Monday, February 10, 2014

Let's Talk about Investment Books - The Wealthy Barber

The cover page of the Book "The Wealthy Barber"

"So one month, when the stock market is really struggling and your mutual fund is [stocks are] suffering accordingly, don't look at the situation and say, 'Darn, my holding is down.'  Look at it and say, 'Eventually the market will go up and take the value of my holding with it, so in the meantime I'm going to pick up shares at a good price.'  Dollar cost averaging is great stuff!" 
--David Chilton, The Wealthy Barber.
(modifications by me, because I don't like mutual funds) 

The Wealthy Barber by David Chilton holds a special place in my life as the first book on Finance that I ever read.

It's a Canadian book, one that I don't think has really left the country.  Finance books don't travel well between different countries, because taxes and investment tools vary so much.  So, I should probably mention at this juncture that I'm Canadian.  I hope we can still be friends, everyone else.

The book is old, written sometime in the 80's, when a conservative estimate of interest rates was 10%.  Reading it, as I did early in the 2000's, I decided that the author was pretty much crazy, which coloured my view of the rest of his investment advice.

The book is written about a fictional barber who is wealthy.  He is wealthy because he saved money, 10% of his after-tax money to be exact, to have 'fun' in retirement.  "Retirement" as described by the wealthy barber is sort of a misnomer, the barber in the story wasn't yet retired.  He spills his wisdom only when the protagonists agree to pay him to cut their hair.

A scribble of three people standing together: woman, barber and man, getting his hair cut.  The barber says: "Yes kids, if you work hard and save your money, one day you too can retire.  Just like me!"

Same scribble, but now the woman says to the barber: "You aren't retired, Ray.  You still run 'Ray's barber shop' and appear to be its sole employee."  Ray looks sheepish.
The same scribble, but now the woman looks pensive and the barber says: "I can quit whenever I want to.  Stop judging my choices."

But! I am making it sound like I hated the book.  I did not; I like this book a lot.

I've never read a better summary of the psychology of tricking yourself into savings.  He says that you should "pay yourself first" - meaning, have an automatic deduction that gets withdrawn the same day as your paycheque hits the bank that goes directly to your savings.  He recommends that you pick a number (10% or higher) to start off your savings with and then... just do it.  He says that after a while, you'll adjust to your new reality, and the savings won't even seem like a burden.

It's so true... just ask the zillion other books that say exactly the same thing.  This one's really good, though.

He also does some interesting talking about math (dollar cost averaging, share values, interest rate calculations)... the kinds of things that really bring out the engineer inside of me.

At this juncture, I should probably mention that I'm an engineer.  I hope we can be friends, everyone else.

The author (through our friend the barber) also specifically cautions against trying to do your own investment.  Why?  Because it's hard.  Instead, he outlines a very complicated strategy of looking at past money management returns to make sure that these returns will continue into the future.  In his sequel, he comes to his senses and informs the world that this advice was wrong.  But investment is still too hard, guys.  So you shouldn't do it.

I ignore that part.  I also ignore his chapter on insurance.  It's really boring.  If you feel a gaping insurance-related void in your life, maybe read it.  If you're young and looking to start on investing, it's completely pointless.

For me, this is where it began.  I started saving ten percent of my money.  I just didn't put it anywhere, because I really didn't like the idea of mutual funds... it just didn't jell with my unconscious vision.

Yes, engineers have unconscious visions.  They involve math... and spreadsheets.


 You must realize that "Let's Talk Investing" is not authored by a financial planner, adviser, or a professional investor in any capacity. As such, this is not expert advice in legal, taxation, financial, or any type of information that may be provided. The reader must realize this when reading these articles and must not rely on them as the ultimate source of information but must seek proper verification from the appropriate professionals before acting on any of this information.

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