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The Only Investment Guide You'll Ever Need
By Andrew Tobias
The Only Investment Guide You'll Ever Need by Andrew Tobias is a fun-to-read introduction to personal finance. If you're only ever going to read one book about personal finance, this one probably should be it.
Tobias tells us that, due to the power of compounding, it's important to start saving early. Tobias has a great way to explain compounding to kids. Start with a cookie jar and $1. Tell the kids they can earn 10% daily on their investment in the cookie jar. (Essentially, we squeeze a year's compounding into a day). At the end of the first day, the kid 'earns' 10 cents. At the end of the second day, you pay him/her 11 cents and so on. (to get the next day's value, just multiply the previous day's value by 1.10, using your handheld calculator, or the use cheesy calculator that comes with Windows.) The kid will quickly learn how fast compounding grows money. After 30 days, he'll/she'll have $17.45 in the cookie jar (actually, due to round-off error, you'll have a different amount, but the idea works).
To have money to compound, you must spend less than you earn and that takes discipline. Sometimes, creating a budget helps. Tobias writes: "Round and round you go, juggling income, expenses, and goals, brushing eraser nubble to all corners of your kitchen table, until you arrive at an earning-spending-saving plan that adds up... . What's involved here, really, is taking control of your life. ....One way or another, the future will come. With a little planning, you can have a say in how it looks. Think of your budget not as your albatross, but as your secret weapon."
One quote I love: "A penny saved is--impossible." Ogden Nash. Tobias modifies that saying to "A Penny Saved Is Two Pennies Earned."
Tobias points out that Ben Franklin grew up in a time of no income taxes and no social security taxes. Back then, a dollar saved was a dollar earned! Today, for every $1 dollar in earnings, you might pay 33% in federal taxes, 8% in state taxes, and about 7% in Social Security taxes (your employer pays about the same also). Added up, that's about 50%, especially if we add in a sales tax. So, for each dollar you spend, you'll need to earn $2. To buy a $20 pizza means you need to earn $40!
The book starts by giving some money-saving tips, such as buying in bulk, insulating your house, replacing incandescent light bulbs with compact fluorescent bulbs, and cutting your own hair (I always knew I should have invested in one of those "Flow-be's" advertised on late night TV many years ago! It combines a vacuum attachment to a barber's clippers. As advertised, it said the vacuum would suck your hair in, the trimmer would cut it to the proper length. Just pass it over your head like a comb, and you're done.)
Tobias also mentions many money-saving tips people might not be aware of, such as using iDine.com, which saves 20% off the price restaurant meals at participating restaurants.
Tobias's discussion of bonds is as good as I've seen anywhere without going into teeth-gnashing mathematics. He discusses treasuries (bills, notes, and bonds), junk bonds, zero-coupon bonds, inflation adjusted bonds, municipal bonds, and saving bonds. Tobias suggests skipping corporate bonds and buying treasuries.
Treasuries can be purchased with no commission (publicdebt.treasury.gov), have almost no risk, and aren't subject to state income tax. Tobias says given the small extra yield of corporate bonds, they probably aren't worth the work and risk for most investors. It's nearly a wash. Similarly, Tobias says don't buy 30-year bonds. You're not going to get a much better yield than with 10-year bonds. I agree. Tobias does like inflation-indexed bonds that pay 3% or 4% more than inflation. To me, it seems if you need the money short or near term, you should just stick with short-term treasuries or a money market fund. If you're investing long-term, stick with quality stocks. But, maybe, for some investors, they make sense.
Tobias almost loses it when discussing junk bonds and, especially, zero-coupon junk. After acknowledging that junk bonds are a speculation, Tobias gets really excited discussing speculating in junk bonds, which could mislead many investors into trying their hand at buying junk bonds. You're probably better off buying stocks.
From what I've read, Tobias is quite a character. He's a very smart businessman and gets involved in all sorts of odd-ball investments that he adamantly recommends others against. For example, Tobias says to avoid investing in Broadway plays, which is solid advice. (Not that many of us are approached to invest in plays!) But, Tobias has invested in many plays. One play, Nunsense, earned him $400,000 on a $25,000 investment over about a decade. Other plays probably cost him a bundle, including a play called "P.S. Your Cat Is Dead," which met with a clever review titled "P.S. Your Play Is Dead." (Smart Money, May 1996, had a good feature about Tobias.)
After telling investors to avoid commodities (good advice!), he discusses short selling and makes it sound like an adequate speculation for average investors. It isn't! He should have just written: "Don't sell stocks short!" He does mention a friend who lost $19 million shorting stocks, and that might discourage some readers. I've been told that professionals who do this silliness don't short overvalued stocks, which can always go up more. Rather, they short beaten down stocks headed for bankruptcy. Of course, if you try this, you may hit the turnaround of the century and lose a bundle.
The book also has good information about buying insurance (Hint: If it's advertised on TV, you probably should avoid it.).
I especially enjoyed the chapter, "What to Do If You Inherit a Million Dollars; What to Do Otherwise." After discussing a Zen approach to personal finance, Tobias writes: "I believe happiness lies less in how much you have than in which way you're headed. Which is a strong argument for saving something each year rather than see your net worth slip backward; and for pacing your acquisition of the finer things, lest the day come when you can't afford them. For remember: a luxury once sampled becomes a necessity. It's not so bad living on a low floor—until you've had a view."