The following is notes I took while reading the book, they are not edited for format.
“MONEY: MASTER THE GAME” 7 Simple steps to financial freedom
Step 1: Dont get rich, START rich - stop being a consumer & become an investor, and Decide on a specific amount you're going to invest monthly, then commit and automate the process.
Instead of eating out order pizza&beers Save $40/week
= $2080/year if invested at 8% over 40 years will net $581,944
$100 will mean a 1 million dollar net return
Get your HR department can set aside a percent of your pay check to automatically to goto your retirement account. Or get automated transfers between accounts.
Suggested 20% start with no less than 10%
Save more for tomorrow, save your pay raises and invest
A study was done with 200 ppl who said they can't afford to save. .
Start with 3% savings per pay.
After 5 years avg saving 15% of their pay check
65% of them were saving 19%
The one percent more savings calculator
A part of all I earn is mine to keep.
Pay to play fee. Used by vendors to maximize profits and limit your selection ability
Fixed indexed annuities
Step 2: Learn the rules of the game - Become an Insider, "become the chess player, not the chess piece"
Ignorance is not bliss.
It's pain struggle and giving your money away to a system designed to separate you from your money.
Fees: 100k one time investment for 30 years @7% 571k = 439k in fees at 3%
game changed: Pension. CDs. Not 0.22 percent today. Blue chip dividend paying stocks
Brokers work for companies that are not required to put your best interest first and focus on generating profits for the shareholders.
Brokers are Paid to funnel your money to sell products tat pay himself,f and his company the best co sidings. Provided with the tools and resources determined by their employers that are not setup to be complex or autonomous.
FEES : The house has the edge - Steve Wynn
Mutual funds have guaranteed income via fees.
Are you funding your retirement or someone else's?
Avg cost 3.17%
Own the S&P 500 for as little as .14% or 14 basis points. (100 in 1%)
Already beating 96% of mutual funds and managers
Same returns different results
There are Total of 17 diff fees/costs paid for by investors
Incl. Asset mgmt Fees, Trading costs. Purchase , record keeping, planned administration
Avg worker pays 154k in a lifetime for fees (assuming they make a 30k salary saving 5 percent annually)
277k paid in fees if u have a 90k salary saving 5 percent per year
Jason, Matt, Taylor, started to invest @age 35-60 (25 years)
& received equal performance @ 7% returns annually
The results of their accounts after 1, 2, 3, percent fees
J $324,340 for 3%
M $432,194 for 2%
T $574,349 for 1%
End up Working a full decade longer
Example: "The lost years" jan 1 2000 and dec 31 2012 the market ended up flat with tons of volatility
With $100k invested in the market
If you paid the avg 3.1 percent in fees and tour manager matched the market
End result, your Account would be down 40% and paid 30k in fees
17 Fee list
1) Expense ratio : main price tag they market to sell funds, avg. 1.31 percent of fund assets paid annually.
2) Transaction costs: Brokerage. Market impact. Spread cost. 1.44% (too hard to quantify so not included)
3) Tax cost or planned administration fees 1.3/yr
4) Soft dollar cost: pay premium on trading costs on stocks for using a particular vendor to get research or software certain services they get rebates from
5) cash drag for liquidity 0.83% per year to provide liquidity. Cost takes away from performance
6) Redemption fee to exit fund , limited to 2 percent. Could cost 2k to get 100k back
7) exchange fee to change funds within a family
8) account fee to have account/maintenance
9) purchase fee. To fund company
10) sales charge to purchase fund prepaid or post paid
Cost calculator personal fund
401k plan administration fees can be 1.3 percent per yr
Suggested total broker+plan admin = 1.25 percent fees annual
Never pay insane fees for sub par performance
Fees can save u 5-15 years of wealth accumulation time to recoup up to 70 percent of your future nest egg.
5 requirements of a independent fiduciary Fee-only advisors | Findanadvisor.napfa.org
1) registered with the govt and Canadian securities
2) compensated on a percentage of your assets under mgmt, no other fees
3) no compensation for trading stocks and mutual funds
4) no affiliation with a broker dealer
5) make sure the money is held with a reputable 3rd party custodian
Earned income can never compare to compounding
Sir john Templeton.
Find the best deals at times of maximum pessimism
When there's a meltdown people give away their homes/businesses for pennies
$10k investment in ww2 in u.s. stocks under $1 into billions after 1945
Myth 1: Invest with us, we'll beat the market-- Nobody beats the market long term: 96% of mutual funds over a 10 year period don't match the market in returns. The avg mutual fund owner over 20 years makes 2.5% net. Most hedge funds do not beat the market,their income is guarenteed via fees. Own a piece of the makret in index funds.
Myth 2: Our fees? They're a small price to pay-- Fees matter: The average mutual fund fee is 3.1% every one percent fee is worth 20 percent of what you accumulate over a lifetime of investing compounded mutual funds take 50 to 70 percent of future nest egg through fees. While telling you they have your best interest at heart
and lobbying at congress to make sure that doesn't happen
Myth 3: Our returns? What you see is what you get -- Average returns are not real returns
Myth 4: I'm your broker, and I'm here to help.
Myth 5: Your retirement is just a 401(k) away.
Myth 6: Target-date funds: just set it and forget it.
Myth 7: I hate annuities, and you should, too.
Myth 8: You gotta take huge risks to get big rewards.
Myth 9: The lies we tell ourselves
Mutual fund: the13 trillion dollar lie . Actively managed. Fund managers stock picking ability fails to beat the market 96% of the time.
7700 mutual funds
Everyone is entitled to their own opinion but Everyone isn't entitled to their own facts
2012 actively managed funds returned 7% s and p did 14%
2013 actively ,managed funds returned 8% s and p did 29%
51 percent market dip
S&P500 outperformed 95% of small cap growth managers
The managers had plenty of tune to make defensive moves
72 percent of all fund deposits float to 4 and 5 star funds. (2 trillion)
Companies will very frequently remove funds that fall below 4 stars
27 percent of domestic 23 percent of international percent merged or liquidated to eliminate poor track records, then market the winners.
2 percent chance a 5 star fund exists after 10 years.
Index shouldn't be for all of your money the market is up 70 percent
2x50 percent crashes since the year 2000
The catch , you dot get to participate in all the gains.
Align yourself with the market instead of trying to beat the market
Power of indexing allows you to passively own the market
A Fiduciary (Legal requirement to put you first) vs A broker (suitibility standard)
David Swinson | Yale. 1 billion to 20 billion in 2 decades
3) Making The Game Winable
Three Key Points
1) Calculate top 3 Financial Goals make a plan and cost out your ideal lifestyle
2) Plan with real numbers
3) Look for and implementing ways to speed it up and earn more
What's the price of your dreams?
You can't reach your financial dreams in less you know precisely how much it cost to get there
Build your money machine
Set up an emergency fund in cash
Critical mass @5% rtn is 20x annual income
G6 jet $5000/hr x 100 hrs a year
Necker island for 16 ppl $250k/week
Bahamas nandana $112k/week
St Martin casa Cervo $9,560/week
Namale Fiji $12,000/week
Financial Goal Levels
Security: (mortgage, utilities, transportation, insurance ,food, saving
Vtality: 1/2 (clothing, dining and entertainment , little luxury, any extras, )
Independence : no need to work (current monthly spend. )
Financial freedom (1 luxury item cost/month, 2nd item, 3rd item)
Absolute financial freedom (add 3 more luxury items)
You do have to own the whole jet
You don't have to own the whole team
How much money do you need to be financially secure, independent or free?
Speeding things up
1) save more and invest the difference , pizza over
2) mortgage principal pre payment
3) create a spending plan, saving $10/day can earn $141,000 over 20@6% interest
4) take a pic of item you want, buy it discount online. online rewards program , you promise.com
1) brainstorm about all reoccurring bills that can be eliminated
2) how much do they cost, how many times per week
3) rate from 0-10 joy from each item/activity
4) think about what it would feel like to have absolute financial freedom
5) decide which is more important. The expenditures or the feeling if financial freedom
6) write down at least 3 expenditures you're resolved to eliminate.
Earn more and invest the difference
4) Asset allocation
Four Key Strategies
1) Asset Allocation is everything! Diversify between: Security, Risk/Growth, & Dream bucket
2) Dont hesitate trying to have perfect timing, use dollar cost averaging
3) Have a dream bucket that gives you excitement
4) Use rebalancing and tax harvesting to maximize returns and minimize losses
Asset Allocation Buckets
1. Financial Security: that amount of money that covers food, housing, cars, travel, and basic entertainment.
2. Financial Independence: where you don’t have to work and everything is covered.
3. Financial Freedom: you don’t have to work and EVERYTHING YOU CAN THINK OF is covered.
Trading Bucket 5% or less of portfolio to picking stocks
The Formula for Financial Independence
You’ll never get financially independent, or free, by your earnings alone. You’re going to have to create a Money Machine, a means of earning money while you’re sleeping, so you’re no longer trading one of the most valuable resources you have in life, which is your time, for money.You want to trade money for money.
The Formula for Financial Independence is:
1. Spend less than you earn and invest the difference.
2. Reinvest your returns for compounded growth.
3. Reach a critical mass of investment capital that creates the annual income that you want.
Whatever you’re investing in—whether it be cars, stocks, bonds, real estate—you’re investing for income and not assets. The goal is to get to a point where the interests on your investments alone, in a secure environment, will be enough to cover at least your financial security, then your goals of independence and, ultimately, freedom. In order to do that, you have to build a critical mass of capital in which the interests alone on that capital will give you the Financial Independence you desire. The only reason to invest is so that you have an income for life
Asset Allocation means that out of the money you have to invest, you’re going to create three buckets to allot that money to. How much you choose to put into each bucket can vary depending on which stage of life you’re in, but the three buckets of Asset Allocation are:
1. Security Bucket(% = your age)--The place where you put money into investments that are secure by their nature. They won’t give you huge compounded return, but if you do it long enough, even if the initial return is small, in the long run that compounded return grows and grows. Your first investments MUST be put into your security bucket.
The types of things you want to put into your Security Bucket can include:
• Cash/cash equivalents for 2 – 6 months (or whatever’s going to make you feel secure)
• Money Market funds
• IRA (Individual Retirement Account)
• Insurance (e.g. Life insurance)
• Fixed income investments—investments that have a guaranteed rate of return. This includes company or government bonds, etc.
•Real Estate Loans
2. Growth Bucket--Where you would put growth investments. You have a much greater return if the investment is successful, but there is also a much greater chance of loss if the investment doesn’t turn out successful. There is no guarantee of return in a growth investment.
• Real Estate
• Structured Notes
• Index Funds, International Stocks
3. Dream Bucket--The material things you want in life, like world travel, ownership of real estate other than a first home, owning a sports team; anything that you don’t actually need but would make you feel more fulfilled toward the life of your dreams.If you’re playing conservative and/or just starting out investing, you might want to put about 40% of your investment capital in the Security Bucket, and then split the rest between the Growth
Bucket and the Dream Bucket, or the remainder into Growth (if you put the rest into the Dream Bucket, keep in mind that the return will most likely be significantly less than Security or Growth). If you’re very aggressive, you might consider putting 30% of your investment capital into the Security Bucket and more into Growth and Dream. If you’re older, you probably want to put more into your Security Bucket because you have less
time to make up for potential mistakes. If you’re younger, you can probably risk putting less. But if you put nothing, you gain nothing. As the old saying goes: no risk, no reward. You may invest and lose, but if you don’t invest at all, you’ve already lost because you haven’t even given yourself a chance to experience the potential reward of investing. You’ll never have a chance to build that Money Machine, and you’ll be less likely to experience financial freedom.
5) Create an Income for life
The number 1 fear amongst baby boomers is running ur of money before they die. Having the income to have the life you want for as long as you live. Worked for ups Theodore johnson , never made more than 14k/year had 70 million dollars when he retired.
• Income Insurance plans (Income, Guarentees, Protection, Easy)
• Annuities ( guaranteed return at 7% a year)
• Annuities ( with a spread 1.5% profit fee) if it loses money u pay no fees
the longer you weight the higher the income payment.
example, at age 65 a lump sum deposit of 100k = a guarenteed $65k/yr income at age 85
@ age 54 a lump sum 100k deposit = a guarenteed $83k/yr income at age 85 | 10 yrs = $883k in payments
Advisors Excel - Annuity Wholesaler
PPLI: Accredited investor $250k x 4 years
Living Revocable Trust - To own home, brokerage account etc, Assets avoid probate
Incapacity clause, to het someone step in to hand in bills www.getyourshittogether.org Free or Legal Zoom $200
6) Invest like the .001 percent
1) Dont Lose Money - Defence is 10x More important than offence, you have to be very focused on the downside at all times if you lose 50% it takes 100% gains to get back where you started, but you cant get back time.
2) Homeruns - Asymmetric Risk/Reward
Risk $1 to make $5 - Paul Tudor Jones
3) Anticipate and diversify - they do their homework until they know in their gut they are right, they anticipate failure by diversifying
4) Youre never done - Learning , Earning, Growing, Giving
David Swenson - 3 Levers of Profit Maximization
Asset Allocation (classes), what assets, which porportion %
Market Timing (costs money), which asset class performs better in the short run relative to assets you hold
Security Selection: structure of bond and stock portfolio (fees).
Mutual Funds make money by having a large amount of assets under mgmt and charging large fees annually.
They do not have a fiduciary responsibility to the customer
Ratings are skewed by survivor-ship bias, under performing funds are merged with high performing funds to have more assets under mgmt and attract more clients.
Another reason why the investors reality is is worse than stated and it has to do with their behavior
Individuals tend to buy funds with good performance and they chase returns. When the performance goes down, they sell the fund, they end up buying High and Selling low. They aim to get 4 and 5 star funds (high fees)
They have performed well, not that they are going to perform well, when they don't, they sell.
Reversion to the mean: The tendency that high performing funds go from performing well to not performing well.
Almost all mutual fund managers behave as if taxes dont matter, the largest expense in the world. Buying and selling is detremental to gains.
Low Cost Passively managed index funds: 0.20 basis point fees and taxes are less
Maximize RRSP contributions and TFSA
Diversification is a free lunch, because for any given level of return, if you diversify you can generate that return with lower risk.
2 Levels of diversification,
Security selection: i.e. owning an indexfund and buy the whole market.
Asset Allocation: (us stocks, us treasury bonds, us TIPS, foreign developed equities, foreign emerging equities, and REITS)
Have as much in bonds as your age.
Jack Boggle - Founder of Vanguard 2.8 Trillion in investments under mgmt
Investing is more luck than skill
Investors are avg, most ppl pay too much for the privelidge of being avg
active mgmt costs 2% in a 7% market you net 5%
an index fund that costs .05% means you get 6.95 return
@6.95% 1 Dollar turns into $30 over 50 years
@5% 1 Dollar turns into $10 over 50 years
Meaning you put up 100% of the cash, 100% of the risk and got 30% of the reward long term, compounding cost/fees.
Buy stocks for the dividend yield and earnings growth, over the long term half of the return in the stock market comes from dividends and thats where all the funds expenses come from. The gross yield of teh average equity fund is 2%. The gross expense ratio of the average equity gund is 1.2%. They take that out of the yield so your yield is .8% the manager is taking over 60% of your dividends to pay himself. The industry is consuming sometimes more than 100%. Yet there is still 100 million people invested in actively managed mutual funds.
Conflicting Feduciary dudies. I.E. Companies like Blackrock have 2 responsibilities, to maximize rreturns to teh owners of the company, and 2 Maximize the returns of the public fund holders. In order to increase one the other will suffer via fees going up or down.
The stock market is a derivative of the value created by corporations.
Deleverating has to continue, Fed reserve 4 trillion on the balance sheet
Never lose sense of history, it may not repeat itself but it rhymes
Dont read wall street journal, dont watch cnbc
Avg person gets market return +or minus something, usually minus, so dont spend time trying to trade the market
1) Choose asset allocation in accordance with risk tollerance and objective
2) Diversify through low cost index funds
3) Have as much in bond funds as your age (vanguard total bond market, tax exempt municipal bond funds)
"Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1"
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
"Time is the friend of the wonderful business, the enemy of the mediocre."
"Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful."
"The best thing that happens to us is when a great company gets into temporary trouble...
We want to buy them when they're on the operating table."
"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."
" I have pledged – to you, the rating agencies and myself – to always run Berkshire with more than ample cash. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits."
Indexing is the way to prosperity
10% in short term govt bonds
90% in low cost s&p 500 index funds
Paul Tudor Jones | Tudor Investments Corporation - Robin Hood Foundation
Robin Hood Foundation Every $1 spent earns 15x the investment
Administration and Operation, fundraising cost fully covered by the board of directors
28 Consecutive winning years
In black Monday stock market crash he captured 60% monthly returns and 200% returns for eh year
Macro Trader: Fundamentals, Psychology, Technical Analysis, Flows of funds, World Events impacting asset prices Instead of stocks, bets on trends, Currencies, Commodities, Interest Rates
Defense 10x more important than offence, focused on the downside at all times
Good positions don't need to be looked at, where you re losing money is the best place to look
Risk Control #1 single most important focus of the day
Diversification is key, and staying in the game as long as you can
Time to hold, time to fold.
PTJ: There’s never going to be a time where you can say with certainty that this is the mix I should have for the next five or ten years. The world changes so fast. If you go and look right now, the valuations of both stocks and bonds in the US are both ridiculously overvalued. And cash is worthless, so what do you do with your money? Well, there’s a time when to hold em and a time when to fold em. You’re not going to necessarily always be in situation to make a lot of money, where the opportunities are great. When there is nothing compelling, be defensive, and run a portfolio where you dont get hurt.when values do arise you have firepower to take action
1) Always be with whatever the predominant trend is, dont be a contrarian investor
PTJ: My metric for everything I look at is the 200-day moving average of closing prices. I’ve seen too many things go to zero, stocks and commodities. The whole trick in investing is: “How do I keep from losing everything?”
If you use the 200-day moving average rule, then you get out. You play defense, and you get out. -
"Get out of anything that falls below the 200 day moving average"
MSFT stock went up 800x , Warren Buffet buys and holds great companies and collets dividends
How to determine the trend, 200 day moving average of closing prices
Day of black monday crash gone under 200 day moving target, waited until the turn.
2) 5:1 Ratio (risk /reward) Risk 1 dollar to make 5, allows you to have a hit rate of 20%, Calculated entry points
"I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms."
Kyle Bass | AFGP Fund
housing prices is a product of income+growth
Analyzing countries - Balance sheet dept in relation to:
GDP and Central Govt Revenue vs Banking system size (how manyloans, how many future defaults)
Riskfree rate vs Value of underlying asset
3-4 basis points/year on japan
Ray Dalio | Bridgewater Associates
Holds: weekly “What’s going on in the world?” meeting.
40 percent return in 2010 alpha fund
21% Annual return compounded since 1991
You can win but you Can't win trying to beat the market
Investing is a zero sum game. And only a small percentage of people win.
Typical money managers are not going to help you win because they don't have the skills/resources to win, if they did you wouldn't have access to them.
A passive way to win, A system to protect you com all the downsides when you're wrong.
Makes money in good times and bad
85% win rate over 30 years
Biggest loss 3.93% in 2008
Avg loss 1.9%
One loss 0.03%
10% annual growth rate example
Ex: William: age 20-40 , invests 4k/year 80k 600% more 2.7 million
James: 40-65 4k/year 100k tital investment ends up with 600k
Earned income can never compare to compounding
7) Just do it
Money and Happiness - If you make twice as much money, ppl think it will double their level of happiness. It improves 9% on avg. Once you make 75k per year, the increase in income increases income at a limited margin
1) If you spend money on things, you limit your level of happiness
2) If you spend money on experiences it creates a generative level of happiness down to the core
3) If you spend money on things that give you time and take away drugery it increases happines
4) Investing in others, gives the most amount of happiness