Andrew Hallam is an awesome teacher.
He’s also a self-made millionaire, having built his nest-egg off of basic, core tenets of sound finance AND a teacher’s salary.
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Zack: Welcome to Tradestreaming radio, I’m your host Zack Miller and this is the place where investors come to learn directly from experts and today’s expert is of the self made kind. He’s Andrew Hallam. He’s the author of “Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned at School,” and I’ll tell you I should have learned all these rules in school, and I hope my children are learning them. Andrew is a teacher by profession. He also has firsthand experience saving money, learning the value of the dollar, learning to sock money away, and learning the value of compounding interest by investing in the stock market.
He primarily recommends using index type investments so, no surprise there. This is a very easy to read, enjoyable finance book that has a place on every investors bookshelf. Check it out; it’s the type of book you can talk about with your children. It’s also the type of book you can talk about with your spouse; we know how hard those discussions can be sometimes. It was really illustrative for me speaking to Andrew because he brings a lot of energy and passion and simplicity to the investment field and I think that’s needed. A lot of times we get lost in the jargon; we get lost in the theory.
Andrew seems to make everything very simple. If I have any fault with the book it’s probably that it is over simplified. The concept here, and it’s no secret, is obviously to save more than you spend and once you’re able to save. he gives a lot of tips on how to do that form buying a car to renting an apartment, to be able to put it away in long-term type investments that save money on fees, are efficient in terms of their production, and hopefully can build you a big nest egg like they did for Andrew.
So, check out the book. It’s very interesting. It’s just launching this week in the U.S. It launched initially in Singapore to a lot of success. I wish Andrew success and thank you for writing such a great book and joining us on Tradestreaming.
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So do you want to tell us a little bit about your background?
Andrew: Well, I was born in England. My dad was a mechanic and we moved to Canada when I was just a kid and grew up in a town [Cowen's Bridge], Columbia. I wasn’t a great student but eventually I got around to college, eventually after taking a year off. I figured I was going to be, for awhile, the next Greg LeMond. I went to Europe and did some bike racing there and my aspirations were greater than my talent. So then I moved back to Canada and got a degree and started teaching middle school on Vancouver Island.
Zack: What subject were you teaching?
Andrew: I started out teaching Fitness and English and Social Studies to a bunch of grade seven kids.
Zack: Now, when did you realize throughout the process that you actually had something to teach in terms of your financial background?
Andrew: I think it was just looking around me, my parents, we didn’t come from money. If I wanted something, from a really young age, I had to put the money together to buy whatever it was that I wanted; whether it was shoes or whether I wanted a jacket, if I wanted a car at the age of 16, if I wanted to go to college. So, in a way I kind of started off, what I felt anyway, kind of behind the eight ball. Whereas a lot of my friends were getting money for college, parents were helping them out with cars and clothing and things like that. But, what I noticed was while I was going to college I was actually saving and investing money, and most of my friends weren’t. By the time I was in my mid twenties, I realized that I had significantly more money than the vast majority of my friends, even though I had to pay for my own schooling and had to sort of pay my way from a teen right up to when I finished college.
Zack: Was that process of saving and investing, was that a natural process, meaning just part of your learning process and you just did it? Or did you have mentors along the way?
Andrew: I think part of it was a natural inclination because I understood the value of a dollar. But, as I mentioned in my book, I met a mechanic while I was 19. I was working at a garage to pay for my college expenses through the summer and I met a 47 year old mechanic who was a self made millionaire. He sat me down one day, and he told me you can do what you really want to do in life. You don’t have to follow the dream of a high salary because you’re going to spend a long time working. You might as well do what you love and manage money. So, he inspired me.
Zack: So, he owned the garage? Or he actually worked in the garage?
Andrew: No, he worked in the garage. He was a mechanic; his salary was probably about $55,000 a year. He pulled wrenches on the weekends doing some sort of jobs for people out of his own driveway. He was just an incredibly frugal guy but a very astute guy as well when it came to money.
Zack: In the book I thought the story of learning to buy a car was very influential and sort of your entire approach to money. Can you talk about that?
Andrew: Yeah, cars are very hugely . . . I mean their depreciating assets. One of the things a lot of people do when they graduate college, one of the first things they want to do when they get that first job is to go out and buy a vehicle. And you meet so many people who go out and purchase brand new cars thinking that they have a salary paying $60,000 a year, but they’re not recognizing the fact that much of that goes to taxes. Then they’ve got their rent, or mortgages, or food and that sort of thing. What Russ told me was he said, look, if you can avoid losing money on cars, because cars are huge liability, you can really benefit and take what you would be putting towards a car and eventually invest money to grow wealth.
Zack: I like the way you put it in the book, it was like paying someone else to sort of absorb the depreciation.
Andrew: Yeah, that’s exactly it. Buying used cars, a car that’s a few years old. One of the things that Russ said to me was to look for a car with really low mileage, and he said if it is a Japanese car with really low mileage, without any rust on it, it hasn’t gone around the block. You’re going to know essentially that . . . say it’s a Honda Civic, you’re going to know that you can get 230,000 kilometers out of a Honda Civic. And if you can find one with 100,000 kilometers or less on it, you know that you’ve got a vehicle that’s good for another 100,000K. So, as he put it, it doesn’t really matter how old that vehicle is, you’re going to have a nice set of reliable wheels.
Zack: So putting this entire framework of the millionaire teacher, a lot of this has to do with, there’s obviously two sides to the coin. One’s the saving and then being able to free up money to invest in the market. It’s like this idea of buying like the rich do, which is really much more frugal then most people think. That’s a crucial point of your entire book isn’t it? It sort of runs through everything you do.
Andrew: Yeah, absolutely. So many people think that wealthy people are the ones out there buying the Ferraris, and they’re buying the mansions, but for the most part there are really wealthy people doing that but most of the people statistically in the United States who own million dollar homes are not millionaires. And the favorite car for millionaires, if you sort of look statistically, a vehicle that they actually like to purchase most, is the Toyota. It’s not the Mercedes Benz or BMW.
Zack: I think you said it was something like $31,000 or something like that, right?
Andrew: Yeah, that’s the median, that’s basically the median purchase price for cars by American millionaires.
Zack: Even when you look at Deccamillionaires, they’re not spending that much more either right? You were talking about an average of $40,000, and that came from the book ‘Stop Acting Rich’. I missed that one, but it is now on my night stand.
Andrew: Yeah, that’s right, very good book actually because it really puts things into perspective. And I think it’s great for kids to see that too, because people typically think that those who have big salaries are those who have big toys, big houses, big cars are financially very well off. While many of them, not most of them, but many of them are just over leveraged. They have huge salaries but very expensive tastes.
Zack: Right, I mean you told the story, I’m actually a financial adviser as well and I can relate to this, of people worth a lot of money. They are not able to stay liquid throughout the month and they bounce checks. It’s really incredible, but the lifestyle requires the spending. So somebody who is able to sock some money away and start investing and not be able to touch it and sort of be self sufficient in terms of their cash flow. Their much further ahead than some of these other people with huge salaries, right?
Andrew: Absolutely, I think sometimes of that Chinese proverb that wealth doesn’t last three generations. And I often think that because you have — it’s a couple of thousands of years old. But essentially, you have a generation that builds wealth, a generation that maintains wealth, and you have a generation that squanders it. And the Chinese have known this for years, I’ve said it to my students in Singapore and some of the kids, you can see them looking left, looking right and occasionally I’ll have a kid whose from china or his family is from china and he will just nod his head and smile and say my grandfather says that all the time.
But yeah, it’s interesting often what happens with successful parents, is they typically come from what I call boot strapping families for the most part. I do a course when I teach English 10, I often ask the kids a question. We do this project called the outliers project and I say that you guys are like outliers. I teach a private school, most of the kids are fairly well off, their parents are fairly well off. I ask them, how many of you had grandparents or great grandparents who had the same relative level of wealth that you have? And I explain what that really means, but very few of them put up their hands. The majority of them are from bootstrapper grandparents who worked their butts off, understood the value of a dollar, got great educations for their kids who then ended up having children who were basically sitting in my class.
And so I often say to my students, you guys are the third generation of wealth. Statistically speaking, you’re on that downward trend because what you look at is the things that your parents have actually acquired. And the moment you get out of college you want those things right now. So you borrow money to acquire those things and what ends up happening is, even if you get a great degree and you end up with a great salary you essentially end up working your way down that sort of curve towards middle class and if you don’t, your kids typically will.
Zack: Do you see that cycle sort of restarting at least in North America given the sluggishness of the economy. Even these 3rd generation people now are going to have to become these boot strapping grandparents to their grand kids.
Andrew: Yeah, I think so.
Zack: Are they equipped to do that?
Andrew: It’s going to be really hard. It’s got to be Darwinian I think, the strongest ones will end up thriving. They are not all going to end up struggling obviously, but there are going to those whose parents have actually taught them that you need to pay for part of your college, you need to get out there and earn that summer job if you want to acquire a car. Some of those values are almost going to be laid in some of those kids, but then given the circumstances hopefully we’ll see some of those kids sort of blossom.
Zack: So if you’re doing what you laid out, if we’re going to mimic your background so you’re able to work and save and live real frugally. You even went through a period where you sort of were monkish in the sense where you weren’t spending on anything. How did that work out? And is that something you would recommend to other people?
Andrew: It was tough but at the same time I was young and it was kind of a fun challenge. Definitely I was monkish and I was pretty extreme. One of the examples was to get a place, I wanted to pay rent, it was minimal. So, at one point I lived a long way from where I worked, and I was riding my bike 55 kilometers a day to work, which was insane. I don’t recommend anybody doing that but at the same time, Zack, it felt amazing knowing that I did this. Often when you face hardship and you actually overcome it, it’s an incredible feeling, and your relative level of satisfaction, it definitely shifts as well. If you’re extremely wealthy, extremely wealthy, and you end up buying a Ferrari, it’s not such a big deal. When I scraped enough money together and found a great Volkswagen Rabbit at a really good deal; it just thrilled me. Watching my student loan liability dropping with every single month was absolutely thrilling. Yeah, it was tough, but at the same time, I loved it.
Zack: That’s awesome. So you’re saving and you have money in the bank. How do you start investing? How equipped were you to do that? I’m interested in your personal background. Were you reading random generalist, walk down Wall Street type texts or you just plunged in and started trying things on your own?
Andrew: I started off with a wealthy barber. And then I started buying actively managed mutual funds through a fund company in Canada. And the expense ratio on those funds was about 2.6% year.
Andrew: I didn’t really catch onto this; this would have been in the 90s. It was 1989 when I really started out and I should have been making a small fortune during the market from 1990 to the year 2000.
Zack: That was a good decade.
Andrew: Yeah, markets were moving at 17.5% annually as an average from 82 to the year 2000, so that’s a really lengthy period of time, but I wasn’t doing as well. I was probably making 8 or 9% and typically what my adviser was probably doing was chasing hotter performing funds and the funds were expansive, and I also had a front end sales log that I had to pay for each time I made my purchases. So, it wasn’t long before I caught on to that and started buying individual stocks and then shortly thereafter started to buy index funds. It was books like Random Walk Down Wall Street that really influenced me.
Zack: Well, we have it now in this investment landscape, there’s a much greater sensitivity or awareness of leakage in terms of fees. Do you still think focusing on low cost funds is they way to go? Or is there a larger picture that people need to understand? I find sometimes that people are focused on the nitty gritty of fees, and they lose their entire perspective in terms of asset allocation or really why they are buying specific things. In some ways, I’ve felt that it’s done a great thing, this focus on fees, but it blinds some people, right? How do you get your hands around something like that?
Andrew: I think to me, if you were to ask me what the biggest detriment is to an investor’s success, to me, I don’t think it’s fees, although, fees are very important. It is very important to make sure that your fees are low but human psychology is huge. I think I was talking to a friend and I said, I’ve got a feeling that I could probably buy very expansive mutual funds, build an account, a diversified portfolio of very expansive products and I could probably beat the average index investor who has extremely low fees. It’s not that necessarily my products would beat their products overtime ,but psychology plays a huge role.
Typically, what people do is when the stock market drops, they’re reluctant to buy those assets that have dropped. They feel very comfortable in buying and putting money into the stock market when there’s a rosy economic consensus. And of course that is really counterproductive to the entire investment process. So, I noticed that there are certain people; you might go as far to say the vast majority, who can’t manage their money on their own. I know that reading William Bernstein’s book The Investor’s Manifesto. He goes so far to say that he believes that only one, and this might sound really out there, but he goes so far as to suggest that only one person is equipped to manage their own money.
Zack: So, but the converse of that is that the professional is not necessarily better equipped, right?
Andrew: Not necessarily, yeah.
Zack: Whether it is from an incentive basis, or if he is a broker who is just trying to sell you something, or even if he has the fiduciary responsibility. He’s also subject to those same confluences of psychology that other people struggle with. It’s sort of like where do we turn? That’s what I try to use Tradestreaming for, just to be honest about some of these things because, just because you have a professional working for you, or you don’t, that doesn’t guarantee any type of success. It’s people like you and your experiences that help other people to understand and become more equipped to deal with some of these issues. So you started investing in these mutual funds having gone through actively managing them, and you’ve tried stocks, and I assume stocks didn’t work out too well, and now you’re in indexes. Do you stay on top of those things? Do you rebalance? Are you doing global asset allocation? Can you talk a little bit about that process?
Andrew: Yeah, I so rebalance. I have an interesting story with stocks and when I started to purchase stocks I read virtually everything I could get my hands on. When I was interested in the business what I typically did was; I would order 10 years of that business’s annual reports. I would call up the business and to get that sort of thing, hard copy which is what I wanted, I often would tell the person I spoke to that I was a fund manager, a small fund manager. I would get the stuff sent to me by FedEx often, so it was wonderful.
I would go through these annual reports, reading them from back to front with Howard Schilit’s book Financial Shenanigans. I would have my Benjamin Graham’s Intelligent Investor, and I would have all my books on picking stocks like Warren Buffet, and I would really go through them. As a stock picker I was actually quite successful. Here in lies the irony, what I found was that I actually did beat the market index fairly handily over a 10 year period with my stocks. But I suppose it was this January, earlier this year, I thought, I’m either extraordinarily gifted, or lucky. Obviously, there has to be a [inaudible 22:16] of skill and luck.
Zack: Does it matter?
Andrew: It did because I did think, you have a guy like say Bill Miller who beat the S&P 500 with his Legg Mason value trust fund for 15 years in a row, and then he gets absolutely shellacked by the market index, and he ends up giving away all of his advantage. I thought to myself, and I do know that Bill Miller has got a tougher job than I do because he’s dealing with a much larger pool of money. But, I saw my investment returns during the decade, essentially where Miller did really well, and my returns had beaten Miller. I had to ask myself a really hard question, even after the expense ratio on his fund. I had to ask myself, am I better at this than Bill Miller? And the answer to me was, well absolutely not. The guys probably 10 times smarter than I am.
I realized, wait a second here, if you count yourself fortunate, diversify your portfolio across a group of index funds, be greedy when others are fearful and fearful when others are greedy, by essentially rebalancing your account when the markets go haywire, and you can guarantee one thing. That’s that after taxes and all fees, I’m probably going to be 90% a professionally active manage my money over my life time. I thought, those are odds I can live with, so that’s why I did it.
Zack: I like that perspective. I had an interesting guest; I have not yet published the interview. He’s a professor at Yale, Ian Ayres, He wrote a book with Barry Nalebuff on life cycle investing. He came up with this radical and audacious idea that young investors, because they are going to be in the market for a long time, because they have their future earnings ahead of them, should really leverage up early on and actually go out and borrow money to invest in the stock market. I know you talk about debt being inimical to long term growth. From a long term perspective, there is some rationality to what he is saying. From the numbers, it looks like you can outperform the markets and lower your risks by doing what Ayres says. How would you respond to something like that, sort of off the cuff?
Andrew: I think it depends on just a person’s personal makeup. If you’re comfortable with doing that then all the power to you, it might really end up doing very well over your lifetime. On a personal level, I am really not comfortable with that. There are people who definitely are and will definitely make a lot more money in the markets than I do because of that. That’s a high possibility, but for me personally, I really love knowing that I don’t owe anybody any money, and I go to bed thinking that. I wake up in the morning thinking, gosh, in a way I’m my own man. I don’t owe any banks money, and it feels good for me personally. I’m a bit of an investment wimp, Zack.
Zack: Well no, you’re independent I would say, and that was actually very important in your life, it sounds like. You talked a little bit about this psychology, the human frailties, the makeup that makes us make bad decisions in terms of money. Can we talk about some of those things? We don’t have to delve into like behavioral finance or anything like that, but some of the things you see that you work with your students to discuss these things, or even in your book, those same human tendencies that trip us up all the time.
Andrew: And are you referring to spending beyond your means? Or are you referring to investing?
Zack: Yeah, both. In your book you don’t dissociate between the two they seem to be connected in your world of investing, right? One part is being able to save so that you can invest and the other is what you do with your money after.
Andrew: Yeah, I think material possessions themselves don’t always, and I think it’s important for people to recognize this and ask themselves some really hard questions about when they purchase something that they really wanted, does it actually make them any more content, or any more happier long term? Often it doesn’t, so the idea of actually borrowing to do that, where essentially you are picking up stress as an added accessory, to me just doesn’t make a lot of sense. Not to say that you can’t treat yourself with the odd nice car, or the odd item, but to actually borrow money to do that doesn’t make since to me.
Zack: What about on the investing side? You talked about earlier that your broker may be chasing gains. Do you see that that’s a commonality that we seem to fall prey to?
Andrew: I think so and I think you were suggesting earlier that a lot of financial advisors do that as well. They say to their client, we are going to get you out of this fund because it hasn’t been doing well lately and it’s focused on Europe and Europe is performing poorly and we have issues with the Greek debt crisis etc, etc. Warren Buffet really made his money by being greedy when others were fearful and being fearful when others were greedy, but it’s very counter-intuitive and it’s tough for people to do.
Zack: Would you recommend almost quantitative strategies for people? I’m not talking about computer black box investing but something that is very systematic, about how much money they are putting into the market, about when they make rebalancing decisions, sort of where they take external rules and have to stick to them as opposed to allowing their decision making process to take over?
Andrew: Yeah, I really think for most people that is a better option to take. It doesn’t have to be too complicated. I don’t know if you are familiar with Value Averaging. I think Michael Edleson wrote that book, where essentially you buy the lagging index, or the lagging markets. I think what I am doing is quite mechanical really, in the sense. I have a variety of indexes; I have a bond allocation that is very close to what my age is. I am 41 and my bond allocation is about 38%. Each month, I look at my portfolio and see which index has lagged the others and I make my purchase decisions based on that.
Zack: That’s great. One question I end most of our interviews with, and I’d love to hear from you. Other resources that you have found, you mentioned a few books in the course of this conversation; A Random Walk Down Wall Street, Malkiel’s book. Are there other places online that you could point others to that you find useful for your own investing process?
Andrew: I think that it depends. I think that for Canadians there is a really good blog that a guy names Dan Bortolotti ends up running it’s called The Couch Potato Portfolio. I do like the Scott Burns AssetBuilder site, and I think that provides some really nice benchmarks for people because essentially with AssetBuilder, as you know, they create portfolios using dimensional fund advisors, basically portfolios of index funds. They track those portfolios, and it’s very easy to actually see that the portfolio was tracked and you can see what those portfolios are comprised of. Those are wonderful guides for people that and Scott Burns is a fabulous writer who provides great feedback and advice for America during the columns and articles that he ends up putting on his website.
Zack: Last question and it’s personal. Do you envision yourself moving into becoming a financial professional along the way? Or do you feel your value is almost as an outsider?
Andrew: I think that my value is as an outsider most definitely. I really enjoy educating kids and teaching is really a passion of mine. This semester in January I will be teaching a personal finance course at Singapore American School. Going through a lot of the things we talked about here, I think I can make a pretty big impact. Because in the sense everybody’s a teacher and if I can teach these kids, they can go on to spread that information to teach others as well. I think the power of a teacher — and it’s really cool because you never really know what the limits of that will be and it feels good to know that you’re out at least serving, I guess, or helping people.
Zack: Giving back.
Zack: Well, Andrew, thanks so much for your time today. This was a great conversation and good luck with the book launch.
Andrew: Thanks very much, Zack.