Archives for posts with tag: The Millionaire Next Door

Markets in this region have been tanking and the STI has fallen below the 200-day EMA to the point that it’s about to pull the 50-day EMA below the 200-day. While this isn’t a perfectly reliable indicator in itself, this could present a good buying opportunity if this trend continues for another 6-9 months.

Anyway, if you’ve had a tough week, here are some reads to make it better.

 

‘Stingy’ millionaire donates S$3.35 million from S$20 million fortune to charity after his death (TODAY)

I’ve written about people like Agnes Plumb and Ronald Read. Finally, there’s an example from our local shores. Mr. Low Kum Moh was a sub-accountant who was born into a family of fishmongers. The secret to his wealth? Frugality and investing in the stock market over a long time-frame. This is pretty much the same story as the other ones I’ve featured here. The point of it all is that great fortunes can be made by people that most would consider very normal. The trick is to find a strategy that works and keep plugging away at it.

Which brings us to the second read.

 

In Praise of Incrementalism (Rebroadcast) (Freakonomics)

Freakonomics was the book that convinced me that economics could be interesting and that probably saved my university life.

In this episode of their podcast, they make the point that lots of progress in this world are based on incremental progress. The problem with most of us is that we tend to view great events or inventions as if they happened miraculously.

In particular, I love this example that their guest, economist David Laibson points out:

LAIBSON: One has the impression that it’s impossible to save enough for retirement — and to a certain extent, it is impossible if you start at age 50. But if you start early in life, and every year, you contribute let’s say 10 percent of your income, and maybe there’s an employer match, so now we’re up to maybe 15 percent, and you invest that savings in a diversified mutual fund, stocks and bonds, and you have low fees, and you keep going at that year in and year out, and you don’t decumulate prematurely — it’s amazing how that process produces millions of dollars of retirement savings. So it’s kind of hard to imagine how you go from what seems like a little bit of money each year to being a millionaire but that’s exactly the way it works when you work out the math.

Instead, most people often aim for that lottery ticket like buying bitcoin. Most people who do this put very little at the beginning (like a lottery ticket) and when it starts to pay out in a substantial way, they then proceed to bet the farm thinking that what has happened will go on indefinitely.

Unfortunately, this is almost always precisely the time when things start to go bad. Think of someone who bought bitcoin at $500 or $1,000. After seeing the price of bitcoin go to $10,000, they feel like a genius and proceed to place even bigger bets. Well, the bet may have paid off temporarily but look at how it’s turned out.

Which brings us to…

 

Bitcoin Bloodbath Nears Dot-Com Levels as Many Tokens Go to Zero (Bloomberg)

I’ve been writing about the problems with Cryptos since late last year (see here, here and here). To be honest, I’m not as pessimistic about crypto now as I was last year. Of course, there’s nothing fundamental to base my thoughts on but buyers are surely not as euphoric about cryptos as they were late last year.

I suppose the article compares the crash in cryptos to the crash in the tech sector during the dot-com era as prices in both situations have nothing fundamental to support them but I would argue that bitcoin is in a worse situation because, in case of the dot-com stocks, you could at least see if things were getting better based on a turn-around in cashflows and profits.

For bitcoin and cryptos, you have to track whatever these cryptos are meant to replace and see if those things are getting replaced at all.

Anyway, here’s the million-dollar picture from the article above.

bitcoinCrashJun18

 

Have a great week ahead!

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An acquaintance of mine posted this (along with a picture of the book ‘Reminiscence of a stock operator’*) on his facebook wall the other day:

“Retail investors quote Warren Buffett. Fund managers quote Jesse Livermore.
Who would you rather trust?”

I’m not sure why these two financial market personalities were even mentioned in the same breath but given this particular acquaintance’s recently found interest in trading I think the point he was trying to make is that if you want to make serious money, go down the path of the fund manager and not the retail investor.

There are a couple of ideas implied in that sentence that I find terribly misinformed.

First off, not all fund managers are going to have short holding periods (and therefore, should be classified as ‘traders’). Most do but that doesn’t change the fact that different fund managers have different styles and mandates.

Second, studies (championed by financial market luminaries such as Jack Bogle) have shown that fund turnover correlates strongly with worse returns.

Next, I like to present to you Jack Macdonald.

Jack who? Well, Jack MacDonald was a retired attorney from a Washington State who left close to US$200 million in his trust to three charities. That’s right. You didn’t read that wrongly, he left almost US$200 million. How did Jack do it? He didn’t do it by running an extremely profitable legal practice. Nor did he trade his way to those riches. He just stuck to good old fashioned investing and playing really strong (financial) defence. So strong, in fact, that no one in his retirement community even figured he was a millionaire, much less a hectomillionaire. The beauty of what he’s left behind is that his trust will probably be able to generate millions of dollars to disburse year after year to his charities in perpetuity. This is the kind of legacy you can build through proper investing. (you can read more about him here. h/tip: Joshua Kennon)

Trading might be a way to get you to riches but ultimately, to leave behind a legacy that lasts, one will have to adopt proper investing.

Lastly, I thought I’d mention that Jesse Livermore died penniless and of a self inflicted gun wound while Warren Buffett looks likely to eventually pass on a wealthy and happy man.

I think I’ll continue to listen to the retail investor in me.

*This book, of course, is the biography of Jesse Livermore.

Have you ever wondered what being a millionaire is like?

When asked that question, most people who aren’t in that grouping probably think of fast cars, high-society life and the likes. And if asked to make a guess of how they got there, these same people would probably go blank. Therefore, there’s nothing better than a good dose of reality and that’s exactly what ‘The Millionaire Next Door‘ (henceforth TMND) brings to the table.

TMND was the product of interviews conducted with 1000 persons belonging to the much sought-after status; and provides a good insight into how these people got there and what their lives are really like. The biggest take-aways from the book would be:

“Wealth is what you accumulate, not what you spend”

The authors, Thomas J Stanley and WilliamD Danko,  also identify seven factors that separate millionaires from non-millionaires which are:

1. They live well below their means.

2. They allocate their time, energy and money efficiently, in ways conducive to building wealth.

3 . They believe that financial independence is more important than displaying high social status.

4. Their parents did not provide economic outpatient care.

5. Their adult children are economically self-sufficient.

6. They are proficient in targeting market opportunities.

7. They chose the right occupation.

I’d highly recommend anyone who harbours thoughts of financial freedom (btw, just to burst your bubble, financial freedom is no longer having a million bucks, that’s hardly enough) to read this book along with The Richest Man in Town. Both books provide insights on what kinds of life the rich truly live and how to get there.

PS: I wrote this much much earlier but left it as a draft and totally forgot about publishing it! Luckily posts like this are timeless.

I recently read a friend’s facebook status that went something along the lines like:

“Car, Check. House, Check. Happy family, check. But little cash… I suppose this is what the life of a young couple is like.”

That got me thinking. Should a young person’s life really be like that? After all, it’s highly likely that most young people’s life would be like that. After all, most graduates fresh out of school earn something in the range of 2.5K-3K. Those that get married and start a family immediately incur out-of-pocket expenses such as renovation of a new home, care and support of young children etc. This would be on top of wedding and honeymoon expenses (which may or may not be covered by the gifts received) and the likes in the not-too-recent past. Add to that a car (which really adds much more to travel expenses in exchange for time savings and comfort) and it’s no wonder young couples find it hard to save at all.

However, should things really be like that?

I won’t go into posturing whether a car is a necessary or unnecessary expense- most people should be mature enough to know that by buying a car, you are incurring much higher transport expense compared to taking public transport. In exchange, you get comfort (rather than time savings in my opinion).

What I’ll do is link you to this calculator! It calculates your Net Worth and benchmarks it by using a formula that was described in The Millionaire Next Door. The good thing about the formula is that it factors one’s age and current income to get a benchmark Net Worth figure. Anything below that and you have under-accumulated wealth, anything over and you’re a Prodigious Accumulator of Wealth (PAW).