I first picked up a ragged old copy of this book at a used book sale, but since then it keeps popping up over and over again. This week, I’ll review chapter by chapter the latest revision of this personal finance classic (it was first printed in 1978, which means it’s had a much longer lifespan than many personal finance and investment books) and find out whether it’s worth picking up or not.
happens to be the first investing book I became familiar with in my life. I discovered it on a bookshelf in my great grandmother’s house when I was in high school, and one lazy afternoon I read the whole thing while laying on a down-filled mattress.
Why? It was – and still is – quite entertaining. This book is a light read with a pretty good sense of humor; it comes off a lot less dense than most investment-oriented books and actually leaves you not feeling weighted down with information at the end of a chapter. That’s not to say the book isn’t informative – it is. Tobias merely has a writing style that lends itself to being quite readable – and I would judge that his style is the reason this book has remained in print for decades.
What of the meat inside the book? It’s a walk through the basics of investing: the personal finance foundations you need to begin, the investment options available to you (and their ups and downs), the planning choices you need to make, and so forth. Does Tobias’ tone set the book apart from the pack? Let’s go through the book chapter by chapter to find out whether the tasty flavor of the writing has enough meat behind it to make this book a delicious mental meal.
Chapter 1: If I’m So Smart, How Come This Book Won’t Make You Rich?
The opener is merely a series of humorous money anecdotes that basically focus on the idea that it’s almost impossible to “get rich quick,” and following the investment fad of the month is pretty much a sure way to lose your pants. It’s quite humorous (if not informative) and serves as a good introduction to the humor and tone of the book.
Chapter 2: A Penny Saved Is Two Pennies Earned
starts off (in earnest) in the best way that an investment book can, in my opinion: looking squarely at the investor. It makes the very astute point that the best investment you can make is learning how to live with fewer expenses, whether it’s actually buying less stuff, buying cheaper things, or simply maximizing your effectiveness at getting deals. Every time you optimize your spending, it’s basically a very effective investment. The chapter spends twenty pages or so listing effective frugal ideas, both simple and challenging, and concludes astutely that these should be the foundation of any investment strategy.
Chapter 3: You CAN Get By On $165,000 A Year
Uh-oh. This chapter includes the nearly-required “nine step plan for financial freedom” that almost every book on personal finance includes in some form or another. Nine seems to be the magic number for personal finance books, as it pops up again and again and again. Here are Tobias’ nine steps:
1. Tally your net worth.
2. Set goals.
3. Figure your annual earnings.
4. Take a first pass at your expenses.
5. Take a second pass at your expenses.
6. Refine your plan.
7. Blow $5 on a budget book.
8. Keep track of what you spend – or use an altogether different system.
9. Give yourself a break.
Chapter 4: Trust No One
Basically, this chapter makes one point, but it’s an important one: never trust a salesman. Do your own research before you dive into an investment or insurance, because salespeople are, well, driven to sell above all. If someone is trying to get you to buy an investment you don’t know about, say “no” and do your own research if you happen to be interested.
Chapter 5: The Case for Cowardice
This entire chapter focuses on the benefits (and diverse options) of buying bonds: they’re very safe and they’re a good place to put your money if you don’t have a taste for risk or volatility. Plus, on years where the stock market goes down, you look like a genius. Here’s another way to look at it: if you have $100 and you buy stocks that go up 15% the first year and down 8% the next (not entirely unusual), you end up with $105.80. However, if you buy a two year bond set at 5%, you finish with $110.25.
Chapter 6: Tax Strategies
After tons of pages of specific advice on how to do your taxes and make investments that shield your money from taxes, the last paragraph basically says “buy TurboTax and do your taxes on your computer.” Here’s the advice in a nutshell: if an investment can shield you from taxes, you can accept a lower rate of return with it and wind up ahead.
The Stock Market
Chapter 7: Meanwhile, Down At The Track
After that opening round of fundamentals and conservative investing, the next three chapters focus on the stock market. This chapter starts off with why you should invest in stocks (they can keep up with or beat inflation, over the very long run they beat almost every other investment, and they can act as a tax shelter via long-term capital gains tax) and then goes on to lay out a very simple and elegant stock investment strategy for the individual investor:
1. Only invest money you won’t have to touch for many years.
2. Buy low and sell high (which is tough to do, so…).
3. Diversify over time by not investing all at once.
4. And then – for the most part – just stick with it.
5. Diversify over several stocks in different industries.
6. Ignore the noise.
7. Be wary of high flying stocks and stocks that “everyone” likes.
8. Beware the deceptive P/E (meaning ignore current P/E and look at future P/E).
9. Don’t waste money subscribing to investment newsletters or expensive services.
10. Invest – don’t speculate.
11. Sell only when a stock goes up so much you no longer feel that it is a good value.
12. If you are going to invest in risky stocks, keep them outside your tax-deferred portfolio.
In other words (to boil this all down), just buy some index funds regularly and don’t worry about it, which is the basic advice of any conservative stock investment strategy.
Chapter 8: Choosing (to Ignore) Your Broker
This entire chapter seems to argue that a broker isn’t worth the money without outright saying so, which is probably the author’s way of avoiding legal or social backlash from making such a statement.
Chapter 9: Hot Tips, Inside Information – And Other Fine Points
This final chapter in the stock section is basically a dictionary of terms discussing various terms that you will come across if you do much stock investing, like and so forth. Basically, I found that most of these definitions were slightly snarky variation on the information contained in the first paragraph of the Wikipedia entry for most of the terms.
Family Planning and the Rest
Chapter 10: All in the Family
This chapter, section by section, focuses on handling money issues with the other members of your family, starting with the children and working up in age to your parents.
Most of the advice for dealing with your spouse and your parents is pretty common, but I particularly enjoyed the advice on how to teach children about how money really works. Here’s the best one, and one that I think I’ll use on my child when he’s old enough:
Give them a dollar to start with and put it in a jar. Tell them that each day they’ll earn 10% interest on whatever is in the jar for the next 40 days. Do this in cash at the kitchen table each night so that they can see what happens over time (I visualize doing this with change). At the end of the forty days, the cup will have $45.25 (or so) in it and the kids will be going berserk over the growth. Thus, they’ve learned about compound interest.
Now, do the same thing except offer them one piece of candy in exchange for starting just three days later. If you do that, after the 40 days, there’s just $34.00 in the jar. That one piece of candy cost them $11.25. Thus, they’ve learned the power of starting early and the real cost of buying stupid stuff.
Chapter 11: What to Do If You Inherit a Million Dollars; What to Do Otherwise
After all of this advice, the book closes with one key message: if you don’t know what you’re doing with your money, take it and invest it in multiple low-cost mutual funds in a diversity of areas and just let it sit. Tobias recommends doing this, or perhaps using what basically amounts to my treasury note retirement plan.
The book doesn’t really finish there; it continues on with several short pieces that seem to be reprints of articles from various places mostly written for the entertainment factor, as well as a few bits of miscellany.
Buy or Don’t Buy?
I’ll tell you right now: this book was entertaining, but it was far from the best investment book I’ve ever read. If you’re looking for a really strong all around investment book, last week’s book, The Bogleheads’ Guide to Investing, would be a much better choice.
However, this book has one big thing going for it: it’s funny and incredibly readable. Just like I did years ago reading a much earlier version of this book, I found myself gulping the whole thing down in one sitting like a hungry man in front of a bowl of stew. Tobias writes with a very breezy, entertaining style, and if you find investment books to be boring, this is far lighter and more entertaining than most.
Buy this book if you want to learn a little bit about investment while being entertained with some great anecdotes and storytelling. That’s really the strong point of this book – the actual information within is repeated elsewhere and with more detail and pinpoint accuracy. This book has much more of the fun factor going for it.
However, don’t buy this book if you want a handbook guide for investing. That role can be much better filled by a lot of other books, including, as I mentioned before, The Bogleheads’ Guide to Investing. While Tobias’ book is better for a light afternoon read, there are many other books which are much more informative for long-term reference and thinking.
The Only Investment Guide You’ll Ever Need is the twentieth of fifty-two books in Money360’s series 52 Personal Finance Books in 52 Weeks.