Millionaire Teacher: Book Notes

I. Summary

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This book reveals a financial secret that everyone can learn but is rarely taught in school: You don’t have to be a finance expert or a high-income earner to achieve financial freedom; prudent spending and rational investing are all it takes, even on a modest income.

The author, Andrew Hallam, is a high school English teacher who started investing at age 19 and became a millionaire by age 38. He distilled his years of investment experience and wisdom he garnered from numerous financial wizards into nine simple and actionable principles. Supported by factual cases and personal anecdotes, he guides readers step-by-step towards financial freedom.

II. Chapter Summaries

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Lesson One: Spend Like You Want to Grow Rich

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• Distinguish between “wants” and “needs”: Spend rationally, control unnecessary expenses, and avoid over-reliance on credit cards. Invest the money you save.
  • Example: In his youth, the author lived an extremely frugal life to pay off his student loans as quickly as possible, succeeding within a year and subsequently investing all his income.
• How to buy a car for less: Opt for low-mileage, easy-to-resell used cars instead of blindly pursuing luxury vehicles.
  • Example: The author purchased low-mileage used Japanese cars in his youth and sold them for the same or even higher price after a few years, turning a small profit.
• Buying a house: It’s not about the down payment, but the interest rate: Consider whether you can still afford the mortgage if the interest rate doubles to prevent financial strain due to rising rates.
• Start strong, don’t rely on a “rich dad”: Excessive financial support from parents can hinder a child’s ability to create wealth independently. Teach them financial knowledge and skills, letting them learn how to earn, save, and invest on their own.
  • Example: Studies show that accountants who received financial assistance from their parents had 43% less average wealth than their self-made counterparts.
• You don’t have to live like a pauper, but spend like a millionaire: Frugality does not equate to a lower quality of life. It’s about investing the money you save, allowing it to work for you instead of the other way around.

Lesson Two: Use the Greatest Investment Ally You Have

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• Leverage compound interest to accelerate wealth accumulation: The earlier you start investing, the longer the time horizon for compound interest to work its magic, leading to faster wealth growth.
  • Example: Investing $45 per month for 40 years yields significantly higher returns than investing $800 per month for only 25 years.
• Buffett’s “Noah’s Ark Principle”: Invest early, just like Noah built the ark, don’t wait for the “flood” to arrive before taking action.
• What to do when you get paid: Keep track of your monthly expenses, calculate the amount available for investment, and transfer that money to your investment account on payday to avoid running out of funds at the end of the month.
  • Example: A couple the author knew, both teachers, realized their wasteful spending habits after tracking their expenses for three months. They subsequently allocated more money to investment, tripling their investment amount within two years.
• The stock market doesn’t believe in tears, but it believes in time: In the long run, the stock market rises with corporate earnings growth. Therefore, be patient and don’t be intimidated by short-term market fluctuations. The author’s stock market investments from 1990 had increased tenfold by 2016.
  • Example: Using Willy Wonka’s chocolate factory as an analogy, the author explains the fundamentals of stocks, share prices, dividends, and the stock market in a simple and engaging way, highlighting the substantial returns from long-term investment.

Lesson Three: Small Fees Pack Big Punches

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• Index funds: the secret to effortless wealth generation: Index funds track a specific market index, holding all or most of the stocks in that index to achieve the same return as the market. Their advantages lie in low costs, risk diversification, and stable returns.
• “The Oracle of Omaha” buys index funds: Investment gurus like Warren Buffett, Paul Samuelson, and Daniel Kahneman all recommend index funds because they provide market-average returns at the lowest cost, outperforming the vast majority of actively managed funds over the long term.
  • Example: Buffett suggests putting 90% of one’s funds into an ultra-low-cost S&P 500 index fund.
• 78% of active fund returns go to the advisors’ pockets: The high fees (management fees, transaction costs, commissions, etc.) of actively managed funds will eat up most of the investors’ gains. Generally, their returns underperform index funds over the long run.
  • Example: The author’s wife could have earned an extra $20,000 if she had invested in index funds instead of actively managed funds, as recommended by her financial advisor, over the past five years.
• Don’t bother picking “top actively managed funds”: There is no reliable method to consistently pick actively managed funds that will outperform index funds. Even if a fund has a history of exceptional performance, it doesn’t guarantee future success. Their returns tend to revert to the average or lower in the long run.
  • Example: Investors in Morningstar’s five-star-rated funds often experience lower long-term returns compared to index fund investors.
• “International citizens” should opt for index funds: Actively managed funds are significantly more expensive outside of the US. Therefore, “international citizens” should choose index funds to lower their investment costs.

Lesson Four: Conquer the Enemy in the Mirror

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• Stay rational, earn 10% returns even in a bear market: Don’t let fear and greed dictate your investment decisions. Don’t panic sell in a falling market or chase rising prices in a bull market. Stick to regular investment and buy more cheap stocks in a bear market to achieve higher returns in the long run.
  • Example: During the 2008-2009 financial crisis, investors who steadily invested in index funds at the lows ultimately reaped higher returns.
• Don’t try to time the market: No one can accurately predict short-term market trends; don’t try to beat the market by timing it. Market timing often causes you to miss the best investment opportunities, leading to lower investment returns.
• Earning 150%? Be wary of tech stocks: Don’t be fooled by high-growth, high-valuation stocks. Stock prices eventually revert to the level justified by corporate earnings. Blindly chasing hot stocks can easily lead to losing your entire investment.
  • Example: The dot-com bubble burst in 1999, causing countless investors to suffer heavy losses. The author himself lost nearly half of his money due to investing in Nortel Networks stock.
• Falling stocks: a buying opportunity: A bear market is the best time to invest. Seize the opportunity to buy more cheap stocks when prices are low. In the long run, stocks rise with corporate earnings growth.
• Young people should be excited when stocks rebound: Young investors have more time to allow compound interest to work its magic. They should actually hope for market declines to buy more low-priced stocks. Over the long term, stocks bought at a discount offer higher returns.

Lesson Five: Build Mountains of Money with a Responsible Portfolio

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• Buy bonds as insurance for your stocks: Bonds offer lower returns than stocks but have lower volatility, reducing the overall risk of your portfolio. They act as a buffer when the stock market falls.
  • Short-term bonds: a safe haven for your money: Short-term bonds are less sensitive to interest rate fluctuations and are more suitable as a “safety cushion” for your portfolio.
• Adjusting your portfolio to profit from market crashes: Determine the appropriate mix of stocks and bonds based on your age and risk tolerance. Rebalance your portfolio regularly (e.g., review it annually), selling bonds to buy stocks in a down market and selling stocks to buy bonds in a bull market.
  • Example: Before the 2008 financial crisis, the author created a portfolio with a 35% bond allocation. During the downturn, he consistently increased his stock holdings. Consequently, he achieved higher returns when the market rebounded.
• “Globalize” your investment: Don’t limit yourself to the domestic market. Diversify your investments across the globe to further reduce risk and access a wider range of opportunities.
• “Lazy portfolio”: adjust once a year for annual returns: Allocate your portfolio equally between stocks and bonds, rebalance once a year. This simple strategy delivers impressive long-term returns without demanding excessive time or effort.
  • Example: Following the “Lazy Portfolio” strategy allowed investors to achieve positive returns even during the 2008 financial crisis.

Lesson Six: Sample a “Round-the-World” Ticket to Indexing

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• ETFs: Access Global Markets with One Account: Exchange-traded funds (ETFs) offer a convenient way to invest in index funds. They are traded on stock exchanges like individual stocks and cover a wide array of global markets.
  • How to buy ETFs?: The author details the steps involved in buying ETFs: opening a brokerage account, finding the ETF ticker symbol, determining the price per share, and setting the investment amount, etc.
  • Limit orders vs. market orders: The author explains these two common ETF order types and recommends using limit orders to avoid losses due to price fluctuations.
• US Indexes: Strategic Allocation for Optimal Returns: For US investors, a portfolio split equally between a US stock market index, a global stock market index, and a US bond market index, with annual rebalancing, is recommended for stable long-term returns.
  • Example: The author’s friend, Chris, following this approach, grew his portfolio by 73.09% in 10 years despite experiencing the 2008-2009 financial crisis.
• Canadian Indexes: Minimize Costs for Maximum Returns: Canadians can build a low-cost, diversified global portfolio using TD Bank’s “e-Series” index funds or ETFs.
  • The author uses personal anecdotes to illustrate that Canadian financial advisors are more inclined to recommend actively managed funds while overlooking low-cost index funds.
  • He uses the example of Air Force Technician, Felix, to demonstrate how investors can build a low-cost, diversified portfolio through TD’s “e-Series” index funds.
• UK Indexes: Avoid High Fees, Optimize your Portfolio: UK investors should be wary of high-fee index funds. Building a diversified portfolio using low-cost index funds or ETFs provided by Vanguard or iShares is recommended.
  • The author cites Virgin Money as an example to demonstrate how high fees and tracking errors can significantly affect index fund returns.
  • He then uses the case of software engineer, Paul, to illustrate how investors can utilize iShares and Vanguard ETFs to build a low-cost, diversified portfolio.
• Australian Indexes: Multi-Asset Portfolios, Lower Fees with Higher Investments: Australians can opt for Vanguard’s multi-asset LifeStrategy funds or utilize platforms like Stockspot and Ignition Wealth to build ETF portfolios.
  • The author shares the story of Andy, a software developer, who uses the Nabtrade brokerage platform to buy ETFs and create a diversified index fund portfolio.
• Singapore indexes: Low cost, smart allocation: Singaporean investors should also be cautious of high-fee index funds. Building a diversified portfolio using low-cost ETFs offered by Vanguard is recommended, but it’s important to avoid ETFs traded on US exchanges to avert US estate taxes.
  • The author utilizes the example of “Fundsupermart’s” “S&P 500 index” fund to illustrate how high fees significantly impact long-term investment returns.
  • He further uses the case of a professor couple to show how investors can construct a diversified portfolio using ETFs traded on Singaporean and Canadian exchanges, thus avoiding US estate taxes.

Lesson Seven: No, You Don’t Have to Invest on Your Own

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• Why do index investors lag behind the index?: Many investors fall prey to their emotions, making irrational decisions during market fluctuations, or are swayed by investment predictions, ultimately hindering their returns.
  • Example: Some investors panic sell during market downturns and chase rising prices in a bull market, resulting in returns far lower than the index itself.
• US Robo-Advisors: Let the Smart Investors “Win” Effortlessly: Robo-advisor platforms can help investors create and manage low-cost index fund portfolios, rebalancing them regularly, and preventing investors from damaging their accounts.
  • Example: Vanguard’s Target Retirement Funds offer a one-stop solution at a very low cost, suitable for those who prefer a hands-off approach to investment.
    • The author uses his wife as an example to highlight the advantages of Vanguard Target Retirement Funds: achieving positive returns even without investment knowledge.
  • Vanguard’s Comprehensive Financial Advisory Services: Vanguard provides comprehensive financial planning services at a low cost, making it a good option for investors seeking professional advice.
  • Investment Guidance Training Services: Mark Zoril of PlanVision offers training services that guide investors to open low-cost brokerage accounts and build their own index fund portfolios.
  • Investment Enhancement Services: Scott Burns of AssetBuilder provides investment enhancement services, using Dimensional Fund Advisors (DFA) index funds to help investors build a “Lazy Portfolio”.
    • The author elaborates on DFA’s investment philosophy: pursuing excess returns through small-cap and value stocks.
  • Betterment, Rebalance IRA, SigFig, and Wealthfront: These companies also offer robo-advisory services, building and managing portfolios consisting of index funds or ETFs for investors.
• Canadian Robo-Advisors: Lower Cost and More Targeted: Robo-advisor platforms in Canada, such as WealthBar and Wealthsimple, offer lower-cost, personalized services, tailoring portfolios to suit client risk tolerance and investment goals.
  • The author uses personal experiences to demonstrate that Canadian bank advisors still favor actively managed funds over low-cost index funds.
  • Tangerine: Tangerine bank provides Canadian investors with a financial product that encompasses a diversified index fund portfolio. Low cost makes it suitable for those who prefer to invest small sums regularly.
    • The author uses 19-year-old Katie as an example to show how young people can leverage Tangerine’s investment products for regular investing.
  • WealthBar: WealthBar offers Canadian investors five portfolio management solutions and provides comprehensive financial planning based on their risk tolerance.
• UK Robo-Advisors: Diversified Index Fund Baskets: UK robo-advisor platforms, like Nutmeg, construct diverse index fund portfolios for investors, rebalancing regularly, although their fees are comparatively higher.
• Australian Robo-Advisors: Increasing Competition and Falling Fees: The Australian robo-advisor market is highly competitive with decreasing fees. Platforms like Stockspot and Ignition Wealth offer low-cost, personalized ETF portfolio management services.
• Singapore Robo-Advisors: Avoid “Suicidal” Asset Allocation: Singapore’s robo-advisory market is nascent. Investors should opt for companies that don’t utilize ETFs traded on US exchanges to avoid US estate tax liabilities.

Lesson Eight: Peek Inside A Pilferer’s Playbook

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• Identifying Financial Advisors’ Tricks: Financial advisors use various tactics to persuade investors to buy actively managed funds, such as claiming that “index funds are more dangerous during downturns” or that “index funds can only achieve average returns,” both of which are misleading.
  • Examples: When the author and his friend sought advice from financial advisors, they were aggressively steered towards actively managed funds without mention of their high fees or lower returns. One advisor even claimed index funds were riskier and that actively managed funds were better suited for navigating bear markets.
• Index Fund Returns Outshine “Financial Elites”: Even seasoned investment professionals like pension fund managers struggle to beat index fund returns. Many pension funds have started shifting towards indexed investments, allocating a significant portion of their funds to index funds.
  • Example: A study by US consulting firm FutureMetrics revealed that less than 30% of large corporate pension funds outperformed a diversified portfolio holding 60% S&P 500 index and 40% corporate bond index.
• Don’t Accidentally Become a “Second-Rate Investor”: Don’t be fooled by financial advisors’ sales pitches. Trust the data and facts - index funds are the most reliable way to profit in the stock market. Advisors’ interests are often at odds with those of their clients; they prioritize commission income over investor returns.

Lesson Nine: Avoid Seduction

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• Stock Picking Scams: Do their stock recommendations really work?: Investment newsletter predictions are often inaccurate, and their recommended stocks are likely to lead to financial ruin. Their primary goal is to attract subscribers, not to help investors make money.
  • Example: The author invested in stocks recommended by “The Gilder Technology Report” and suffered significant losses. The author of that report continues to publish similar reports, using the lure of high past returns to attract investors.
• Investing in Emerging Markets: Don’t be fooled by GDP: High economic growth does not necessarily translate into high stock market returns. Be cautious when investing in emerging markets. They are more volatile and risky, and their long-term returns may not surpass developed markets.
  • Example: While China’s GDP grew rapidly from 2008 to 2016, its stock market performance was lackluster, with investors in a large-cap Chinese stock ETF experiencing a 30% loss.
• “Gold speculation”: It’s not investing: Gold has a low long-term return rate with high price volatility, making it unsuitable for long-term investment. “Gold speculators” attempt to profit from price differences by buying low and selling high, a risky strategy that cannot guarantee stable long-term returns.
  • Example: $1 worth of gold purchased in 1801 would only be worth $73 in 2016, whereas a $1 investment in the US stock market during the same period would turn into $16.24 million.
• Investment Magazines: The Untold Truth: Investment magazines rely heavily on advertising revenue, leading them to cater to their advertisers rather than prioritize investors’ needs. They often recommend high-fee actively managed funds while neglecting low-cost index funds.
  • Example: In April 2009, “SmartMoney” magazine recommended bond funds and gold, ignoring the investment opportunity presented by low-priced stocks amidst the financial crisis.
• Hedge Funds: Picking the Pockets of the Rich: Hedge funds charge exorbitant fees and carry significant risks, with long-term returns that are often no better, and sometimes even worse, than index funds. Their reported performance is often skewed by “survivorship bias” and “backfill bias.”
  • Example: Hedge funds struggle to achieve an average annual compounded return of even 1%. Only one out of the top 20 largest hedge funds has outperformed the S&P 500 index.
• Don’t buy currency-hedged ETFs: Currency-hedged ETFs aim to eliminate the impact of exchange rate fluctuations on investment returns. However, the hedging mechanism itself incurs costs, decreasing a portfolio’s returns.
  • Example: Research indicates that non-currency-hedged ETFs generally outperform their currency-hedged counterparts over the long term.
• Don’t fall for smart beta funds: These hybrid funds fall somewhere between active and index funds, attempting to achieve excess returns with specific strategies. Their effectiveness is debated, and their fees are generally higher.
  • Example: Studies show that the market capitalization growth of smart beta funds has been primarily due to valuation increases, not corporate earnings growth, suggesting potential decreases in future returns.
• Don’t blindly buy into small-cap stocks: Small-cap stocks, those of smaller companies, offer high growth potential, but also carry higher risk. Investing in them requires careful consideration and risk tolerance; avoid chasing high returns blindly.

III. Key Quotes

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You don’t have to be a financial expert; even with a moderate income, you can achieve financial freedom through prudent spending and rational investing.

This encapsulates the core message of the book: financial management and investment are not exclusive to the wealthy; ordinary people can also achieve financial freedom through learning and practical application.

Time is money.

This emphasizes that time is our most valuable asset. The earlier you start investing, the longer the time horizon for compound interest to work its magic, leading to faster wealth accumulation.

A successful investor should follow two principles: the first is to never lose money and the second is to never forget the first principle.

This quote highlights the importance of risk management and capital preservation in investing.

The investor’s task is to focus on the horse, not the jockey.

This means that investors should prioritize a company’s intrinsic value over the fund manager’s individual ability. Over the long run, a company’s profitability is the most important factor determining its stock price.

If you plan to live off hamburgers for the rest of your life, but you don’t own any cattle, would you want beef prices to go up or down?

Buffett used this analogy to illustrate that stocks represent ownership in a company. When share prices fall, long-term investors should view it as an opportunity to buy more shares.

The most insidious devil is the high cost associated with holding certain actively managed funds.

This quote emphasizes that investment costs are one of the most important factors affecting investment returns. Choosing low-cost index funds maximizes gains.

How much you can accumulate in your lifetime depends not on how much you can earn, but on how you invest. Money finds people more effectively than people find money. Let your money work for you, not the other way around.

Buffett stresses the importance of investment and financial management, pointing out that wealth accumulation relies not only on income but also on how you manage and invest your money.

Too much money can harm investment returns.

This seemingly paradoxical statement highlights a critical principle: avoid over-diversification and the blind pursuit of high returns. Concentrating your investments in a few high-quality assets and holding them for the long term often yields better results.

In stock investing, luck inevitably plays a role, but in the long run, good luck and bad luck offset each other. For sustained success, skills and sound principles are essential.

This emphasizes that the key to successful investing lies in mastering the correct investment philosophy and principles and adhering to them in the long term, rather than relying on luck.

Let time and money work for you; you just need to sit back and wait for the results.

This emphasizes the power of long-term investment and compound interest. By choosing the right investment method and being patient, significant returns will follow.

IV. Practical Implications

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This book’s key takeaways include:

1. Developing a sound financial mindset: Understand the importance of thrift, control unnecessary spending, and invest your savings.
2. Mastering simple and effective investment methods: Learn to leverage compound interest, start investing early, choose low-cost index funds, and commit to long-term investments. Avoid being swayed by short-term market volatility.
3. Avoiding common investment pitfalls: Be wary of financial advisors’ sales tactics, don’t blindly trust investment predictions or stock recommendations, and avoid being lured by the promise of high returns.
4. Developing financial independence: Learn basic financial knowledge and skills, don’t rely solely on financial advisors, and learn to make investment decisions independently.