I know a lot of people have a desire to invest in shares but have a road block because they don’t understand it or don’t have any clue as to where to start. Well, look no further. Andrew Hallam author of the Millionaire Teacher joins me today to explain how the share market works, what index funds are, why fees matter and what makes sense to be investing in.
You can listen to the interview above or read the transcript of the interview below.
Meaghan Smith 00:20
Hello beautiful people and welcome to the Money Mindful Podcast. I am your host Meaghan. As always, I have an episode packed full of great content that will help you move forward with managing your money and making more. This month in Book Club we are reading the Millionaire Teacher: The nine rules of wealth you should have learned in school by Andrew Hallam. I came across this book after listening to the Canadian podcast Mo Money hosted by Jessica Moorhouse. she interviewed Andrew Hallam and after listening to what he had to say I was compelled to buy his book and I'm so glad I did. As a former school teacher, of course, I was attracted to the title, Millionaire Teacher. How could I say no to a title like that? It was certainly attention grabbing for me. But it was Andrews simple teachings about investing that kept me hooked. In the book Andrew shares the nine rules of wealth he follows himself which led him to become a debt free millionaire in his 30s yeah, that's right. You heard me correctly, debt free, and a millionaire in his 30s grab a notepad and pen and pay attention ladies, I think there is a lot that we can learn from Andrew today. I have recommended his book too many times to mention so I am absolutely thrilled to have him on the show. Andrew, welcome.
Andrew Hallam 01:53
Thank you so much, Meaghan. I love the way you open it by welcoming, beautiful people. We love that we think it's great.
Meaghan Smith 01:59
Oh, they are Andrew, all the listeners who listen to the show, they really are beautiful people, and most of them women. And there are some men listening. Hello, men, we love you too. But of course, I'm all about my ladies. So, I'm so pleased to have you here. So my listeners can hear from you firsthand. I have read many books on finance and money management, but I found yours to be the most instrumental in moving me forward to invest in the share market. You must hear this kind of thing all the time. But I have to tell you that you have had a really positive impact on my life, Andrew. So I've got to start by saying a heartfelt thank you. And I'm really excited and pleased to have you here sharing your expertise and wisdom on the show today. So perhaps we could start with a little introduction. Can you tell our listeners a little bit about yourself? What do you do?
Andrew Hallam 03:01
What do I do? Well, now, I guess I can, I could start by saying that I was trained to be a school teacher. And I was inspired by a millionaire, who was built a million dollar portfolio on a mechanic salary, really through a combination of real estate and in the share markets. And he told me that if I became financially literate, that I wouldn't have to work as hard as other people, I could save less than other people, thereby allowing me to spend more than other people and have more money. It just seemed like this plus plus plus scenario. So I started to learn about investing. And by the time I was, I guess, early 30s, I'd read I think I'd read more than 450 personal finance books. And I used to I was an evangelist. So I got a job as a school teacher and I was teaching the public system in Canada. And we all had what we call defined benefit pensions. So essentially government pensions, that the the end of the day, it's like, the ultimate unicorn, because they're going the way of the Brontosaurus now, but not in Canada, at least the defined benefit pensions. But of course, corporate pensions as we both know in Australia and Canada are nowhere near as prolific as they were. For our parents, for example, it's just not as common. That's what we're calling the unicorns just for a joke.
But I ended up moving to Singapore and I got a job at a private school and people there were not contributing to a defined benefit pension, there was no way that they were, you know, they weren't giving the government money in exchange for them. Or at least a percentage of our salary wasn't going towards what would effectively be monthly guaranteed cash payouts upon retirement so they were on their own. And while I was learning to be a teacher, I guess while I was going through that educational process, and while I was reading those finance books, I guess I started two careers concurrently. One was, I was teaching high school English Middle School in high school English and which morphed into also teaching personal finance, but I was writing for finance magazines as well. So I was writing for Canadian newspaper, writing a column there. And I started giving books away that I would find easy to understand, I started giving them out to my colleagues because they weren't contributing to like there's no superannuation. for Australians living, for example, in Singapore and working, there's nothing for them. So they either save and invest on their own, or they don't, and many of them don't save at all. And so this frightened me and then when I saw how many of them were investing, when they did invest, they would be investing with financial service companies whereby the fees were really high. I realised wow, I've got to do something to try to help these people.
So I started to give away copies of different books that I had read that I thought were really simple about stock market investing, and I would buy them I'd spent a few thousand dollars buying dozens of books, putting out a big email at work saying come and get one. I've got 12 titles here. They're really great. You like them? They're simple. They're easy to understand, come and pick them up. And people did. They scooped them up. And I found that perhaps a month and a half later I said, Hey, anyone who's read your book, let's do like a giant book club talk thing. Let's do a giant book club meeting and share what we've learned. And so they all came. The fundamental premise in these books is, is fairly timeless. It's the same premise. It's really in my book, but I found that people didn't understand the concepts. So at first they said, they did that they, how's everybody doing? You understand the concepts in this book? Oh, yeah, yeah, we get it, we get it. And then I guess based on my background, as a teacher, I thought, okay, wait a second. We don't learn this in school. So so many of these concepts will be fairly foreign to everybody. I mean, that's one of the reasons why people shouldn't feel intimidated by personal finance. It's that the average college educated adult knows barely more than an eighth grade kid. You know, it's, it's just we don't learn this in high school typically. And then we don't end up learning this in college. And then we get into a pattern of busyness and we don't end up in educating ourselves.
And so I spoke to my editor at money sense magazine magazine that I was writing for, and I said, Ian I'm kind of frustrated. I've spent a few thousand dollars giving up these books. And I didn't get it. People didn't understand these concepts. And so I didn't know I'm, I feel like an idiot. And he said, Well, Andrew, there's only really one thing to do. And that's to write your own book, and, and run it pass run chapters by people who have never read a finance book before in their lives, run chapters pass people that had to have that self admittedly say they have no understanding of the stock market and if they can understand your book, chapter by chapter, obviously you work it and tweak it. It if they can understand it, then then perhaps then you've done a good job with it. You know, you've done the service to the, to the general public so, so that was it. That was sort of the story behind Millionaire Teacher and how I started and I began investing when I was 19. So that mechanic really inspired me and I was putting away money every single month from that point forward. And then of course, as my salary increased the amount of money that I was able to invest ended up increasing, and my wife and I decided in 2014, to take a year off. So we were teaching at Singapore American school where she was teaching high school Spanish, and I was teaching high school English and personal finance. And we thought we take one year and one year led to two which has led to six and we've just really enjoying travelling so we do loads of travel. Sometimes we travel we have a tandem bicycle and so we have some panniers and we travelled throughout Europe on that and Cuba. in Southeast Asia, sometimes we're backpacking. And then a couple of years ago, we bought a, we bought like a camper van. And we spent 17 months down in Mexico and Central America. And in the meantime, what ends up often happening is I get requests to give talks. And you met my wife, Pele, she's like the ultimate organiser. I'm fairly useless. She sorts it all out. And she will corral a series of talks into, say, a five week period. So maybe we'll do like the Middle East, and we'll put all the Middle East requests, and we'll sort of fit them into a five week span. And then we'll go and hit the Middle East hard and I did a series of talks. And then sometimes we might end up attaching some Asian talks to that. But I've done a lot of it Meaghan, like, I know in 2017 I said yes to everything. And in a six month period, I did 90 investment talks in 13 different countries.
Meaghan Smith 10:02
Andrew Hallam 10:05
Yeah. And it was fun. It was fun because we, you know, we learned so much about. I mean, I ended up going to Tanzania, Ethiopia, Kenya speaking about this. Dubai, Bahrain, Egypt, Oman, Thailand and Indonesia went to Bali of all places. We were asked by an international school to come to Bali, so I could teach the teachers about this stuff. It was just so much fun meeting so many new friends along the way.
Meaghan Smith 10:35
Ah, Andrew, I am getting chills like, I'm just you guys can't see us. But Andrew and I are on Zoom. And we can when we're looking at each other and I just have the biggest grin on my face because to me, what really stood out about what you said there is first of all, this just happened by chance because you happen to know a mechanic who exposed you to this. Then look at this life that you live now just from making a few simple moves to do with your finances. Now you're living this incredible dream life and I'm sure there's many people listening going. Holy moly, that sounds incredible. What's but spurs me forward about continuing with this podcast is that I want the women who listen to this to hear that. Oh my gosh, this is possible. You know, what you're telling us now is is really possible. It's not some fantasy rainbows and daisies life, like this is something that is literally possible to create if you just learn how.
Andrew Hallam 11:41
Right. Yeah, you know, a fun fun little side story. I guess. I called that mechanic on the phone from Singapore and I hadn't chatted with him for 10-15 years, probably 15 years. And I I called and I said and he was pretty, he's a gruff guy. Yeah, he was. He was rough and gruff. And he is like, Who is this? And I told him and then he says, Oh, yeah, you. And I said, hey, look, I've got a, I got to tell you something. Thanks to you. There are 120 families in Cambodia, who have access to fresh water who did not have access to fresh water before and if I hadn't have met you, this wouldn't have happened. I would not have been able to donate the monies to have these wells, fresh water wells built for these families. And it was so cool because he went pretty quiet on the other end, and I could hear in his voice this little quiver, like I explained, I went back and I explained the whole story. And I and I gave him all the credit in the world for being the first person to sit me down and say, Look, I'm going to give you the education that you should have had in school. And that was such a cool thing to share with him in the way he emotionally took that on was just so that gave me goosebumps.
Meaghan Smith 13:06
I love that so much. And I'm so glad that the listeners can hear this because I think this is a myth that we need to dispel in society. There's so much negativity towards people with money. It's like money is the root of all evil or all the rich people you know, horrible mean people or something like this. And it's it's just simply not true. Like if you're a kind and generous person without money. When you have more money, you are still going to be a kind and generous person. Money doesn't. I mean, yeah, of course it changes some things about you because you know, you might be able to drive a nicer car or it doesn't change who you are inside. You're still the same person. It just amplifies things. And if you're already someone who's selfish and unkind if you have more money, you're probably still going to be selfish and unkind. Money is not connected to how you behave in the world. So I love this story, because it's an example that, you know, this is what you can do. When you get savvy with your money, you can actually have such a positive impact on not just yourself, but others. So thank you for sharing that. I absolutely love that story.
Andrew Hallam 14:23
I don't even think we need to have a lot of money to be able to give, I mean, some of the most giving people we know too or people that sometimes they have the least, but that act of giving feels better than the act of spending and behavioural studies suggests that it increases our levels of happiness far more so than actually spending things on ourselves. So yeah, it's a it's one of the things too and you asked me about you said, well, this, is this something everyday people can do. You were implying that they can, and yeah, they absolutely can. But we have to think a little bit differently. We have to shift our paradigm a bit and recognise that we are in a spenders culture, we're in a culture where people will acquire things now pay for them later, we spend probably too much money on things that really don't enhance our levels of happiness or well being.
It's interesting looking at happiness studies and there's a psychologist named Daniel Kahneman, who won a Nobel Prize in behavioural economics. And he looked at two levels of happiness. One is called reflective happiness. And then the other is called experiential happiness. And he said that the reflective happiness isn't really real. It's just what's verbalised. So you can say to somebody, how do you feel driving that brand new BMW? Are you happier driving that and driving a 10 year old Honda? And the person will say, Yes, definitely. But some fascinating, fascinating studies have been done on the experiential happiness component, where a study at Michigan State University University which was replicated in Germany, where they asked people about all sorts of different questions like any great experiment, would they ask the subjects all kinds of questions, so they don't really know what it is they're looking for. But one of those questions related to how they felt about the last time they drove their car, and how did they actually feel? How much did they enjoy it. And they had previously asked all of the subjects to identify what kind of vehicle they have. And what they found was experiential happiness isn't any better or higher with people driving a brand new Mercedes Benz versus a 15 year old Toyota there's a sugar fix associated with purchasing a brand new car, and then it wears off. It's just like buying the latest iPhone after a really short period of time is just another phone and and things like automobiles because they're massive depreciating assets, or wealth destroyers.
We've, we live in a culture where the norm isn't exactly healthy. So we're often trying to keep up with the Joneses. buying the latest and the greatest and we don't even know that we're doing it. And if it doesn't enhance our levels of happiness, then why bother going into debt to acquire these things when, on the flip side, if we have a way to take that money and invest that money, we could end up purchasing things that actually do augment our levels of happiness or contentment, like purchasing time, I guess, for Pele and for me, that's really what we ended up purchasing. We purchased time together, where we can spend time travelling the world, enjoying new experiences, and happiness studies do point to experiences new experiences, augmenting our levels of happiness and you don't have to like travel the world for that. It could just be learning to play the guitar. But you need time to do that to set that time aside and say I'm not going to chase this dream Mrs. Jones. In their acquisitions, I'm going to live a life that's a bit more purposefully defined, I think a little bit more deliberate. And when doing so he frees up money that you didn't know you would have had to invest small amounts into what we'll talk about in a few minutes with the shares market and eventually end up with money.
Meaghan Smith 18:12
Yeah, I absolutely agree. And you at the start of the book, described this frugal lifestyle that you had in your youth. And I've got to be honest and say that does not appeal to me in the slightest. In fact, if it was cold at home for sure, yeah, I'll put an extra jumper on but I'm turning the heater on. There's not a doubt about it. However, I think you make such an important point about the car. We drive a 2005 Subaru Forester and you know, I mean, we're doing alright, my partner is a doctor, you know, we have a good income. But for us, it's I mean, yes, sure. Wouldn't that be nice to have a luxury car but actually I would much rather just spend the money out right like we bought that car outright years ago secondhand, and we don't have any car payments. But we can afford to do things like we pay a lawn mower guy. And where now that I'm working again, we're about to get a cleaner again because on Saturdays we don't want to spend Saturday morning mowing the lawn and cleaning the house. We want to spend Saturday morning out with the kids on a bush walk because we've got lots of bush walks around our area. And I think that's an excellent example that time is the most precious asset we have. We can't get time back but that's one thing that money can buy. It can buy us time and I love that you have brought that up. It's great. I've got all these notes here and I really love it when I don't need to use them because every all the points that I've put down here you just keep coming up with up ready which is which is terrific. It shows that we are on the same page.
Okay, so let's change this up a little bit. One of the reasons I speak so highly of your book Millionaire Teacher is because I think one of the biggest roadblocks for many people who have an idea that they would like to invest, is that they actually have no idea how to do it, or their perception of what investing in the share market is is not is not accurate in the sense that there's ways to invest in the share market that I think some people just don't even realise is available to them. And what I would love to talk about now is can you give us just a simple rundown of how the share market works and by the way, I've got to say before you do, I love your analogy, your Willy Wonka analogies, I'm showing my age here, but one of my favourite movies as a kid. You give this beautiful analogy of how the share market works using Willy Wonka's Chocolate Factory. You're not required to give that example here. I would love it. If you could just give an overview. How does the stock market work? Why do prices go up?
Andrew Hallam 21:21
Let's take an example of a single business. Let's take an example of a business like apple. So everybody's really familiar with Apple. So Apple produces phones a big part of their market, among other things, computers, phones. Now, when Apple itself makes money as a business, it earns what I call business profits. So they're not we're not talking stock market right now. I want you to think of Apple as a business. So Apple produces the phone. Apple sells the phone, gets revenue, and that's counting as essentially business income for the company. So when companies often when they first start out, they issue shares. And it's like an invitation to own a piece of that company and to ride on with the fortunes or misfortunes of that business. So Apple has issued plenty of shares. We can buy shares in Apple stock, Apple stock doesn't go necessarily long term up and down on a whim, short term. Yes. Short term, the stock market is what we call a popularity contest. It's manic depressive, it's incredibly whimsical, it goes up and down and the shares of Apple will go up and down. However, long term, the shares of Apple in the future are directly aligned with the actual business profits per share. So the business profits, so that share price of Apple has increased dramatically over the last 15 years, because apples business profits have risen dramatically over those 15 years so it's a one to one type of correlation.
The risky part is when you choose to put money in a single stock, like Apple, even Apple. It's one of the biggest companies in the world. It's one of the most loved companies in the world. However, let's say Samsung comes out with a phone that absolutely blows away anything Apple has ever created. Well, people are going to start buying more Samsung phones than Apple phones. Let's say an upstart computer company produced something better than any laptop Apple has ever produced. Likewise, what Apple is going to start losing market share in the laptop department. And so as a result of that, there's no single company that is an indestructible iceberg. Anything can start to happen whereby the business profits of that company end up declining so we've had historically loads of big businesses that have gone through exactly the same thing. So to put your money in a single business, even in three or four businesses that you think are going to do well, is a risky endeavour, because those businesses could end up going bankrupt. Or they could end up just just sort of slipping into anonymity, if competition ends up eroding the business profit potential going forward. So instead of buying one business, or hand picking four businesses, which requires all kinds of crazy research, staying on top of the business and what's happening within the business, and even then you really have no control over the things that you have no control over. Better than buying a single company is to buy them all.
So in Australia, for example, you could buy what's called an Australian stock market index. When you buy an Australian stock market index your money is getting divvied up into virtually every single share in the Australian stock market. Shares that you might deem to be Well, the good, the bad, and the downright ugly. But the really freaky thing about this is often the shares that we think are going to do terribly, often end up doing really, really well. And the shares that we often think are going to do really well end up doing terribly, it's a really tough game to predict. So when we end up owning all of the shares in the Australian market, then our profits rise in conjunction with the Australian market plus the dividends that those businesses end up throwing off. So you have on the flip side, how most people invest is actually not through an index fund that would own all of the shares in the Australian market. Most people would go with a financial services company, a mutual fund company, also known as a Unit Trust Company, and then we buy an actively managed unit trust. And so here's how it differs. To an index and Australian index, if you purchase that your money is virtually divvied up into every single share on the Australian market. When you go with an actively managed unit trust, you're putting your money with a fund manager, and he or she is going to be purchasing the stocks the shares that he or she thinks are going to do well in the future. And so, the people who own the fund or buy the fund are supposedly able to benefit from that person's savvy purchasing. Unfortunately, about 90% of actively managed unit trusts or actively managed mutual funds will under perform a simple low cost stock market index.
Meaghan Smith 26:48
Okay, this is why I bang on about index funds whenever I'm talking about shares on the podcast but let's delve into this a little bit further. Can you take us through a bit more about why are index funds good to invest in in the sense of fees? Can you explain that? And then also, can we talk a little bit more detail about why they outperform the managed funds. And yes sometimes on paper, it doesn't look like they outperform if you're looking at a period of time, but if you could explain that in more detail, because I really want the women listening today to walk away understanding exactly what an index fund is, and why they may be a really good investment.
Andrew Hallam 27:43
Well, it's good to understand the index, it's good to know the, it's opposite. First of all, like you need that mirror reflection to understand what an index is. Sometimes it's best to know how to compare it or a comparison between that and an actively managed fund. So let's assume that Meaghan, you are working for Vanguard Australia. And your job is to manage an index fund. Then your friend Michelle, she works for, say Fidelity giant mutual fund company. Her job is to manage a Australian stock market fund through active trading, buying and selling, buying and selling. Now when I speak to my students about this, I would say okay, intuitively what makes sense? Do we go with Meghan's index fund, whereby your money gets divvied up into virtually every share in the Australian market? and Meaghan does nothing. She just she could literally just lay in a hammock all day and drink cosmos. She's just set up a computer such that when we buy Meaghan's Australian shares index fund, your money gets divvied up into every single share in the market. And Meaghan does no trading because she does no trading. fees are exceptionally low on the fund itself because we don't have to pay her much. She doesn't she is she's not doing much of anything. We don't have to pay for research. We don't have to pay for trading costs. So a fund would have a trading cost internally that you'll never see every time it makes a trade when it buys and sells. Also, if the fund company is a basically a nonprofit, like Vanguard, Vanguards run much like a co op. And so any profits that the company make go directly into reducing the fees of the product over time. So if you invest with Meaghan's index fund, costs, total costs could be as low as 0.1% per year.
On the flip side, if you go with Michelle's actively managed fund, now we have to pay Michelle a higher, higher salary, right? We also have to pay trading fees. That's internal, you don't see that happening, but Michelle is buying and selling shares within that fun. Also, that's not a nonprofit enterprise Fidelity or any of these mutual fund companies, they need to generate a profit. So what they do is they skim off the investors total proceeds. So you pay a fee to invest in that product. And in Australia, the average mutual fund fees, about 2% per year. So if I invest with Meaghan's index, I might pay about 0.1% per year. So let me give you an idea of what that means. Because it doesn't sound like it's that much. So, so what? So I go with an index, I pay 0.1 and I go with an active managed fund and I paid 2%. Well, one thing also I should add is that many people, when asked the question, what makes more sense to go with Meaghan whereby you own the good, the bad, downright ugly in the index, you just own everything, or to go with Michelle, who's actively trading today. fund, getting in and out watching the economy, looking at political environments, looking at earnings forecasts for businesses, trading in and out looking at how this might have COVID-19 might affect the economy. When you ask people, what makes more sense to go with the active managers products are to go with the index fund. Most people intuitively will say, well to go with the active founders product, because this is a person who's going to be diving in and out of bad scenarios. However, what people don't understand, and this is based on this is really cool. If you're a super geek like me.
A guy named William F Sharpe, he's a Nobel Prize winner in economics, wrote a piece called the arithmetic of active management. And what that suggests is this, all the monies that's in the Australian market, it would be as a result of money that's in Australia and hedge funds, Australian pension funds, Australian actively managed funds, maybe your brother in law who buys into individual shares, maybe the guy down the street who has a day trading company. All the money that's in the Australian market is as is a result of the investments made by these entities institutional bank money. And here's what's really cool. When the market, let's say the Australian shares market earns a return of 8% in a given year, then we know that the aggregate return of all of the monies that's been invested in that market made 8% because they are the market. So if the Australian shares market makes 8%, the Australian index will make 8% minus 0.1% fee. So they will earn about the 7.9% return the aggregate return of all the professional money that's in the market, all the actively managed mutual funds, the hedge funds, the pension funds, institutional traders, the day traders, your cousin Toby, the aggregate return on their fund are enough money invested would also be 8%. In a year when the Australian market made 8%. Because they are that group from which we've gathered the data, they constitute the entire market. Now, some of them would have earned more than 8%, some of them would have earned less than 8%. But when we average it together, we find that professionals would have averaged and they do this is a statistical reality, they average the return of the market itself. That's before fees, however, now deduct a 2% fee.
So now, Michelle's actively managed fund, Michelle has a high salary, she works for a firm, let's say Fidelity whereby the share owners of Fidelity want some part of the business profits. So you as the investor, when you're investing in that fund are paying fees. I'm just going to give you an idea of the difference a 2% fee makes. If you had invested a flat $10,000 and you'd left it for let's say a 40 year duration. So okay, you're 20 years old, you put in 10,000. At age 60, you pull it out, if you weren't a 6% return, that was $10,000 would grow to $102,000. But if you paid 2% less in fees, you wouldn't have earned a 6% return. In that case, you would have earned an 8% return at 2%. Doesn't sound like much. But the difference between 6% and 8%, that 2% difference is huge. That $10,000 at 6%. Over 40 years, we grow to $102,000 at 8%. Remember, it's only two percentage points more, it grows to $217,000. So this is why it makes no sense to go with an actively managed product because on aggregate actively managed products will earn the market's return. But then of course, there are the fees associated with them.
Sometimes what you'll find is, of course, if you were asking me, hey, do your best to sell actively managed funds to some friends of mine, I would say, Okay, if that were my job, and I had to do that, and they said to me, hey, I read this book on index funds, and it says they're better. What I would do is if I had to try and sell them on the concept of actively managed funds, I would find funds with five or six or three year track records or 10 year track records that have actually beaten the Australian shares, stock market index, and I can find them I can actually go through and cherry pick and I can find them and then I would try to sell them. If I were the person trying to sell them to a to a client. If you put me in a position where that had to be my job, you twisted my arm behind my back and I said Uncle Uncle, okay, I don't want to do it, but I'll do it. That would be the strategy that they would use on you. So if you walk into a financial services company, they don't want you buying indexes. Because indexes aren't profitable for the financial services company. They want you buying the actively managed products. And the interesting thing about this, there's a concept called reversion to the mean. Typically a fund that outperforms the index during one time period. Not only does it typically go on to underperform during the following time period, but it goes on to underperform the average actively managed fund as well. So not only does it usually underperform the index, it usually goes on to underperform the typical actively managed fund too. So the worst thing we can do is actually pick funds based on their track records, but that's what most investors do.
Whoa, that was a mouthful, okay, so I'm just gonna break that down to make sure I've understood all of these and getting this clear. So basically, okay, we don't want to bad mouth financial advisors. Because I, I like to think of people in general, do the right thing. But what I've heard you say there is a fund manager or a financial advisor who sells funds. They also need to live and make money. And so to do that there is a cost involved with those funds because they're buying and selling shares actively, which does cost money, you have to pay money to buy and sell shares. And so they pay the money to buy and sell them. And then also they have a fee on top of that to pay the people who are doing this, which they get paid very well, I, I've heard whereas with an index fund, they're you're not they're not actively buying and selling shares. They're only ever buying or selling just to stay in line with the indices that it's following, right?
Meaghan Smith 38:02
Yeah. And so in that sense, there's not all these additional fees on top. And that's why they're cheaper. And in the long run, you've just told us that a simple 2% difference in a fee can be a difference of hundreds of thousands of dollars depending on how much we've invested. And so that's the really important takeaway to get, gained from this is that we seek out professional help because we think, oh, I don't know how to do this. This is all too hard. I'm going to get a financial adviser to tell me what to do. And then the financial advisor advises you to buy a particular product and it's not necessarily a bad, a bad product, but the fees on top of it is what's going to cost you the money in the long run and ladies, I have to tell you that I am not a unicorn, okay, I didn't study economics at university, I, my maths is probably not really that great if I'm being really honest. But I can do this, you know, I read Andrew's book and I've read other books as well. It's not like I've just read his book and then, you know, just blindly followed him into the fire. It's, you know, I'm not saying that you just pick one person and do whatever they say like I've read other books as well, which have backed up what Andrew has said in terms of why investing in low cost funds makes so much sense. But when you actually take the time to read a book, like Andrews and maybe, maybe do a little bit more of investigate for yourself, like you might want to get a book about the Australian share market, just so you understand the terminology, but you'll you will see that It's not difficult. If I can do it, anybody can do it. You know? Yes, it took a bit of time in the beginning, I have a fund with Vanguard and there were quite a few calls back and forth while I just made sure I understood everything in terms of the fund and the people on the phone were always helpful and very patient with me explaining all the maths because there are a few things that, you know, I really needed to get clear in my head to understand how the fees work, because I don't pay a specific fee every time I put money into the fund, but I do pay a fee overall, they do have fees, but it's all sort of built into it.
But again, I just can't stress more clearly to you that you just have to actually put a bit of effort in in the beginning to learn about it. And then the results are incredible. I mean, I'm currently speaking to a man who you know trots around the globe with his wife riding their bicycles and backpacking, because he invested when he was younger. And sure I'm starting later and everybody says, you know, it's time in the market not timing the market. However, it's never too late to start because you just start when you start, I mean, when you start is exactly the right time to start, in my opinion, you might just not get as amazing results as you would if you started when you were 19. But hey, big deal. We we do what we can. So I think this is maybe a good time to explain. Andrew, can you talk about what dollar cost averaging is? Because I put money I do this I put money into my fund every month. And I'd like it I'd like if you could explain why. Why we would do that. You know, because I I don't save up a heap of money and then put lump sum in every six months or once a year, I just continue to put in the same amount every month.
Andrew Hallam 42:07
Well, the longer we can keep our money in the market, generally, the better. I mean, the statistical odds are that the longer the money has, in terms of timeframe grow, the better off we're going to be. dollar cost averaging means that you're investing a constant sum every month. And so it works well for somebody with a job. You have a regular income, you can set it up on autopilot often where you'll have a set amount that will just come directly from your bank into your investment. And what what will happen with that which is which is kind of cool is let's just assume it's a it's $100 a month, and $100 a month is going in, and you have a fund like the one you have, which includes a diversified basket of index funds. And so Meaghan and I were talking and she owns a fund that has an Australian shares index and basically a global stock market index as well, which is a US stock market index, international stock market index, and then what we call a fixed income index, which is just a bond index. So, when Meaghan buys every month, when the share price rises when the unit price rises for that index, that same hundred dollars is able to buy slightly fewer units, because the share price has risen. But then when the share price drops, that same hundred dollars is able to buy a slightly greater number of units of that index. And so the dollar cost averaging process allows you to pay a lower than average price over the time duration of your investment period.
Meaghan Smith 43:51
And also I heard something and correct me if I'm wrong that in general when the share price is higher, the price for bonds is usually lower. And then when the price for bonds sorry, when the price for shares is lower, the price for bonds is higher. Is that right?
Andrew Hallam 44:09
Yeah. And it's not always like a direct correlation quite like that. But when share prices drop, so you can take what's happened with COVID-19. So globally, I think the markets down calendar year to date something like 12%- 10%. Most bond prices have actually risen during the same time period. So I was just looking at the Australian shares bond index, and it was up I think, calendar year to date, something like 6% while the shares market has dropped, and when you're rebalancing your investment portfolio, and so you have something that actually does the rebalancing automatically, which is great. So when the share prices rise at the end of the calendar year, your money is split as you described to me 70% into Australian and International stock market shares, ETFs shares, indexes, and the remaining in a bond ETF a bond index. So it's a calling an ETF because sometimes they're used concurrently. They're saying the same type of product, it's basically an index.
So Meaghan with your account when the stock when the share prices rise, your fund company will automatically skim a little bit off the top and put it into the bond prices into the bond index. So often they're inversely proportional in terms of one goes up and the other goes down. And so through the process of rebalancing, you're always being what Warren Buffett calls a little bit greedy when others are fearful and a little bit fearful, when others are greedy. And Meaghan, I know you don't have to do any of that because the fund company just set that up automatically. The one thing that we do know for sure is that when share prices drop hard. bond prices don't always rise, but they never drop like share prices do. So this gives us a wonderful opportunity at years end whether we're doing this manually or whether the fund company's doing this for us to sell portions of the bond index to buy portions of the stock index, and just simply bring us back to the same allocation that we started with, it has nothing to do with speculating. It's just what is your allocation in the beginning, so many people would be 70% stock indexes. That's the riskier growth part. 30% bond indexes, that's the more stable part. And they rebalance those to make sure that that allocation is consistent, year after year, so there's no speculating. There's no following the economy. I was saying I spend 10 minutes a year on my investment portfolio. And my wife has an investment portfolio as well with Vanguard USA. And she has a fund very much like you. It's just it's automatic. She spends zero minutes a year on her investment portfolio.
Meaghan Smith 46:59
So I'm playing the devil's advocate here a little bit, but I just wanted to talk to what's happened in the market recently. So the stock market has dropped. And Andrew, have you rushed out and sold all your shares now because the market has dropped? And of course, I know you haven't it. Why? Why shouldn't we all be quickly rushing out now and selling all our shares because the market has dropped.
Andrew Hallam 47:25
It's kind of funny how people view stock market drops, and really they should be viewing stock market drops the same way they, they view a sale at the supermarket. So when cans of beans go on special, if we're regular purchases of beans, we buy them all the time they go on special, we should actually be loading up. We should be happy that the cans of beans have gone on sale. The really weird thing about human psychology as it relates to the stock market is it's almost like back to that supermarket analogy. It's almost like people saying oh my god, the price of beans just dropped about buying beans this week about buying beans. And others might go, well not buying beans because, well, maybe it'll go lower and I'll buy it then you can't predict the price of beans. And you can't predict the level of the stock market. But the one thing that we have to get into our heads, we have to rewire our thinking. And we have to recognise that if we are regular purchasers, if we are dollar cost averagers, if we are people who consistently take portions of our income and put it into a portfolio of index funds, and we should actually celebrate when markets drop because we are able to buy an increasing number of units for those businesses that we are buying and make no mistake the biggest businesses in the world despite what's happening right now with COVID-19. The General Electric's the Apples of the world the Walmarts of the world, the Amazons of the world, the Johnson Johnson's and the Coke Cola of world, their business profits, business profits now will be significantly higher 10 years from now than they were last year. And so we are basically buying into their future earnings potential. And when we get a discount, such as what COVID-19 gave us, that's really only the only bit of sliver of you know, of anything positive that is relating to this whole thing. When we get a discount, that's wonderful opportunity. Just keep doing what we're doing. Don't do anything different, but know that we're actually getting a better deal on the same things we were buying last year. We're getting a better deal on them today.
Meaghan Smith 49:38
Yeah, that's right. And I think that's something that you have to have a mindset shift to, to really get that and be okay about when you see the share price going down. It's, you don't need to panic. It's alright. Like my portfolio, the actual price of it. Yes, it's dropped, but, you know, I just put up I just put my monthly amount in at the end of the month and yeah, I've bought way more units than I normally do. So that was really exciting because now when it goes up by I have more units. So yeah, I hope that that you listening you can understand this this concept. So I also wanted to ask you about where do you think the common investor goes wrong? And why does stocks get such a bad rap?
Andrew Hallam 50:30
That's funny, they, I think, if I were in a game show, and someone were to say to me, what, what nationality is most reluctant to buy shares? What nationality is absolutely in love with an asset class and it's not stock market shares? I would hammer that buzzer right away and I'd say Australians, they love the property market. They love the property market and the property market is great. You can borrow money to invest, then you can end up getting rental revenue from that. But what's so interesting is if you ask the average Australian on the street, hey, so let's say you could have bought a stock market index and Australian stock market index in 1980. And you had all dividends reinvested. How would that have performed relative to the price of your, your parents house in Sydney or Perth or Melbourne? and 100% of Australians? No, let's not do that. Let's say 97.22% of Australians would say the price I'm very, very, very, very executive. The most Australians would say the price increase of that home in Melbourne, over a 35 year period would destroy the Australian stock market. It's actually the opposite. But the average Ozzie doesn't know this. And that's an interesting thing. When you say the stock market and it's bad rap. I'm not sure if many of the people in the rest of the world really have that feeling so much about the stock market.
The Australian share the Australian property market has been one of the best performing property markets in the world. And so for good reason, Australians have really, really really loved buying properties. But over the past 35 years, their share prices have actually also been among the best performing in the world as well. So they've been on par with share prices in the United States. I'll give you an idea in 1980. If somebody had invested $100 in 1980 in Australian shares, it would be up 8,000% today 8,000% and it's it's mind boggling. When we look at his a kind of a cool thing, the rate of return on everything. And you can actually have a look at it. Go online and read it. The Federal Reserve Bank of San Francisco what they did they looked at rates of return on different investment entities, and the Australian shares market after inflation from 1980 to 2015, this is quite extraordinary. It's increased 906% after inflation. I mean, it's amazing. That's after inflation. So that's not just your house value increasing nine times. That's its its value increasing nine times after inflation. That's extraordinary. It's one of the reasons why Australians love property. I mean, 906%, higher than inflation, over 35 years. Australian shares 1,750% higher than inflation over the same 35 years. Now, I'm not saying that investing in the stock market is better than investing in the property market. I'm not saying that at all, because there are so many different factors at play here. One is you get to use leverage when you're buying into the property market, you have a renter who ends up paying off big portions of your mortgage. But what I am saying is that the Australian shares market or the global shares market is nowhere near as bad as many Australians, perhaps think.
Meaghan Smith 54:16
Yeah, and look, I totally agree with you that owning your own home and buying property is definitely the Australian dream. And there are many mum and dad investors. I'm one of them myself when we buy properties to, as investment properties. But I think one of the things that gets overlooked is the costs involved with managing a property and the long term cost of the upkeep of a property and I think that's a really big factor that that does actually get overlooked and the more that I learn about it, the more that I feel like I'm tending to swing towards the share market, becoming my primary focus and that's just from actually learned experience. You know, I don't think there's anything wrong with buying property. And I certainly do not regret buying the properties that we have, because I've learned so much from that. But I also think that I haven't switched off. I'm not continuing to not keep learning. And the more that I do in terms of speaking to people like you and investing in the share market and investing in property, the more I learned from that experience, and then just make new decisions, but I don't think that you can go too wrong as long as you just start taking action and actually make a start. I mean, don't just rush out and invest in anything but you learn from your experiences, you know, how else can you do that? Alright, so moving forward we are kind of getting into wrapping up here, but I do have a few more questions that I want to ask you, Andrew. I actually don't know this, but whether you've got kids or not. But if you do have kids? I'm interested to know what do you teach them about money? And if you don't have children, what would you teach these hypothetical children of yours about money? What would you want them to to learn? And know as they grow up?
Andrew Hallam 56:15
That's such a great question. So my wife and I ended up marrying late. And so we tried to have children but we're unable to, but we recognise that hey, there can be life without kids as well. So we're enjoying that. The the idea with children is something that when I give these talks around the world, there's typically one that I give for parents when it comes to their children and how their children should think about money. One is to have your children working for money from a really early time period. It's to understand that money doesn't grow on trees, and to wean them off the Bank of mom and dad as early as possible. That when you think Meaghan of your your friends who are financial train wrecks, I'm going to guess that many of them are still on the umbilical cord or they are perhaps on the umbilical cord of mom and dad a little too long. And it's kind of like, you know, a parent saying, Well, I'm going to do these push ups for you so that I get strong, so that I can help you. I'll do push ups so that you can get strong. Oh, no, no, it doesn't work like that.
It's, it's, I've met many parents to wealthier parents who say, Well, I want to put $100,000 into a portfolio of index funds for my child, so that my child can end up with a far cushier life. And wow, imagine how that money could compound. I've worked really hard. I want my child to have a much easier life. It doesn't work like that. Because what typically happens is one is there's the Chinese proverb that wealth doesn't pass three generations. When you look at the Forbes list of, of richest Americans or richest people in the world, most of them are either first or second generationally rich. This concept that money gets passed down from generation to generation to generation is, is mostly a myth. It's super, super rare actually for wealth to pass more than the fourth generation, the first generation builds the wealth. The second generation typically maintains that wealth. And the third generation typically squanders that wealth. And you may be listening to this and saying well, it doesn't relate to me because I'm not that first generation of rich. No, it absolutely does. When we ask ourselves, what is it that the rich do wrong? What do they do wrong? They give too much they enable their children, they don't allow their children to build their own financial muscles, to get their own skin in the game and to get going early. So for my nieces and nephews, I got them into portfolios of index funds with their own money. And it was really, really important. I wasn't going to give them any money. I give them a little bit of money towards their education when they were born. And that was it. So what they do is they all have, they have my, I'm just thinking two of my sister's boys. They have portfolios of index funds that they've had. That's insane. really small, and I helped them set it up. And their money would go into those over time. And it's really cool to see how proud they are of it, they can see how much it's grown. They understand that there will be years when it rises and the years when it drops, to have them understanding that concept at 12 and 13 and 14, gives them an emotional advantage that most 40 year olds don't have to have that understanding that you know, this will go up and down over time, but over lengthy periods, it's going to go up more often than it will drop so statistically speaking, the stock market rises about 66% of calendar years, which means it could rise five years in a row and then have two years where it doesn't make money or it could go up two years or up three years down when you're up three down one isn't there's no pattern to it whatsoever. So that's my response to the to having children and having them
Meaghan Smith 59:58
I love I love that so much because it's so empowering. And it's funny because you see these sensationalised headlines of, you know, some wealthy billionaire not leaving an inheritance to their children, you think, ah, but then when you put it in the context of how you've just explained it, yeah, it's because it's completely disempowering them to be able to make it themselves and know how to do that.
Andrew Hallam 60:24
We feel pride in accomplishing the things that we accomplish in life. And we feel more pride when it's a little bit difficult. So if you want to take that away from your child, make everything easy for them. And unfortunately, all you're going to be doing is you're going to be contributing to low future self esteem. And it's one of the reasons why a lot of really, really wealthy families, their their children end up in therapy with serious problems. They just don't feel good about who they are as people.
Meaghan Smith 60:52
Yeah, yeah, I totally see it and it's really easy as a parent to I don't want to get too sidetracked. But I have to Young girls three and five. And sometimes I find myself going to just help them because it's one it's quicker. You know, it's much easy for me to help my three year old
Andrew Hallam 61:10
Meaghan Smith 61:11
get her clothes on, you know, when she's struggling trying to do something. However, I mean, occasionally I do when it's necessary, but for the most part, my girls are very independent. And when we go when I drop them off, my three year old a preschool you know, the teachers are like, wow, she's really independent. She just does everything myself. And I think yeah, because what don't be don't do it all for her. She's She's got to work it out. And you know, so often they're like, mum helped me with this puzzle. And it's like, No, no, you'll figure it out. You'll problem solve like how can you do it yourself or how could you build that cubby with the pillows and the couch? No, work it out. And they do which is so amazing and seeing it because I was a I worked as a primary school teacher and you would understand this as as well, but I think you were high school. Is that correct?
Andrew Hallam 62:05
Right? Yeah. Middle School. Yeah,
Meaghan Smith 62:07
Yeah. But the primary school kids so often, they really, you know, they can kind of be a bit. What's the word like have a bit of a tantrum at first when you leave them to work it out themselves. They're like, this is so hard and but then when you walk away, then that you could hear these little grunts and these frustration noises, but suddenly they come to you. Like a sunbeam when they have worked it out how to do it themselves, it is incredible to see. But as a parent, it's actually much harder to do that because you have to listen to that screaming and frustration. And, you know, sometimes it's easy just to go No, no, no, I don't want to listen to that. Let's just do it for them. But. Yeah, I would encourage I'm totally in agreement with you that Yeah, leave the kids to do it. Let them work it out because they will become problem solvers of the future and be empowered to make decisions for their own life and then actually create it what they want to do. I yeah, agree. 100%. All right. So coming to our conclusion you sent me when we were emailing, you sent me a great article that you wrote about female investors. In the article you say that females make better investors. So who's the main investor in your household? Andrew? And why do you think
Andrew Hallam 63:42
Have you ever read that book called men are from Mars Women are from Venus?
Meaghan Smith 63:46
I actually haven't been I know about it. It was it was definitely around in our household when I was younger. I'm pretty sure my mum read it.
Andrew Hallam 63:54
I read that book, and I didn't even identify with the man at all. I was more Like the woman from Venus. And I know that there was a great book that was written recently too, called Warren Buffett Invests Like a Girl. It's so let me tell you a while this is the greatest compliment a man could ever have. So first of all, can I give the backstory to this?
Meaghan Smith 64:19
Andrew Hallam 64:20
Okay, so here I am. I'm giving these financial talks around the world. And I've been doing that a long time. I really did start that. As soon as I started working internationally, I started giving these talks first at the school I was working at and then another school in Singapore would invite me and then a school in Thailand, so be giving them for years. And I'd say okay, this is really simple. All you need to do is build a portfolio of index funds. And I show people exactly what to buy. And I said, Don't day trade. Don't do the Bitcoin thing. Don't go with actively managed funds. And whatever you do, do not speculate. One bit, just stay the course. stay the course.
So invariably, I'd find my way back to some of these same schools. And I'd sometimes end up sitting down with people that I'd spoken to 6, 7, 8 years before. And the topic would come up and I'd ask well, so, you know, how's it going? Have you been able to stick to the plan? And then there'd be these really sheepish looks. And I found that without fail, if it was a man or woman partnership I was talking to without fail. The one that sabotages the plan, and screwed everything up was 10 times out of 10, the man the man, and so financial literacy, I find this so interesting. So I started to research this. I thought, this is anecdotal. It's one guy me, but I'm talking to a lot of people. I mean, I'm, I'm going to be finding that, shoot 100 times out of 100 when I'm finding that somebody has imploded the investment account done something stupid. It's been the man in the relationship and a woman's jabbing them and saying, I told you not to do that, but you did it. And I'm like, Oh my god, I have to start, like play counsellor here to keep these two from scrapping. Here's the fascinating thing.
Then I started reading about this and finding that when we give men and women a financial literacy test, just in terms of what they know what their knowledge is, in the shares market, for example, men are far more interested in it, typically, and so they do exhibit higher levels of knowledge. So when we give them tests, it doesn't matter whether we get that test in Australia, or the UK or Canada or the United States. Typically, in most cases, men typically know more about finances than women, they just find more of an interest in it. However, this is the tail of the tape right here. I love this part. When we actually look at investment portfolio accounts in doesn't matter what country we're looking at. Whether it's Canada or whether it's the United States, we find that women outperform men by up to three and a half percent per year. Now, when I showed you how much a 2% per year impacts in investment portfolio, imagine three and a half percent impacts an investment portfolio. That's the difference between men and women. And a lot of men have a really hard time accepting that. And I think it has to do with men with the male ego. men often think they know things they don't know. I do think it's the level of testosterone when I've been able to show the strategy to single women or to women couples, they nail it, they nail it, they freaking nail it, month after month, year after year, show them how to do it. They don't start gambling typically. I mean, obviously there gonna be some that do but from my experience, they don't start typically gambling with Bitcoin or some brand new, initial public offering on some shares. Or I'm going to dabble with a little bit of a hedge fund money or I'm going to try and speculate. Men speculate, men were trying to figure out what's going to happen with the economy what's going to happen with their investment portfolio.
Men have made me bald Meaghan made me freaking made me bald, I'm bald. So if you haven't seen me or see my picture, I have no hair. It's men that have done that. But women, man, so if you're in a relationship with a man, I don't care how much the man knows, or says he knows, he might know loads more than you. You're the woman in the relationship. Here's the deal. At the very least, at the very least, you have to be 50% involved, at best, you take the reins, you take the reins, sure read that book, Millionaire Teacher or any other book. There are loads of books that have this still the same thing. So I just I was just the conduit for Nobel Prize winning research. That's all I did. And I wrote Millionaire Teacher and I tried to make it simple, but take the reins if at all possible away from the man you're going to have a much more profitable future.
Meaghan Smith 69:04
I love it. I absolutely love it. Yeah, women. That's right. See, we can do it and we can do it better than the men. Just final my final question, Andrew, because I always end with this. Is there some sort of habit or ritual or just tip that you've got? I mean, you probably just gave it to us, that you do with your money that we can end with something a takeaway?
Andrew Hallam 69:28
Yeah, the simplest of all, it doesn't matter how well your investments grow if you're not saving enough money. And so the idea of saving, and the easiest way to encourage saving is to just track what you spend. There are loads of people who say, oh, get a budget. Budgets are super boring, and I don't have the discipline for a budget like I could never do it. I'd go crazy after a while setting up my budget, but what I typically do is I will figure out, my wife and I have been tracking our money forever. So we used to do it with pen and paper. Now we do it with Like an app on our phone, you could use like Mint or Good Budget, any kind of portfolio tracker, sorry, any kind of savings tracker. And all we do is we write in what we spend. That's it. So it does take perhaps, I don't know, maybe 30 seconds out of each day. So I come from the supermarket, I noticed I've spent $120 on groceries, I enter the date, $120 groceries, and it goes into that little pie category. And what we'll do at the beginning of each year is, Pele and I will determine how much we want to save. And the rest is just gravy, we make sure we save that amount. So we put that amount aside as our goal.
As soon as our monthly check comes, that money is either allotted towards that right now it's not as consistent because I don't have a regular salary as we're floating around. But when we were working full time, that money we would remove that at the beginning of the month so that we would never see it. But by tracking what you spend, what will happen is automatically end up spending less on the silly things because you become accountable for it. You become your own accountability measurement, you start seeing how much you're spending Starbucks on coffees, because you can see it like it's a category. And you're like, Oh my god, I had no idea I was spending that much. And what will happen is without anyone telling you to, you'll start feeling like ashamed to continue to enter that coffee amount into the tracker. So you'll spend less on coffees, you'll end up spending less overall. So it's much like diets. I love seeing the studies on diets. Weight Watchers did this really cool one to see what single variable allowed people to lose weight most effectively. And it wasn't, it wasn't exercise and it wasn't diet. You know what it was?
Meaghan Smith 71:39
I can guess from what you've just said.
Andrew Hallam 71:41
It was just tracking what you eat, just putting it on a tracker. So that's my that's the takeaway. That's the most important part it will allow you to save more money.
Meaghan Smith 71:49
Well, that is a really fantastic tip to end on. So Andrew, thank you so much for giving us this valuable time today to let me interview you, I am absolutely honoured and thrilled to have you on the show. Your book has had an incredible impact on my life. And genuinely, thank you for being here today and sharing your wisdom with all the people who are going to be listening to this episode. Thank you.
Andrew Hallam 72:22
My pleasure, Meaghan, thank you so much.
Meaghan Smith 72:25
Well, there you have it ladies, I am thrilled to have been able to share this interview with you. If you haven't already, you must go out and get his book straight away. It is, of course available from my website under the book club tab and at all good retailers. Andrew has a knack for distilling complex concepts into relatable and easy to understand format. I hope you got as much out of this interview as I did. Of course I will put all the links in the show notes too. Where we can find Andrew his website. He also has a really fantastic YouTube channel that mentions that goes over some of the topics that we've talked about today in more detail, so I'll put a link to that as well. Just a reminder that book club is next Tuesday the 30th of June at 8:30pm on the Money Mindful Facebook page. Can't wait to see you there and discuss everything that we have learnt today and from the book. As always, if you want to stay in touch between episodes, join the Money Mindful mailing list or contact me connect with me on Facebook or Instagram. The handle is @moneymindfulpodcast. Until next time, have a beautiful week. Bye Bye.
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Daniel Kahneman, Nobel Prize winner and psychologist, well known for his work in behavioural economics.
William F Sharpe, Nobel Prize winner in economics, wrote a piece called the Arithmetic of Active Management