I have summarised the big ideas from the book here.
1. Spend like you want to grow rich.
You need to build assets, not debts.
You need to spend far less than you make and invest the difference.
When you buy a depreciating asset, like a car, decide what you exactly want and how much you are willing to pay and buy only when all your criteria are met.
If you are considering purchasing a home, double the interest rate and if you can still afford the monthly payments, then you can afford the home.
You have to know what real wealth means. Real wealth means that-
- You should have enough money to never to have to work again.
- You should have investments, a pension or a trust fund that can give you twice the level of your country’s median household income over a lifetime.
2. Use the greatest investment ally you have – the power of compound interest
Compound interest is the one of most magical things you can see in the world.
If you start early and invest efficiently, then this will make you rich.
To do that you first need to have money to invest.
You need to pay yourself first this money to invest before you spend on anything else.
You need to pay off your credit card debts and high interest loans before you invest.
You need to track your expenses and be conscious of your spending so that you have more and more money to pay yourself first and invest.
You will then definitely get rich slowly.
3. Invest in low-cost index funds.
Actively managed funds are expensive(higher expense ratios, 12B1 fees, trading costs, sales commissions, taxes) and most of them do not beat the index funds over the long run.
Nobody can consistently pick the best performing active mutual funds all the time.
A lot of fund advisers have a conflict of interests as they make more money if you invest in active mutual funds.
And unless you really can pick stocks well, you will lose money in the long run.
You just to need to invest in three index funds.
- A home country stock market index( for Americans – US, for Singaporeans-Singapore)
- An international stock market index( holding the widest array of international stocks from around the world)
- A government bond market index( money you would lend to the government for a guaranteed stable rate of interest)
4. Be fearful when others are greedy and be greedy when others are fearful.
Buy the index which has gone down and sell the index which has gone up.
Understanding stock market history and psychology will make sure you do the right thing.
5. Build a complete balanced portfolio.
You need to get the percentage of bonds versus stocks right.
% of bonds
- risk averse= equal to your age
- slight risk= age-10
- moderate risk=age -20
% of stocks
- Equally divide between home country and international index
Such a portfolio has been shown to have better returns with lower volatility and drawdowns.
6.Create indexed accounts wherever you live.
Use the principles above to do that.
7. Do not fall prey to financial advisers and make sure you don’t invest in active mutual funds.
This is a sure way to lose money and under perform.
8. Avoid investment schemes and scams and “too good to be true” products
You will definitely lose your money.
Investment newsletters, high yielding junk bonds, fast growing markets, gold, investment magazines, hedge funds are all fraught with danger.
9. If you can’t help buying stocks, limit it to 10% of your portfolio.
Seek a mentor like Warren Buffet-read his letters.
You need to hold stocks for the long term – for at least 2 years.
You have to understand that if prices fall, it is a good thing and you buy more.
You need to learn to find a great business.
You need to understand your circle of competence.
You need to invest in businesses which are simple and predictable.
You need to buy them at a fair price.
You need the business to have pricing power, competitive advantage and low debt. Look at the debt to earnings ratio. If the company’s net annual income( 3 year average) is higher than or close to the company’s debt level, it is conservatively financed.
The company needs to have a return on total capital of greater than 15% consistently for long periods of time(10 years is a good term).
The business needs to have honest managers.
You should investigate their competitors.
Compare the earnings yield(average three years) to the 10 year bond yield. Buy if slightly more( fast growing) or 10% more( slow-growing).
Sell if company deviated from core business. Sell if the business is overpriced. Again you could compare it to a bond’s yield to see whether it is overpriced.