Millionaire Teacher

Millionaire Teacher by Andrew Hallam Page B

Book: Millionaire Teacher by Andrew Hallam Read Free Book Online
Authors: Andrew Hallam
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Growth
Value
0
$1,000
10
$2,584.32
20
$6,678.74
30
$17,260.04
40
$44,604.58
50
$115,275.37
60
$297,909.16
70
$769,894.43
80
$1,989,658.28
90
$5,141,925.80
    Notes
    1. Jay Steele, Warren Buffett, Master of the Market (New York:Avon Books, 1999), 17.
    2. Andrew Kilpatrick, Of Permanent Value, The Story of Warren Buffett (Birmingham, Alabama: Andy Kilpatrick Publishing Empire, 2006), 226.
    3. The Value Line Investment Survey—A Long-Term Perspective Chart 1920–2005 and Morningstar Performance Tracking of DOW Jones ETF from 2005 to 2011.
    4. Jeremy Siegel, Stocks for The Long Run , 3rd ed. (New York: McGraw-Hill, 2002), 18.

RULE 4
    Conquer the Enemy in the Mirror
    My brother Ian is a huge fan of the 1999 movie Fight Club , particularly the scene where the lead character Tyler, played by Edward Norton, is shown throwing haymaker punches at his own swollen face. Norton’s character is metaphorically battling his materialistic urges. Most investors fight similar battles in a war against themselves.
    Much of that internal grappling comes from misunderstanding the stock market. I can’t promise to collar your inner doppelganger, but when you understand how the stock market works—and how human emotions can sabotage the best-laid plans—you’ll experience greater investment success.
    When a 10 Percent Gain Isn’t a 10 Percent Gain
    Imagine a mutual fund that has averaged 10 percent a year over the past 20 years after all fees and expenses. Some years it might have lost money; other years it might have profited beyond expectation. It’s a roller coaster ride, right? But imagine, on average, that it gained 10 percent annually even after the bumps, rises, twists, and turns. If you found a thousand investors who had invested in that fund from 1990 to 2010, you would expect that each would have netted a 10 percent annual return.
    On average, however, they wouldn’t have made anything close to that. When the fund had a couple of bad years, most investors react by putting less money in the fund or stop contributing to it entirely. Many investment advisers would say: “This fund hasn’t been doing well lately. Because we’re looking after your best interests, we’re going to move your money to another fund that is doing better at the moment.” And when the fund had a great year, most individual investors and financial advisers scramble to put more money in the fund, like feral cats around a fat salmon.
    This behavior is self-destructive. They sell or cease to buy after the fund becomes cheap, and they buy like lunatics when the fund becomes expensive. If there weren’t so many people doing it, we would call it a “disorder” and name it after some dead Teutonic psychologist. This kind of investment behavior ensures that investors pay higher-than-average prices for their funds over time. Whether it’s an index fund or an actively managed mutual fund, most investors perform worse than the funds they own—because they like to buy high, and they hate buying low. That’s a pity.
    John Bogle, the founder of Vanguard, explains in his book, The Little Book of Common Sense Investing , that the average mutual fund reported a 10 percent annual gain from 1980 to 2005 after fees and expenses, but investors in those funds over the same time period only averaged 7.3 percent per year. 1 Their fear of low prices prevented them from buying when the funds were low, while their elation at high prices encouraged purchases when fund prices were high. Such bizarre behavior has devastating financial consequences when investors give away 2.7 percent annually because of their knee-jerking alter egos.
    Over a 25-year period, that’s a pretty expensive habit:
    $50,000 invested at 10 percent a year for 25 years = $541,735.29
    $50,000 invested at 7.3 percent a year for 25 years = $291,046.95
    Cost of irrationality = $250,688.34
    But what if you didn’t care what the stock market was

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