Factual Books

So you want to get rich and become a millionaire? Perhaps this book will tell you how.

The approach taken has been to sample or survey a lot of millionaires and ask them about their lifestyles and wealth levels. The book majors a lot on a frugal lifestyle, and that millionaires are surprisingly hidden from view(and hence may be living next door).

It is filled with anecdotes about how much they spend on items like clothes, holidays, cars, etc the data is all from the USA and seems to be drawn from the 1980s and 1990s. But there is a problem in that the sample may not be unbiased and you have to assume that they are reporting the truth. The millionaires tend to be blue-collar workers who have established their own business that have done rather well. They have generally saved hard and reinvested this money over decades.

The problem is that this might not be the best way forwards for a young potential millionaire. For every millionaire dry-cleaner there are probably  tens of very poor dry-cleaners. Much depends on luck as to when and where a business is established. Careers that require higher education; teachers, accountants, lawyers, doctors may not have so many very high wealth individuals but will have fewer with none. To be fair the book does mention this, but the focus is on very wealthy rather than very comfortable people.

There is something too the idea that controlling spending is a key to wealth. It is always fascinating that many high earners seem to end up bankrupt or poor. It might say something about me that this is a book that I would prefer to read(How to Blow a Million in Five Years!) I guess that it is because they spend up to their income, and this income then disappears.
 
For me this book felt quite dated with the fairly obvious advise that you need to earn a lot and spend little if you want to be wealthy. It is better than a get rich quick kind of book, it is more of a get rich slowly affair really. As a read it felt quite dull with pages of statistics that didn't translate well into British 2013 prices and a quite US centric feel. Perhaps because in the UK we don't really believe that anyone can rich in quite the same way. The takeaway is that you should look to spend less than you earn makes sense. 

Unconventional Success: A Fundamental Approach to Personal Investment is written by the head of Yale endowment fund.

Like “Smarter Investing” this is no “get rich quick” guide to investment book, it differs from that book in that it is focused on USA rather than the UK. The book similarly advocates investors hold a diversified portfolio - generally preferring government bonds, property and stock market trackers. Investors are advised to avoid the high fees associated with the active investment fund management industry. Where the book is strongest is in examining agent-principle issues. This occurs when the investors aims differ from the managers of the asset or their owner.

Developed World Shares - The management are supposed to be operating for the benefit of shareholders and are often remunerated to increase the returns to shareholders.
Government Bonds (Gilts) - Generally government lend to their own citizens and so are broadly neutral. In developing countries most Gilts are held domestically and in a democracy default is very unlikely.
Company Bonds – Interest payments on bonds are a cost for companies and so they will seek to minimise them. There is a downside risk of default and complex contractual arrangements that can allow bond issues to buy back Bonds if interest rates fall, but unlike shares the potential upside is limited. This leads him to prefer Gilts.
Property - Investments in commercial real estate which have a predictable revenue stream (like bonds) and a residual value at the end of the lease. This makes them operate a bit like a cross between Bonds and Shares.
Developing World Shares – These offer potentially returns are higher, but political factors may limit potential for shareholder as returns are diverted to workers, governments or managements.

He recommends avoiding asset classes where the cost of information are too high for private investors – such as high yield bonds(junk bonds), private equity, hedge funds and asset backed securities. These do tend to form part of his professional portfolio, but he has more resources to evaluate these asset classes than a private investor. A problem with this is that much of his returns are generated from these assets as the high barriers to entry presumably offer the potential for higher profits.

The book argues that professional advisors suffer from a severe agent-principle issue. These professionals as agents seek to maximise their fees. The structures of the industry mean there is often little incentive for these to be aligned with the interest of investors. The result is complex and overly large fee structures (“Where are the Customers’ Yachts?” as another book asks).

The writing feels like it is written by an academic economist and the issues are considered rigorously. What it does not do is offer much in the way of example portfolios or concrete advice for the UK investor. Instead it is more a call to be careful on costs and consider how the interest of the person issuing or managing an asset is aligned with the interest of investors.

The author also guest lectures on the Yale finance lectures with Robert Shiller, this is available from iTunesU.