Afford Anything - Andrew Hallam (Part One): How I Became a Millionaire on a Teacher's Salary

Episode Date: September 2, 2019

#212: It’s September!! If you’ve been listening to the show for the past few months, then you know that I’m on what I’ve dubbed my September Sabbatical, in which I’m taking a break from podcast production and traveling the globe. In light of that, we’re digging through the archives and airing some of my favorite interviews on the show, in between airing interviews I’ve done on other podcasts. First up is a two-part interview with Andrew Hallam, a teacher who became a millionaire in his 30s and reached FI in his 40s. How? Beyond investing small sums (we’re talking less than $100 per month) throughout college, he also saved half of his starting salary of $28,000. This episode is for anyone who thinks it’s impossible to reach FIRE on a low salary. I originally interviewed Andrew in January 2017, and we could not stop talking. Which is why our three-hour interview was divided into two parts. In this first part, Andrew shares his story - how he became a millionaire, and why he wanted to achieve FIRE in the first place. He also shares three principles from his book, Millionaire Teacher: Nine Rules of Wealth You Should Have Learned in School: Rule 1: Spend like you want to grow rich. (Don’t waste money on junk.) Rule 2: Use the greatest financial ally you have. (Time.) Rule 3: Small percentages pack big punches. (Avoid high-fee funds.) As for the other six, they’re coming up in Part 2. :) Enjoy! P.S. - We’ll return to our regular podcast production schedule in October!   For more information, visit the show notes at https://affordanything.com/episode212 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a tradeoff against something else, and that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention, anything in your life that's a scarce or limited resource. That leads to two questions. Number one, what matters most to you? Number two, how do you make day-to-day decisions that reflect those priorities? Answering these two questions is a lifetime practice. That is what this podcast is here to explore.

My name is Paula Pan. I am the host of the Afford Anything podcast. It is the month of September 2019. which means this month we will be featuring two things. Number one, we'll be featuring some of our favorite interviews and episodes from the archives, some stuff that I think was pretty great, but that happened kind of early on in the lifespan of this podcast that a lot of people haven't heard. We're going to be featuring that this month. And then we're also going to be featuring interviews that I myself have done on other shows.

Today's episode is one in which we interview Andrew Hallam. Andrew Hallam is a high school teacher who became a self-made millionaire. As a little bit of background, when Andrew and I actually did this conversation when we had this interview, this thing went on for three and a half hours. Andrew and I could not stop talking and we covered everything from crazy mutual fund fees to stock market highs. Like, we covered the whole gamut. And so the way that I broke that up, three and a half hours is a very long interview. first we edited that down. We chopped it down to its core two hours. That's still a very long podcast. So we broke that down even further. What you're going to hear today is the first half of

this conversation. And the majority of today's episode is going to cover Andrew's personal story where he'll share how he became a millionaire. And in the second half, he's going to talk about the nine rules of wealth that you should have learned in school. That's the topic of his book, which is called Millionaire Teacher. He's going to talk about the first three of those rules, which are the introductory rules. So today's episode is very much a like, hey, Andrew, hi, getting to know you. It's very much one of those episodes. Next week, in our follow-up, we're going to dive into the meat of his book.

We're going to talk really in the weeds, heavy analytical stuff about investing. So without any further delay, I want to jump right into it because there's a lot that we're covering. So here he is. Andrew Hallam describing how he became a millionaire on a teacher's salary. I was working at a bus depot. I was 19 years old and I was saving money for college. And it was a summer job that I had and I would wash the buses and check their oil and check their mileage and then park them backwards in these stalls. And it was a night shift and there was a mechanic there. And everybody said to me, if Russ ever wants to talk to you about money, makes you listen to him. and I thought, well, why would I listen to a mechanic about money?

And this guy, Russ, was a bit of an enigma. He mostly kept to himself, and then one day he brought me into his office, and he asked me, what would you do if I gave you $10,000? And I was really excited because I thought, oh, man, the guy is, he likes me. He might give me some money. I thought about it, and then I said, well, I put it towards my schooling, And we became friends later and he said to me that at the time he just said, okay, that answer is acceptable. And later he said if I told them that I would buy a new car or I'd buy a stereo or they'd go on a flashy trip, he said that he probably wouldn't talk to me again unless he had to.

He was a bit of a strange duck. But he was the guy who inspired me to see that I could actually build wealth on a middle class salary because he certainly had. And how did he do that and how did you know that? he was frugal and it's a great question you asked me too because he wanted to actually show me and so he took me out to his home he took me around the neighborhood in his car he showed me the houses that he owned he showed me his investment portfolio and he really wanted to make it very clear that he knew what he was talking about and he became a mentor of sorts from that point on he really make me see that if I became financially literate, that I could have financial freedom at a much

younger age than most people. So a great little story to a few years ago, I phoned him. And I haven't had much contact with him since then, but I phoned him. And I was living in Singapore. I was teaching high school English at an international school there. And I called him, and it was probably the first time I'd spoken to him in 10 years, I think. And I had had. And I had. just bought a bunch of wells. I had some wells built in Cambodia. So for like $150, I could build a freshwater well that would service three families through a really cool NGO operation that was based in Nampan. And of course, they have so many waterborne illnesses that their children end up suffering from there because these people are just, they're so, so poor, if you know,

anything about Cambodian history. Yeah, I spent a month in Cambodia. I've been to Nampen And so they were outside of Nampen in these really old dusty roads. And I went out and I met some of these families. But anyway, I ended up putting money towards building a whole series of these wells. And I called up Russ. And I said, Russ, there are people in Cambodia right now who have access to freshwater. And their children are drinking at freshwater. And they don't have to worry about their children getting sick and dying.

And you know why they have access to that? And he was kind of confused. Typical mechanic, he was a bit gruff, very blue collar. And I said, it's because of you that those people, and I explained it. I said, look, you inspired me so much. If it weren't for you, there's no way I would have had that $8,000 to donate to have those wells built. And he started crying on the phone.

It was the coolest thing. Oh, wow. So you were in college when you were working for him. Yeah. And you were washing buses, right, at a bus depot? Yeah, I drove them through an automated bus wash. And he was... He was the head mechanic.

Okay. And what do you think inspired him to take the time to take you under his wing and teach you how he had become a millionaire mechanic? You know what I think, Paula? I think deep down he was a lot like you and a lot like me where he discovered something and he wanted to share it. And he told me years later that he would ask college students that ended up sort of circling through that place over the years. He would ask them that same question about what they would do with that $10,000. And he would try to talk to them about differentiating between wants and needs. And he didn't get a lot of positive reception from that. He said there were only a few guys that

took what he actually said seriously. But those who did, and I was fortunate enough to be one of those that did, he took them under his wing and he kind of mentored them on a few things, which it made all the difference. So then it sounds like meeting Russ was what kicked off your interest in developing financial literacy. Now, at this time, you were 20 years old, you were washing buses at a bus depot in order to pay for your college tuition. What happened next? You're young, you're a college student, how did your life kind of continue from there? Well, he said to me that I should really start investing at 19. And I said, Russ, I can't.

I can't invest. I don't have any money. And he said, look, I've been watching you. And I've been noticing that, you know, from time to time, you go to that vending machine. I said, yeah. And he said, well, think about this. Could you buy a muffin and a couple of chocolate bars from that vending machine every day? day if you had to. I thought about it and said, I guess I could. And he said, think about it. That's

$3.33 a day. It's about $100 a month. If you start investing $100 a month right now, you could retire as a millionaire. And so did you? I absolutely did. Really? So he showed me how compound interest worked. I didn't learn it in middle school or high school in terms of as a practical implication. In fact, I didn't learn about it at all. I don't think it was even mentioned when I was in high school. But he showed me how compound interest worked. And he said, you can end up saving far less than your friends over your lifetime and end up with twice as much money. Let me show you how.

And so that whole vending machine kind of example was what kick started me. And so it was within a week I'd opened my first investment account and I started to invest money. and it started out with, you know, the $100 a month. And what were you investing in at the time? I bought actively managed mutual funds. I hear that a lot from people. Those were my first investments as well. Yeah.

Before I knew better. Yeah, of course, they're expensive. They have high management expense ratios, and that's exactly what I rail against in my books. Right, exactly. Exactly. We've lived through it so we know. Yeah.

So take us through your story after that. You graduated from college, having gone through this financial education under the wing of Russ, the mechanic, what happened next? Well, it's funny, because I probably went a little bit too far. You know, you have frugal, and then you have, like, crazy, ambitious, crazy. Yeah. That was me. I was on the crazy, ambitious, crazy end for a little while.

Yeah, I call them the frugal weirdos. I was a frugal weirdo at the same time. And it's not something that I would end up recommending to people. But when I looked back at it, it was also a fun time. And what I did have was I had a student loan, not a big one, because I was always working, doing multiple jobs while I was in college. How big was your student loan? At the end, it was only $12,000. At the end, meaning at the time you graduated? Like at the time I graduated, yeah. But at the same time, I could have at any point in time

actually paid that off because I was continuing to invest money. So even when I was in college, I took out a student loan, which was an interest-free loan while I was in college, and I invested money. Way, I guess I was kind of investing the student loan. I didn't see it that way because I was making money into other areas. And so there was this towards my living expenses. Oh, I'm getting some student loan here, but I was investing on the other end. So I was doing it all. And then when I started working, I looked at the whole sort of package and went, okay, well, the student loan's got to go. And it's got to go right away in the first year. That has to go. And so I stopped. investing that year. The first year after you graduated? Yeah, so it was the first job that I ended up having. It was I wanted really low rent or no rent. And so I would post these ads in the

newspaper saying that I would house sit for people and I would meet people that really did look for people that were going away for the winter and needed their homes looking after. And so I did a lot of house sitting and paid very little rent. I ended up getting a roommate for a little while, but kept my rent payments overall during that year, such a minimum that I was able to pay off that student loan in full, probably after about nine months of working. And what was your job at the time? I was teaching English at a middle school.

I remember my first paycheck was $2,884, and that was for the month. after taxes. And so that was a 10-month schedule. So just over $28,000 after tax per year. Okay. So you were making $28,000 a year. You had $12,000 in student loans. That's almost half of your take-home pay, a little less than half. Yeah. And I killed it. Wow. And the following year, I was so inspired by this, I thought, okay, I got a bit of a raise because it was my second year teaching. I thought, okay, I'm going to rent a place. This is a bit ridiculous. But you might think what I did next was even more ridiculous,

because I wanted to pay so little in rent. I found one place that was $350 a month. It was 35 miles from where I worked. And so I'm thinking, geez, all right, this is going to cost me quite a bit of money and fuel. I had a Volkswagen Rabbit, which was great on gas, but I thought, you know, even then it's going to cost me quite a bit because this is 70 miles that I have to travel back and forth. So I rode my bike. And what's, what's particularly crazy about that, or particularly laudable or both, is that you, you were living in Canada this time, right?

That's right. So it's cold there, from what I understand. Yeah, I actually live on the coast, and it's somewhat temperate, so it didn't snow very often. So it's usually above, freezing, so it'd usually be above 32 degrees. But there was some cold rain. And occasionally it would snow. Oh, yeah, I was a fruit cake. There's no doubt about it. I was nuts. At the time, when you were biking through cold rain on your way to work, at the time, did you ever the second guess yourself? Did you ever say, I should just climb into a car? Well, you mean start driving my car? Yes. Obviously there were days.

If I woke up and there was snow on the ground and that was rare. But if there was snow on the ground or if I felt kind of crummy, then yeah, I would get in the car and I would drive. But most of the time I did ride. I grew up as a bike racer. When I was in high school, I really had no interest in going to college. At least no interest in going to college right away. I wanted to try out for the Olympic team. I wanted to turn professional and move to Europe and bike race.

So the big long-distance cycling thing, it's not like I was completely unfamiliar with that and with that kind of discipline. So, but what happens when you arrive at work, though? Because it's one thing to do a long-distance ride in your spare time on the weekends when you can then go home and shower and relax. But how do you do this crazy long-distance ride sometimes through the rain and then show up at work and need to look professional? I got there before anybody else did. There was a bathroom that I used just off the staff room. And after the first couple of months, one of the guys put this sign on the door that said Andrew's, Andrew's cream. And I had little hangers there, and I had shirts that I would line up there and I would kind of hang them there.

There was a shower in there, and I would shave in there. And occasionally stuff would get done to my shaving cream. Oh, your fellow teachers would have a go at you. Oh, absolutely. They sure did. What did they do to your shaving cream? What can you do to a person? shaving cream. Oh, you can put it in the shoe, for example. Okay, what else? What else?

With the shaving cream? The one thing that I remember most of that crazy thing is we used to do this fly on the wall thing where once a year we would get these into the gym and there would be these big pieces of slabs of wood that would get fastened up onto the gym wall and you'd get a certain amount of duct tape and you could actually, one teacher would stand on a chair or a student. So each class got to participate in this. So these grade seven kids, you know, they get to stand on a chair with their backs up against the wall and another kid would get duct tape and would duct tape and would duct tape their hands and their feet to this wall. And then the idea was they would move the chair away and you only got a certain number of strips of duct tape. They would move the chair away and then

they would time to see which kid hung up there the longest. And so of course, the staff needed somebody. They wanted to be part of the fun too. So they chose me. And so I'm getting strapped to this thing. And here I am with this duct tape and they're just about ready to pull this chair. And then one of the guys comes in with the shaving cream. He puts it on my head. He puts it over my face. And you know what, Paula, that's when I regretted riding my bike to work. you saved on fuel you spent on shaving cream. And the shaving cream was probably a gift. I didn't buy shaving cream. You could just use soap, right? Somebody would have gifted it to me. But it was more trouble than it was worth. People felt sorry for me, Paula. There was a woman, and I mentioned this in

my book where I was writing home. I got halfway home, and I was really hungry. I became good friends with a couple of the guys. We played practical jokes back and forth. And At one point, at one point these guys had ended up hiding my lunch. And I didn't actually find it until halfway through lunch. And I eat a crazy amount of food. Like, I'm incredibly inefficient. Like, if, if you and I ever got lost in the jungle somewhere, you just have to run away from me. I don't be a liability. Well, I mean, if you're riding your bike 70 miles a day, then, yeah, I would assume you would need a lot of food. Well, then there's that, right? So just naturally, I've got this crazy metabolism. And then there's that. So it just, it's insane. So anyway, I really, and I'm a slow eater. So I was really only able to eat part of my lunch. And I think the other half of it got ruined. I mean, I had this cucumber that these guys had tied this chair. Actually sounds kind of like I'm the victim. But if they were here right now, they'd be able to defend themselves and say, you, you are not the victim. But anyway, I went home pretty, I went home kind of hungry. I ended up getting partway home and stopped at this gas station. And this is the part that I mentioned in my book. I thought, gosh, I'm not going to make it.

I'm going to bunk. And once you balk, it's like completely hit the wall. And I still have 15 miles to go. And it's just in a slog and just barely moving. So I bought a power bar. There was a woman at the gas station. She was fueling up her Mazda Miata. And she worked with me at school.

And we haven't to see each other at the same time. And she just looked so concerned. And she was such a nice woman and she was so concerned. And she said, Andrew, you know, I've really been thinking that we should start a collection for you at school. And at this point, this was my second year there. I was debt-free. I had enough money in my investment portfolio to buy two or three of her cars with cash.

So I was a bit embarrassed by that. I would take that as a badge of honor. I would take that as a compliment. She ended up reading that book later too. And she remembered that. She laughed. She thought that was so funny. She said, I had no idea.

You also mentioned, speaking of how much you eat, you also mentioned in your book that most of your meals were pasta and potatoes because those are cheap starches. And then you would pick your own clams in order to get protein. Paula, what do you call those crazy people again? Frugal weirdos. Yeah, frugal weirdos. I did a lot of that where I was looking for stuff. And I did, I was definitely a healthy eater, so I was into getting vegetables. So that was one thing.

I did have salads. I had salads most nights. But to keep that bill down, I was getting clams from the beach. And so, I mean, they were free. There was an old guy named Oscar, and he and I would go out there with a bucket. And he'd turn them into delicacies. And I would just toss my clams in with a bunch of pasta or, baked potatoes and I would have clams and pasta or clams and potatoes. And it definitely kept the frugal

weirdos costs down a lot so that the frugal weirdo could invest his money. But there's not a lot of meat in clams. You would really need a lot of those. Yeah, we had a lot of those. We would get bucket loads. It was a great place. Actually, you've probably had oysters from that particular area. It's a really, really fertile area for seafood. So you've probably had oysters your salad. from the Buckley Bay Area. It's interesting because I've had them all over the world. There's some oysters. Where are they from?

Oh, man, they're Canadian oysters. And I find they're from that same patch, essentially, that I was close to where I was picking those clams. We'll come back to this episode after this word from our sponsors. I'm happy to introduce Skillshare as a sponsor of the show. Skillshare offers over 30,000 online classes in areas like entrepreneurship, finance, marketing, productivity, freelancing, blogging, and more. If you've always wanted to start side hustling,

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Well, as you know, you have a lot of things going on. And there are certain things that you have to do as a small business owner, like filing taxes, running payroll. They're necessary, but that's not the reason that you got into business. And that's not the thing that's going to 10x your revenue. That's where Gusto comes in. Gusto makes payroll, taxes, and HR easy for small businesses. They offer fast, simple payroll processing and benefits and expert HR support that's all in one place and designed for small business owners. Gusto will automatically pay and file your federal, state, and local taxes so that you just don't have to worry about it.

These old school clunky payroll providers, they're not built for entrepreneurs, solopreneur, small businesses, but Gusto is, so let them handle that because you've got better things to do. You can get three months free when you run your first payroll. So try a demo and see for yourself at gusto.com slash paula. That's g-u-t-o.com slash paula, p-a-u-u-l-a. gusto.com slash paula to get three months free. Okay, so you're living alternately either rent-free as a result of house-sitting or if on the occasions when you do pay rent, you've got roommates and you've like lowered the bill down to just a couple hundred dollars a month.

You're buying pasta and potatoes and some vegetables and picking your own clams and you're riding your bike to work. Yeah, yeah, frugal weirdo kind of stuff. Yeah, wow. Okay. What kept you motivated? I mean, I understand that first year you had this goal of paying off your student debt, but why did you continue in the second year? Oh, I thought it was, I mean, each year I got a little bit less and less extreme. But I was, I was really keen. I'm really goal oriented. And I'm kind of lazy. And I knew how compound interest worked. And I knew that if I could differentiate between my wants and my needs and figure, you know, know what? I'm not going to end up buying a new car even though I can. I'm not going to end up renting an expensive place just because I can. I'm going to put this money away for the future and it's going to compound for me. So I think it was that I'm inherently, my wife hates it when I say

this, but I'm inherently lazy. So I figured let that money work so I don't have to work, or at least I have that choice not to work. And yeah, the very beginning. was crazy in terms of how frugal I was, but it all worked out. So you've always been a high school English teacher throughout your career. Yeah, I taught high school English and I ended up teaching high school personal finance as well. Yeah, I mean, who better? You were part of the curriculum. I've gotten emails from some of your students, actually. That's great. That's how I knew I was part of the curriculum. Can I tell you a really cool story? Yeah. one of the parents, so what I would get my students to do is they would look for, one of their

projects was they could find a cash flow positive real estate, is what I was calling it, and they would show the class, they would present to us a series of properties, and they would present one as a good investment, and then two or three that were not good investments, and they would go through and explain why this one was a good investment and this one was not. And I told them that it couldn't be something silly like, this one's not good because it's a crack shack or this one's not good because it's a million dollars. They were ones that when you first looked at them, you really couldn't determine they were similar prices, similar sorts of looking places in terms of overall size, but they would really get into the nitty gritty of, okay, what kind of neighborhood

is it? What's the crime rate there? What might taxes be? All that sort of thing in terms of the wear and tear on the property. And they would contact the realtors and they would have Skype conversations and it was a really cool project. But one of the parents ended up actually purchasing one of the properties that one of the kids found. Wow. And so that was super cool. That was right from the personal finance school of Paula Pant. That's excellent. That is excellent. Yeah, it was. My reach is further than I realized. It is. And you mentioned earlier that you became a millionaire at the age of 36. That's right. What were you investing in? In the beginning, I started out with, as I mentioned, actively managed funds, but then I ended up

moving to index funds and individual stocks. And then by 2011, I looked at my portfolio and I had done well picking individual stocks. And I had been measuring on a dollar weighted basis how I was doing relative to an index. And I was doing better than I would have been doing with an index. But I owned indexes and individual stocks. But what I was doing was, I was continuing to read more and more about investing. So by the time I was in my mid-30s, I read about 400 books on personal finance and investing money.

And there were a lot of common denominators there. And much of that ended up being the foundation for the book that I ended up writing. But the one thing that struck me was that you do end up getting the odd person who ends up beating the market or the odd mutual fund that ends up beating the market. But invariably, the market comes back typically to beat them. There's a process called reversion to the mean. Yeah, reversion to the mean. There was a guy named Bill Miller, and he had a mutual fund called the Leg Mason Value Trust. and it had beaten the S&P 500 for 15 years in a row.

And I remember journalist Andy Surwer said that this was the greatest mutual fund manager of that particular generation. He ended up getting walloped during 2008-2009. He lost so much more than the market did. And he didn't do much better the year after that or the year after that. I looked at this and it was tough to do

because I had to put my ego aside, but I thought, Andrew, I asked myself the question, Andrew, do you think you're smarter than Bill Miller? And there's no way. I mean, I had done well with individual stocks for, let's say, a dozen years, but that's nothing. That's a blip in terms of an investment lifetime. Bill Miller had done well for longer than that and then got absolutely walloped. And if you look at his fund now from the very beginning, Until today, it has underperformed the market over the length of that fund, even though within the middle there, it had that stretch of 15 years of performance. And so I thought, I'm not smarter than Bill Miller. And there were other examples of people that they'd beaten the index for a while until they didn't.

And so I thought, you know, I really should be more responsible with my money. At this stage, my money had grown to a seven-figure sum, well into seven-figure sum. thought this is something I should do. I should index this portfolio and manage it with a lot more. Not that I didn't manage it with discipline, but have it much more diversified. And yeah, in a sense, in a sense, but more disciplined. It sounds to me like you, you were on a hot streak with the individual stocks that you chose, but you realized that you were experiencing statistical variance. And you realized that you shouldn't assume that you're a genius just because you happen to be experiencing the positive end of statistical variance. Exactly. And it's not like I ended up buying a stock that gained two or three thousand percentage points. And when I worked it out, I'd outperformed the S&P 500 by something like 2% per year on average over about a dozen years. That's a big deal over a 12 year period. But at the same time, 12 years is a blip.

Right. And plus it's when you frame it in terms of risk-adjusted return. Yeah, exactly. As I said too, it did have, uh, bond component to the portfolio. I did have some index funds, but I had $700,000 worth of individual stocks. So I had $700,000 in individual stocks. I had some index funds, stock market index funds, and I had a bond market index. So yeah, it had diversification, but really with $700,000 of individual stocks, it was probably better to diversify that money, and so I did. So how did you do that? One day I woke up and I did it all at once. I sold everything. Wow.

Allocated it. And it was a gut-wrenching thing, but I decided it was kind of like ripping a band-aid off. I had to do it really quickly so that I wouldn't change my mind. Wow. And I'm glad I did it. I'm glad I did it because I was spending a lot of time reading annual reports of businesses. A lot of time reading, it was a book by a guy named Howard Schen. Schillett called financial shenanigans. And Warren Buffett always said, if you can't figure out where a company is fudging on its annual report, then you really have no business owning an individual stock. And so what I did was I would plow through and literally memorize this guy's book on how the typical gimmicks that companies end up pulling on their annual reports. And then I would order

a series of annual reports, hard copy. I would pretend I was a mutual fund manager. And I would call them up and I would ask for five or six years worth of annual reports and they would often then FedEx them to me. And I would plow through them and end up reading from front to back and back to front and try and figure out where they were fudging. And they were always fudging somewhere. And so it was a matter of when you're reading these year after year after year and you're trying to figure, okay, now where are they holding back? Where are they not paying taxes that they're going to end up having to pay? Or where is an expense that they're going to have to put forward at some point in time? And so I felt really good when I could see.

that because they all seemed to fudge a little bit. So anyway, it was a lot of work. And so I was glad to realize that with a portfolio of index funds, I was probably over my lifetime, number one, I was probably going to perform better over my lifetime, despite all of that work that I was doing. And statistically, I was going to outperform 90% of professional investors. And that's academically irrefutable. So I was able to sleep pretty well at night after doing that. How old were you at this time? You said this was around... I was probably about 40, 41. Okay. And that was right around the age at which you reached financial independence. It was, yeah. And it was right around the same time that I was writing my book. And so it is kind of

interesting when you ask me that question. Because of course, when I'm writing the book millionaire teacher and I'm looking at the statistical academic reality of this and the reality of beating the market and how improbable it is over a lifetime. So all of the reading and the researching and pulling all of this material together that I had been reading all along, but pulling it all together for a book was probably that awakening for me where I decided to index the entire portfolio.

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Yeah, it was something that when I looked at, I thought, how can I really boil this down everything that I've been reading? And it really starts with saving. And you don't have to be the frugal weirdo. But my rule, my title for that first chapter was spend like you want to be rich. There are perceptions of what rich people do. And then there are the things that rich people typically do. 80% of millionaires have never leased a car. Yet, if you go into a typical parking lot, many, many of the cars there are leased by regular folk who just don't have enough money to buy a particular car outright. And so the idea of, you know what, most millionaire or million dollar homes are not owned by millionaires, and most millionaires do not own

million-dollar homes. So that's another thing that is kind of counterculture to our belief system. We think that rich people are those that are driving really flashy cars and that they're always living on those mansions on the hill. And the best thing to do is to try to mentor yourself after the rich because they got there for a reason. And most million-dollar homes, according to Thomas Stanley, who studied wealthy people from 1973 until his untimely debt last year. They're just owned by people with really big salaries and really big mortgages. Not that there aren't rich people that own those homes, but by and large, most millionaires own homes that are worth far less than a million dollars. I did notice that. When I was reading your book that I thought

was one of the really interesting statistics that came out of that chapter was that most millionaires own homes that are worth less than a million. And also, there's one in here, the average deca millionaire, meaning a person who has a net worth of more than $10 million, paid $41,997 for their latest car, for their current car. Isn't that incredible? Yeah, that is really interesting. Yeah. And that date itself is probably seven or eight years old.

So I did index that to inflation for my latest book and suggested, you know, let's say $52,000. Okay, so they spent $41,000 in $2,010. There you go. And I'm sure if you were to do it today, it would probably be something like 52 or 53,000. But if you look at what was the most common car purchased by, the most common car most recently purchased by millionaires, it's a Toyota. Toyotas are very reliable. Yeah. One thing I thought about, Paula, when I was in Singapore, I was there during the financial crisis and I read something in the newspaper about all.

of the Ferraris that were brought back. And I thought, you know, if they really owned those cars, they wouldn't be bringing them back. Right. Okay, but let's move past that because, I mean, my audience, the people who are this deep into a conversation, the people who listen to personal finance podcasts and go this deep into these types of conversations, I mean, the listeners here know the basics. We'll go through all the nine rules, but I want to go deep into some of the investing rules that you had that we will get to later in it because I think that our listeners could get a lot out of some of the meat that you've got packed in the latter half of this book. So rule two, use the greatest investment ally you have.

What's our greatest investment ally? That's time and compound interest. So if you start early and you're never going to be younger than you are right now. So it doesn't matter how old you are, but if you start early... Oh, I plan on being younger than I am right now. Yeah, it's not going to work, Paula. You've got to figure out a name for people like you then, if that's the case, right? Time machine, want to be...

Benjamin Button. Yeah, Benjamin Button. But the idea that you can actually end up saving less than other people, but ending up with more money because you start earlier and you allow compound interest to work its magic. So that's something that is so, so powerful. All right, rule three, small percentages pack a big punch. The beautiful thing about the United States is that you have the greatest financial service firm in the world.

You guys have Vanguard, which has run much like a non-profit firm. It's actually kind of like a co-op. Like anyone who invests in the Vanguard Index Fund owns or is a part owner of the company. It's really a fool that way. And so you can choose to invest really, in low-cost index funds and pay as little as 0.1% per year, or you could choose to invest in actively managed mutual funds that pay about 1.5% per year. And academically speaking, guarantees you that you'll end up with a third less or even a half less at your retirement

than you would if you invested with low-cost index funds with a firm like Vanguard. And that shocks a lot of people. I say just I choose these funds and I'll end up with at least a third more money at my retirement date than if I go with what is typically sold by the average financial advisor. So the average financial advisor will sell you the more expensive products. Now, now why is that? So let's say that a given fund has an expense ratio of, we'll just pick 1%. How is it that if you were to go into an actively managed fund with, a 1% expense ratio, you would end up having such a dramatically different output at the end of a 40-year term.

Is that all because of compounding interest or is there more at play? It does have to do with compounding interest. And if you go to moneychimp.com, an online financial calculator, which will allow you to compound money over time. And you plug in two interest rates. plug in 8% and do, oh, what would $100, what would sort of whatever, $5,000 a year grow for 30 years at 8%? And then plug in 9, just change it by 1. And you'll be shocked to see what kind of a difference that makes. And one thing that a lot of people end up saying to me is if they're in their 40s or their 50s, they say, well, okay, but I'm in my 50s.

And so I only have, let's say, 15 more years to work. And so, okay, so I have, I've just figured out, I've got these expensive mutual funds, but I might as well stick with them, right? I mean, I'm only 15 years from my retirement. And I say, no, no, no, your investments last as long as you do. So your investments aren't meant to be something that you cash in on the day you retire. Your investments are the thing from which you are drawing perpetual income from until you draw your last breath. So someone who's 50 years old feasibly could have money in the

markets for 40 years or longer. So now once you start playing with that 1% difference, so looking at an 8% return versus a 9% return, it makes a massive difference over time. Right. Exactly. You're not going to pull all of your money into cash on the day that you retire or on the day that you turn 65. It's funny how people think that, though. Exactly. John Oliver did a really, really funny show fairly recently about the tyranny of compounding fees. I saw the show that he did about high fees in retirement plans. Exactly. And that was it. So he went through and looked at what kind of impact fees have on retirement plans. And it was, yeah, it was an eye opener for a lot of people and it was funny. Yeah, it was fantastic. We'll link to that in the show notes.

Yeah, super. In terms of small percentages and fees that people should look out for, you talk about five in particular. Expense ratios are the ones that we all know about. They're the ones that I'm always railing against. And that's the fee that is associated with the mutual fund. That's the fee that you pay to hold a mutual fund or an index fund every year. So index funds have expense ratios as well. It's just that there's are a lot lower.

And if you go into a Vanguard fund, it's among the lowest that you will ever find, if not the lowest, if you're a U.S. investor. But you talk about five fees in total expense ratios being one of them. Can we quickly go over some of these others? So the next one that you talk about is 12B1 fees. Yeah, a 12B1 fee is a fee that comes out of the fund. It's not part of the expense ratio. It's in addition to the expense ratio. And so if your expense ratio is 1%, you may end up really.

paying something like 1.2%. You may end up paying 0.2% per year for a 12b1 fee. And what that is, it's kind of the ultimate con really, because what the mutual fund company does is it takes that money so that it can actually use it to advertise for the fund, radio, television, and newspapers, magazines, that sort of thing. So who pays for the advertisements for these particular funds, the people who actually invest in the funds themselves, not the fund companies. company. They take it from the pot of the investment pot, which is pretty crazy. Yeah, yeah. That and the fact that the larger that mutual fund grows. In the industry, they call it elephantitis. So a fund that typically has done well over time to also attract, typically attracts a lot more fresh

new investors because they'll have this track record. They'll advertise it in the magazines. This is the fund that beat the S&P 500, five years in a row, or whatever it might. might be, and then more money starts to flow in towards that fund manager. And even if that fund manager is skilled, suddenly there's more money coming in than really good ideas. And so ultimately, they're going to have to lessen some of their standards in terms of what they're actually purchasing. They're not going to be getting scorching deals on everything that they buy.

And so the reversion to the mean ends up occurring as a result of success. So it's ironic that one of the worst things we can do is purchase a fund based on its historical track record. That should not impress us. The saddest thing is those advertisements that bring in that influx of money that typically accelerate that concept of reversion to the mean, we as investors actually pay for that with 12B1 fees. I've heard the argument that the reason that a manager who has outperformed will a revert to the mean is because of L.O. and Titus, and therefore, if you find a manager who limits the size of their fund, or if you find that small scale growth, you could actually essentially try to make a bet on the performance

of that given manager because they will not be a victim of their own success. What is your opinion on that argument? Well, it's an interesting, it's a good thing to do. If you are interested in actively managed funds, the fund companies actually do close the doors to new investors at some point. That's a good thing. They do do that to benefit their investors. So that's great. I'd never actually seen any studies showing how people can find actively managed funds that could beat the market ahead of time. At least no, actively managed peer review or academic peer reviewed studies that actually support that and allow that to hold water. I was looking for something like that and I read a book called The Investors Dilemma. I believe it came out

probably around 2008. And this writer ended up arguing that, yes, you will beat 90% of professional investors with a portfolio of index funds. However, there are those magical funds whereby they close to new investors that people have to eat their own cooking. So the managers end up having to own a large percentage of the fund themselves that they're actually invested in. So their own money is on the line. They had a series of other variables in terms of their costs. They had to be value-oriented. And they ended up writing an article about it because they had taken, I think, 12 different

funds. And they said, these are the ones. Look how they had beaten the indexes over the previous 15 years. And they had. And they said, these are the ones that are going to continue to beat the index going forward. And after about, it was probably six years, seven years, six years after that book was published, I thought, let's have a look.

let's see and they hadn't so they had a great past but once again they didn't have that great future and why do you think that was i just think it's so difficult to beat the market it's that tough so there's luck that's associated with a great streak and i do believe that there are people that that are good stock pickers or some people who don't believe that at all they think it's entirely luck no i do believe that there are people who are good at picking undervalued stock but it is such a difficult thing to do. To continue to replicate consistently. Exactly.

Right. So even if you do close the, even if you are a fund manager who does close the doors to your fund, and therefore you are not at risk of elephantitis, you still are at risk of your own judgment, the shortcomings of your own human judgment. Absolutely. Let's talk about the other three types of funds.

So we've, I'm sorry, the other three types of fund expenses that drag down the performance of actively managed funds. So we've covered expense ratios. We've covered 12B1 fees. And then trading costs. Yeah, people don't know about trading costs. Sometimes in some countries, what they'll do is they'll have an expense ratio. And then they'll have something called a T-E-R, which is a total expense ratio. When you see your expense ratio, what it doesn't actually include are the trading costs that the fund

manage who will incur through the buying and selling of the stocks. And so when they buy and sell stocks, they don't get to buy Coca-Cola one day and sell Coca-Cola the next day for free. They have to pay a commission to a brokerage house. And so when an actively managed fund has this a degree of, obviously a degree of turnover, they're buying and selling, it does cost the firm money. And then once again, where do they actually get that money? Well, they take it from the investment pool.

So the investors pay trading costs as well. So the actual fees you pay are always higher than the expense ratio that's posted. Right, exactly. So even if I'm not paying $10 to E-Trade or Scott Trade to buy the fund, even if I am able to make a fee-free trade, there are still those fees that I'm not seeing. Exactly. And so you'll get most of the money. mutual funds have something close to a 100% turnover, which means that at the end of a 12-month

period, they've traded 100% of their actual stocks. And some, they've still owned at the end of that 12-month period, but others they've traded two or three different times. So a 100% turnover really just means that in theory traded every single share. And so there's a brokerage cost that's associated with that, and the investors pay that. Wow. And if there's if you're trading within less than a year of buying the stock, that is subject to short-term capital gains. Correct. Correct. Which is significantly more expensive than long-term capital gains. Exactly. Now, what's really cool is when you go to Morningstar and you can look at a particular fund. And so if you, in my book, what I did was I was explaining this and I said, let's assume that, I mean, anyone who's a big saver, you're a big saver, I'm a big saver, we're doing more than just, filling out our IRAs. We're doing more than just maximizing the amount of money that we could

theoretically put into a 401k. We're investing beyond that. So we're investing in taxable accounts, right? And most mutual fund money is actually in, the mass majority is in taxable accounts because we have a lot of people with far more money, disposal money, to put into, or investable money, far more money than what they would normally be just allotting into their IRAs, for example. and the short-term capital gain kick is exactly what happens, Paula, when the stock within the fund incurs a profit, somebody gets that tax bill and it's not going to be fidelity. It's going to be you as the investor.

So what Morningstar does is they actually have, you can actually see what the performance is on any given fund, but you can see the after-tax performance as well, which I really like. And so in the book, I wrote about the Fidelity Contra Fund, which has done very, very well on a pre-tax level. It's been a strong fund.

And over the past three years, it's outperformed the S&P 500 by something like 0.8% per year, maybe even about 1% per year over the past three years. But it's after-tax performance is lower than the Vanguard S&P 500 index for that exact reason. The portfolio has turnover. And that turnover, that fund manager is actually quite disciplined. The turnover is only 35% of the past three years. So 35% per year over the past three years. But still, it underperforms the index fund by almost a full percentage point, even though

its pre-tax gain was about a percentage point per year higher than the index. What if you held an actively managed fund, not that I think that anybody should, but theoretically, if a person held an actively managed fund in a Roth account, how would that affect taxes? Would they not have to pay the short-term capital gains tax on the turnover within the fund? They would not. So in that case, they'd be better off. Not better off with an actively managed fund, of course, because they still have a higher expense ratio. They still have often the 12b-1 fees and the trading fees, but they don't have to deal with that taxable liability if it's in a tax deferred account like a Roth. Okay. So that's at least one of five different types of

fees that they are exempt from. Right. And only in a tax-deferred account. And actually, and so that leads us to the fifth and final example, sales commissions. I can't believe these still exist, to be quite honest. Loads. Oh, they exist. That's shocking to me.

It seems like it should have gone the way of the typewriter. It's funny. There's talking about things going the way of the typewriter. I wrote a story fairly recently about Indeat. funds and not all index funds are necessarily created equal. With Vanguard, yes, but there are firms that will sell index funds that actually carry fairly high expense ratios. So like above 1% for an index fund.

And one of the firms I was looking at actually has a 4% upfront sales commission to buy this index fund with more than a 1% management expense ratio associated with it. And I thought, who would buy this? Wow. Wow. Okay, so what is their justification? I mean, what is their argument for why you should buy it? I haven't asked them, but I think they're just trying to see, I think Wall Street will sell what Wall Street can sell.

So they put something out. They make it really silly. They put out like a $15 kit cat just to see who's going to buy it. And invariably, somebody somewhere is going to buy that $15 kit cap and they're going to say, Thank you very much. Gotcha. A lot of this is the result of just financial illiteracy. Absolutely.

If you have, and I've seen this just from conversations that I've had with friends, if you've got somebody in an expensive suit with sitting at a mahogany desk with a marble foyer telling you that X, Y, Z fund is where to put your money, then if you don't know any better, you're going to believe that person because you don't, you haven't developed the judgment to be able to make decisions for yourself or make more critical decisions. That's exactly right. Okay, so small percentages pack big punches. I sure do. So what are some of the key takeaways that we got from this episode?

Number one, you can't beat the market. Andrew had $700,000 in individual stocks and he was beating the market over the course of a dozen years. He was outperforming the S&P 500 by about two percentage points. And yet, he had, fortunately, the wisdom to know that he wasn't smarter than the smartest guys on Wall Street. He wasn't some expert stock picker. He was just having a lucky streak. If you listened to an earlier episode where we interviewed former professional poker player Billy Murphy, you learned about the concept of variance. This is a concept that poker players and anybody who studies statistical probability or game theory is familiar with. Andrew, fortunately, had the wisdom to realize that he was on

the upside of variance. He was experiencing the joy of when it's going right, and he got out. He realized you cannot consistently beat the market over the long term, so don't try. Just stick with low-fee index funds and replicate the market, as long as you stick with low fee index funds, you will, on balance, do as well as the overall economy. No better and no worse. And ironically, if you try to do better, you will, statistically speaking, put yourself in a position where you are much more likely to do worse. So the lazy approach is the best one. And that is one of the key takeaways that I think comes out of this past hour that we've spent chatting with Andrew. Key takeaway number two, taking a step backward and looking at this a little bit more broadly,

is, and I think this came out of Andrew's story, you don't have to make a bunch of money in order to invest enough to become a millionaire within one or two decades. I mean, Andrew was making $28,000 a year in take-home pay, and he was saving half of it. And granted, yeah, he was biking 70 miles through the cold rain uphill both ways while eating clams out of a bucket. You know, it may not be a sustainable life that you could live over the long term. But, geez, isn't there something you could do? Even if you don't want to necessarily have all of your colleagues throw shaving cream in your shoes, the way that Andrew described, there's got to be something you can do.

If you look around at your life, there's got to be some waste that you can identify. And that waste, if you cut the fat and you put that into the mom, market, I mean, those small amounts add up. Like the story that he shared at the beginning, $3 a day at a vending machine, that's $100 a month, you put that into the market and you do that consistently over the long term, that adds up. And I know we're getting dangerously close to being like, oh, don't buy lattes, you know, because nobody wants to do that because like obsessing over penny pinching and obsessing over lattes is also not a great way to live your life and to dedicate your limited mental bandwidth. I fully acknowledge that.

But that being said, all things live in creative tension. So while I wouldn't recommend that you become necessarily like a penny pinching, hoarding, coupon clipping freakazoid freak show, that's not necessarily a good way to live your life. But by the same token, the limiting belief that you have to be a high income earner in order to invest is also equally out of balance on the other side. the fact of the matter is you can invest no matter how much you make. If you have the discretionary income to be able to listen to this podcast streamed through some type of iPhone or Android, if you have a computer or a phone, you've got some disposable income. You are not living under a bridge below the poverty line.

And I'm certain that you can make some investments. You can take some of that disposable income, put it in the market, put it in a low fee index fund. You don't have to know a whole lot about investing. And keep doing that because if you consistently make that a habit, well, guess what? After 10, 15, 20 years, you're going to have some serious money built up. So those are two of the big, big takeaways that I got out of this conversation with Andrew. Don't try to outsmart the market. And don't try to outsmart yourself.

Don't talk yourself into believing the negative beliefs and the negative narratives that you tell yourself. Just commit to starting to invest and let the rest flow from there. Hello, this is Paula again, recording this from Slovenia. Thank you for joining us today as we listen to part one of two of our interview with Andrew Hallam. Hope that you're enjoying the September 2019 September sabbatical content. which I'm airing some of my favorite interviews, both previously played on this podcast, as well as interviews that I have recorded on other shows. So thanks for joining us for today's episode. Be sure to hit subscribe or follow in whatever app you're using to listen to podcasts so that you

can make sure that you catch part two of this interview with Andrew Hallam, which we will air on our first Friday bonus episode, our September 2019 first Friday bonus episode. So that is coming up later this week. Thanks again for tuning in. My name is Paula Pat. Have an awesome month of September, and I will catch you on Friday's episode. See ya.