way to earn a terrible return on your long-term money. Until interest rates change dramatically, and until purchasing zero coupon bonds becomes dramatically easier, I would not endorse this plan.
Variable Annuities
McKinley advocates using these as a kind of retirement plan for kids. I can’t agree. The extra layer of fees, opacity, and complexity, in my opinion, overwhelm any advantages that variable annuities have over traditional tax-sheltered retirement plans. Variable Annuities also violate my basic principal of insurance: use insurance products only for risk-transfer, not for investing.
These few quibbles aside, I still enjoyed this book and learned quite a few things. Parents of young children, this one’s worth it.
[1] I am drinking a large 3-shot cappuccino as I write this review. I can say out loud, with no remorse, that this 3-shot cappuccino really is more important than my kid’s financial security. But that’s because I’m an addict. Please forgive me.
[2] McKinley notes some legal limits on how children can earn wages. There are child labor laws of course, and a household ‘allowance’ does not count as ‘earnings’ that may be invested in an IRA. But there are still many ways young kids can make money, legitimately.
Gary Sirak’s primary insight in his book If Your Money Talked What Secrets Would It Tell– an insight I happen to agree with – is that the psychology of money, our personalrelationship with money – is usually our biggest personal finance problem.
Financial insecurity often plagues the professional making half a million dollars per year, even while financial sufficiency is possible for a person earning one tenth of that per year.
Whether you love money, or hate money, whether you accumulate it to excess like Scrooge McDuck or spend it wildly like Brewster, the underlying problem starts in our head, not in our paycheck.
Each person’s own personal money secret may be what Sirak calls a “self-limiting belief,” a deeply – probably unconsciously – held belief about money.
Self-limiting beliefs, Sirak explains, form at an early age. To overcome self-limiting beliefs we need to commit to self-examination and – one presumes – the additional intervention of a financial professional and personal finance books.
Sirak keeps this short enough to read on a flight between Chicago and New York. Pick this up at the airport bookstore, crack it open upon takeoff, and you’ll be done before the wheels touch down, with extra time leftover to solve the easy Sudoku puzzle in your inflight magazine.
Memorable Anecdotes
Sirak – just like anyone who has ever written a book like this – has a set of “8 Principles of Money,” common sense ideas not unlike ideas from, say, Thomas Stanley’s The Millionaire Next Door.
To makes his principles concrete, however, Sirak tells good stories. Over a thirty-year financial-planning career for individuals, Sirak accumulated illustrative anecdotes about people and their unhealthy relationships to money.
For each of his 8 Principles of Money, Sirak provides a brief and telling sketch from his own financial planning clients as illustration.
Getting tricked by smooth-talking scammers? – Sirak tells of his own gullibility about a start-up kids’ sports camp.
Worshipping money? Meet Roger, the ‘successful’ businessman who literally decorated his home with cash, while neglecting relationships with his wife and 5 year-old son.
Hiding debts from your spouse? – Sirak describes Ron and Alison, a married couple with totally incompatible spending patterns masked by secretiveness.
Spending money before you have it? We read about Dr. Allen, the newly minted MD who bought the twin BMWs instead of paying off student loan debt before the ink dried on his first paycheck because he felt he finally “deserved to live the good life.” Financial woes followed in short order.
Through his own and the mistakes of his clients, Sirak cautions us about common personal finance errors. With a quick series of “How Not To” stories, Sirak helps us begin to self-examine, exploring our self-limiting factors and money mistakes.
Gary Sirak blogs, and also has videos, sample budget spreadsheets, and a “Marriage Money Agreement” plus further information on his site www.ifyourmoneytalked.com
As a father of two daughters, I know I’ll never forget certain special times: their birth, Day 1 of Kindergarten, baby’s first piano recital, menacing the punk who is picking her up to go to the prom, and the police report I’ll file when she quits college to run off with the lead singer of that Norse Death Metal Band.[1]
Moments you never forget, like a first stock market investment
Dear readers, that stock market investment moment has arrived, so I thought I would bring you along with us on this beautiful father-daughter bonding journey.Grab your spreadsheets, and your handkerchiefs.
My daughter’s life savings
First, a confession:I am clearly a mean Daddy.
Until last week, my oldest had $370 in her bank account, the sum total of eight years of hoarding cash gifts from Aunts, Uncles, Grandparents, Santa Claus and the Tooth Fairy.In addition to the savings account, she also boasted $31 in cash that she scored at my Sunday evening poker game with the neighborhood dads.[3]
A few months ago I realized – here’s the mean Daddy part – that if she had a total of $500, I could take her hoard and buy some public shares in a custodial account.In that way I could simultaneously:
1.Remove her liquidity/temptation to buy Bratz Dolls (or something equally horrible)
2.Teach her valuable lessons in long-term investing, delayed gratification, and math.
Now, buying shares in public companies ranks #748 in the priority list for what eight year-old girls want to do with their life savings, but again, I am a mean Daddy and that’s the kind of cruelty I subject my daughters to.I’m an ex-banker, what did you expect?
The manipulation begins
I started in on the project a few weeks back.
“Do you know you have about $400 saved up?And do you know what would be fun to do with your money?”
Silence.
“We could pick a stock to buy and then track it in the newspaper, or even online!” I said cheerfully.Perhaps a bit too brightly.
“Okay…” she looks at me, with a healthy dose of mistrust.(I’m so proud of her.)
“So do you want to do that?” Picture me, with a hopeful face.
“Do you remember that plan I had for investing in a stock with your savings?”
“Kinda.”
“Let’s work on that today.”
I explain to her my plan, which is to walk around the kitchen, living room, and her bedroom, picking all the things that are made by big companies.And then from there I’ll have her pick which one would be the coolest company to invest in.
And also, I mumble to her in that fast voice explaining terms and conditions in the final 5 seconds of every car commercial or Levitra advertisement, we’ll need to pick a stock that we can invest in directly through the company, with an automatic dividend reinvestment plan, without having to go through a brokerage company.
Extra incentive
Then I told her if we did my stock investing plan with her $401 in life savings, I would kick in an extra $100, so she could have $500 total to invest in a company.She’s no Warren Buffett (yet) but I think she quickly understand the good deal I was offering.
And I knew that she needed at least $500 to invest in a company the way I preferred, which again was to pick a stock that we can invest directly in through the company, with an automatic dividend reinvestment plan, without having to go through a brokerage company
What we did
That afternoon, we spent 30 minutes with a pen and notebook, walking around the kitchen, living room, and her bedroom.We picked up objects and looked for the names of the companies that produced them.
Here’s what we wrote down:
*Johnson & Johnson – Lotion
*Macys – Couch
*Campbell’s Soup – Can of soup
*Colgate Palmolive – Soap
*Kellogg’s – Cereal
Maytag – Stove
Lakeshore – Wooden toys
*Sony – Stereo
Kenmore – Microwave
Viewsonic – Computer monitor
*Black & Decker – Coffee maker
*Apple – Computer
Bic – Lighter
Bayer – Vitamins
*Hewlett Packard – Printer
*Hasbro – toys
*CVS – Medicine
Morton’s – Salt
Kitchen Aid – Stove
Emerson – Clock radio
Sunbeam Products – Coffee grinder
Lands End – Lunchbox
*Target – Bag
Penguin Publishing – Cookbook
Biersdorf – Aquaphor
Milton-Bradley – Games
*Kimberly Clark – Kleenex
Pampers – Diapers
*Starbucks – Daddy’s coffee
Next, we opened up the Wall Street Journal[4] to the 1,000 largest stocks page, and whittled our list of companies to only those which appeared on this list – a smaller group – which I have identified above with an asterisk before the name.
Old-school stock picking – printed page and magic marker
I prefer her first stock investment to be made with a large, widely-followed company.
Finally, I asked her to choose among the large, public companies which five she felt most kindly toward, or which she thought made great products.
Her List
Her list was as follows:
Kellogg’s (Rice Krispies are loud loud loud!)
Apple (Mommy has an iPad and she is nice!)
Target (Fun shopping trips with Mommy!)
Starbucks (Daddy is an addict and clearly has a problem!)
Campbell’s Soup (Big Warhol fan!)
The final choice – DRIPs
The final choice of which company would get my daughter’s $500 came down to the very particular criteria imposed by Dad.
I wanted to teach my daughter a few key pieces of information about stock investing that I did not learn until relatively late in life. Namely:
1.You don’t have to invest through a brokerage company, but instead you can invest directly with many public companies, bypassing a layer of investment costs.If you are a buy-and-hold investor, this can save you money in fees over time without any inconvenience when it comes to trading – since you won’t be trading much.
2.You can set up a plan with companies to have any dividends directly reinvested in their stock.Traditionally these plans are known as DRIPs (Dividend Reinvestment Plans), and they allow investors to automatically purchase more shares – including fractional shares – with dividends.This is ideal for a kid with a 10-year (at least) investment time horizon, and who will not need to use dividends to cover her cost of living.DRIPs reduce reinvestment risk,[5] and they remove the temptation to spend investment income.In sum, they are awesome for my purposes with my 8 year-old daughter, and they are probably awesome for many adult buy-and-hold investors as well
So, I took the list of 5 preferred companies and looked up on line to see which ones offered DRIPs.
Our search among the 5 preferred companies
It turns out Apple is the least DRIPpy, as their investor relations page says it’s not possible to buy shares directly from the company.That’s fine, and seems like a perfectly reasonable position for the most valuable stock in the world.
Starbucks, Target, and Campbell’s Soup all offer a version of direct purchases from the company plus dividend reinvestment – in fact all via the same company – called Computer Share, which manages DRIPs programs for a number of companies.
I didn’t love the user interface for Computer Share, and each company specifies different terms: different minimum amounts, different costs to purchase, different costs to sell, and different reinvestment programs.
In my search for simplicity for my daughter, this wasn’t it, although I’m sure it’s a fine solution for many folks.
My daughter, admittedly, lost a bit of interest as I surfed the Interwebs reading about different programs for direct stock purchases.After looking over my shoulder for about 3 minutes, she disappeared for the next 30 minutes.She was either playing with her American Girl doll or playing Norse Death Metal Groupie.I’m not sure which.Daddy was busy.
“Aha!I found it!Kellogg’s allows us to invest directly and have automatic reinvestment of dividends, and they have a $500 minimum.So we’re good.So is Kellogg’s ok?”
“Um, ok Daddy, if you say so.”
“See?Isn’t this exciting?I’m excited.”
With her blessing I then took ten minutes online to open up the Custodian Account for a Minor, which involved my social security number, and inputting the bank account from which $500 would be drawn.
With that task completed, I returned to telling her a few things about investing in Kellogg’s stock.
I showed her on that page also that every quarter owners of the stock receive money in the form of dividends.Her dividends would buy more shares over time.
I told her that the total investment value of a company is the number of shares multiplied by the price of shares.I showed her in a spreadsheet how $500 would buy about 8 shares, with the stock price around $60/share.
I told her that her $500 could lose value, but that more often than not, in the long run, it will increase in value.
What I’m not trying to do with this investment
I’m excited about this project – admittedly about 8 times more excited than my daughter – but still this was a wonderful, awful, idea of mine.
But I know that my idea does not teach everything my daughter should know about stock investments.
We had nearly zero discussion about the relative money-making prospects of her first stock purchase.We barely talked about the attractiveness of Kellogg versus other companies – other than the fact that Rice Krispies are a very loud cereal (a big plus in the 8-year-old world) and other companies do not make Rice Krispies. Ultimately, greed can be an important motivator for stock investing, but I decided to downplay that for now.
I’ve told my daughter nothing about value investing vs. growth investing.
I’ve told her nothing about modeling future cash flows to identify the value underpinning her business ownership.
We know nothing about the management of Kellogg’s – for all I know Dennis Rodman is the new Chairman of the Board.
Dennis Rodman and new BFF Kim Jong Un
We didn’t read the latest annual report (although I downloaded it).
I have not exhaustively read the business news on Kellogg’s to help identify with her the known risks and opportunities of the company.
I’ve told my daughter nothing about properly diversifying a stock portfolio.I realize we’ve concentrated 100% of her equity portfolio in a single company, something I would never advocate for an adult.[6]
I’ve shown her, but de-emphasized, the importance of the historical price chart for the company, because it’s frankly not as useful as it appears.
I have not reviewed with her the freaky Black Swan events that can take a perfectly healthy-seeming company with a long history and destroy it quickly, in the process dis-Apparating[7] her $500.
What I am trying to do with this investment
Despite not covering everything, I feel good about four lessons which I have started to teach my daughter.
1. Our relationship to big business and the economy – We buy and use things, every day, made by big public companies.Those companies aren’t monsters. And they’re not the boss of us.If we have savings, we can be the boss of them.[8]
2. Math helps in the real world – Multiplication (a key 8 year-old skill to master) has a practical use in the real world, as do spreadsheets. The total market value of her investment at any time can be calculated by multiplying the share price by the number of shares she owns.
3. Investing money over time is possible, and important.
We can pick which investments to make from a wide variety of choices.It’s possible – although of course not guaranteed – that we can grow money through stock ownership, both when the companies pay dividends as well as when the share price goes up. In the long run, a variety of stock investments could make her money grow.In the short run, and in plenty of cases, she could lose money.
4. When possible, try for as little startup cost as possible
She can start investing her savings in public shares for as little as $500.
She does not need a brokerage company in order to invest in companies, but rather can invest in the companies directly, for about $15 in total cost.
She can set up a system to have regular dividends reinvested in those companies.
For now, that’s enough.
By the time she decides to sell – maybe that will be age 18 when she goes to college and needs spending money, or maybe age 19 when we enroll her in the convent to avoid the Norse Death Metal Singer – I expect we will have covered a few more investment lessons.
Disclosure statement: Other than the $500 Kellogg’s investment described here I have no direct investments in any of these companies mentioned, nor in any death metal bands, Norse or otherwise.
[1] Note: These last two are still in the distant future.My oldest daughter is only eight, thank the Good Lord.
[2] Note: That hasn’t happened yet either, because again, she’s eight.But I get weepy just thinking about what joy that milestone will bring to our family.
[3] Long story, short: She had a few premium hole cards early and a couple of good flops. Admittedly, also there was a little bit of crying when the pressure mounted.
[4] Yes, Daddy is a super-duper dinosaur.I read the Wall Street Journal, print version, every day.In this case though, I think the print version helped because we could physically hunt the page with our magic marker for the names of companies we’d found around the house.So, if your investment strategy involves a magic marker, I recommend a long-standing commitment to print journalism.
[5] Traditionally a bigger risk for bonds – the idea that you can’t invest your investment income at the same expected return as your initial investment – but still an issue for dividend stocks.
[7] She’s a Harry Potter fan, so she could relate to this description of her money.
[8] But listen, kid, don’t get any ideas about being the boss of Daddy, because only Daddy is the boss of Daddy.Doubts about this point are already a looming problem in the household.
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!
