Your Personal Finance Pro http://yourpfpro.com Personal Finance for Young Professionals Tue, 16 Oct 2018 23:22:01 +0000 en-US hourly 1 31591919 Why Is Business Class Travel So Expensive? A Review Of The Undercover Economist http://yourpfpro.com/business-class-tavel-expensive-review-undercover-economist/ http://yourpfpro.com/business-class-tavel-expensive-review-undercover-economist/#comments Mon, 25 Aug 2014 13:30:34 +0000 http://yourPFpro.com/?p=5294 I’m taking a little break from writing about my honeymoon to talk about some other stuff I’ve been thinking about lately.  Don’t worry though, the trip report will go on but for now a review of the latest book I read. Economics has always been a fascinating topic for me.  Even though I kind of […]

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The Undercover Economist Review

I’m taking a little break from writing about my honeymoon to talk about some other stuff I’ve been thinking about lately.  Don’t worry though, the trip report will go on but for now a review of the latest book I read.

Economics has always been a fascinating topic for me.  Even though I kind of poked fun at it during college since my econ major friends literally had to find extra classes to take so they would graduate with enough credits, I still think it is a very respectable and interesting profession.  In my daily life, I’m all about figuring out how to be most efficient and do the most amount of work in the least amount of time or make the most amount of money by doing the least amount of work.  And that’s what economics is all about.

But at the same time, there are some extremely complex economic theories that although I find interesting, I don’t always have the time or the energy to read about them.  Just google ‘John Maynard Keynes‘ the next time you want to fall asleep.  What I liked most about Tim Harford’s book: The Undercover Economist is that he does a great job explaining complex economic theories in terms that layman people like you and I can actually understand.

Interesting Stuff for Beginners

Most of the topics he presents are pretty basic economic principles but he does it in a way that makes it interesting and fun to read.  Many of the examples he uses relate every day life and you can see how they are applied and why certain things are priced the way they are.  I really enjoyed the every day examples he used when he talked about the pricing of a cup of coffee and why business travel costs so much more than coach.

I didn’t know many economic terms before reading the book but along the way Hartford did a great job explaining things like scarcity, price discrimination, relative pricing, marginal cost, comparative advantage, etc.  These are all things that I knew existed but couldn’t tell you how they applied to real life until reading the book.

There’s really something for everyone too since later on in the book he takes a step back and looks at some of the bigger issues like healthcare, benefits of globalization and the rise of China.  I found these macro sections to be interesting but I will admit they were a bit over my head.

Business Class Travel

As I mentioned, I really liked the examples he gave in his book but one stood out in particular.  Why is business class so much more expensive than coach?  As Harford explains, the main goal of travel is to get a person from Point A to Point B but companies want to know how they can wring the most money out of the wealthier passengers.  The answer is called price targeting.

In order to price target effectively, travel companies need to exaggerate the difference between the best service and the worst.  The example he uses is on Brittish trains:

There’s really no reason at all why coach-class train cars shouldn’t have tables, as they typically don’t in the U.K., for instance, except that potential customers for first class might decide to buy a cheaper ticket when they see how comfortable coach has become.  So the coach-class passengers have to suffer.

This is just one real life example that Harford uses to explain what a term like price targeting means.  Although I read most of the book over my honeymoon, I don’t know if it’s quite pool-side reading, more like fire-side reading.  I did find myself a bit confused at times and having to re-read certain passages but overall the book is very easy to read and if you have even an inkling to learn about economics, this is a great beginner to intermediate read.

Ultimately, I’m sure die-hard economists out there will be able to find a lot of flaws in his arguments and I think that’s where some of the mixed reviews come in (4 star rating on Amazon) but for your every day guy/gal this was an interesting read.  I’m on a mission to increase my knowledge of economics because I think it’s an important business skill to have going forward so if you have any recommendations for my next economics book, please let me know in the comments section below.

Readers, what do you think about The Undercover Economist?  Does it sound like a book you’d be interested in reading or do you have another go to basic economics book?  

If you’re interested in buying the book on Amazon, please use our referral link.  I get a small commission on all Amazon purchases that you make after clicking the link, not just the book.  So it’s a great way to support the site since I know how we all love Amazon 🙂

-Harry @ PF Pro

PS – Here’s an interesting podcast I listened to last week that has to do with why milk is always in the back of the store.

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What I Learned From the Book Rich Dad Poor Dad http://yourpfpro.com/learned-book-rich-dad-poor-dad/ http://yourpfpro.com/learned-book-rich-dad-poor-dad/#comments Mon, 04 Aug 2014 13:12:53 +0000 http://yourPFpro.com/?p=5085 Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! That might be the longest title in the world for a book but don’t let the title fool you.  I thought this book was truly an inspiring and fascinating read.  I’ve always had an entrepreneurial […]

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What I Learned From the Book Rich Dad Poor Dad

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Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!

That might be the longest title in the world for a book but don’t let the title fool you.  I thought this book was truly an inspiring and fascinating read.  I’ve always had an entrepreneurial spirit and the principles laid forth in this book echoed a lot of what I’ve done and am doing with my own life.  The book has received mixed reviews but in general I think the good outweighs the bad.

It took me a few pages (ok maybe more than a few) to figure it out but the book’s main character Robert Kiyasaki doesn’t really have two dads.  He grew up under the influence of his real dad (the poor one) and worked for his friend’s dad (the rich one) all throughout his childhood and into early adult life.  Robert’s poor dad was highly educated, believed in working hard, not spending beyond his means, but he never quite made it.  On the other hand, Robert’s rich dad taught him that the poor and the middle class work for money while the rich have money work for them.

Learning From the Rich

The one thing that you can’t take away from this guy is that he has achieved what he set out to do big time.  Over the years, he has made a lot of money and while I don’t agree with everything he does there is still a lot that can be learned.  You need a little bit of luck to go from nothing to a millionaire in 47 years but you also need a lot of skill.  I think for me the biggest take away from the book is that most ultra-successful people don’t get to the top working for somebody else.

Any time you are working under someone, there’s always going to be a limit on the amount of money you can make, the responsibility you’re given and the power you have.  Someone will always be above you with the final say but that’s not the case when you work for yourself.  Robert learned at a young age that his rich dad worked very hard but he was always the one in charge.  He was the boss and he was the one who made the rules.

Being an entrepreneur is way harder than working a day job but that’s also why the rewards are so much greater.  The author tends to glorify working for yourself and I think he makes it sound a lot easier than it is.  Trust me, most people aren’t cut out to work for themselves but there’s nothing stopping you from trying.

Assets vs Liabilities

I think some of his best guidance comes when he talks about the difference between an asset and a liability.  Most people tend to think their home is an asset yet they don’t treat it like an investment at all.  Especially here in California, where rent vs buy multipliers are not even close to reasonable investment levels (it’s way more expensive to buy a house than rent a comparable one).

“Rich people acquire assets. The poor and middle class acquire liabilities, but they think they are assets”

I love that quote.  How many people actually believe that a diamond ring is a good investment?  I would NEVER go into debt to pay for a liability (think cars, vacations, jewelry, etc) yet most people do it all the time.  And that’s why most people complain about not having enough money and wanting to be rich but will never get there.

And Now the Bad

It seems like people either love or hate this book but I’m somewhat ambivalent.  I think way too many people go through life complaining about their job or their situation yet refuse to do anything about it.  Robert was not one of those people and I have a feeling a lot of the naysayers are the ones who went to college, got a decent job, yet find themselves living paycheck to paycheck without even knowing it or working until they’re 65 to pay off all the crap they bought.

Related Review: The Boglehead’s Guide to Investing

I like the real estate examples the book uses but Robert definitely downplays the risk at times.  He makes it seem like it’s a cinch to go out and find a cash flowing property in any city in America.  One thing that might make you a little weary is all of the bragging he does about how much money he made doing this, the Porsche he bought for his wife, etc.

A little bit of bragging is good for inspiration but by the end of the book I found myself saying, “Dude, we get it.  You’re rich.”  I think he tends to downplay the risk in a lot of his investments and although he may have had a lot of success picking stocks in the 90’s the facts and evidence show that this is not a viable strategy for an overwhelming majority of people.  I highly disagree with this strategy of his, stock picking should be limited to 5-10% of your portfolio.  All of the evidence and facts support this.

My Take on The Book

Overall, I would recommend this book but with the caveat that it is read as just one part of your financial training.  A basic investing book like the Boglehead’s Guide to Investing will quickly stop your head from spinning and bring you back down to reality after he gets done talking about all the great IPO’s and stocks he was a part of in the 90’s.  Risk and reward are always related and although Kiyosaki claims to have made a ton of money off small caps during his career, you can bet that he took on an equal amount of risk and/or lost plenty of money on these bets too.

I do think that his advice on investing in rental properties (and not your primary residence) and running your own business is pretty invaluable though since most people don’t do this.  This book shouldn’t be treated as a get rich quick manual.  Instead, consider it one man’s story about how he became wealthy.  There is good and bad advice abound in the book and it’s up to the reader to determine which course of action to take.

Don’t kid yourself though, being an entrepreneur is a lot of work.  But who says you have to do it all at once?  I know that in my personal life I have done a little bit of both and have been very successful.  Even at the age of 27, I don’t depend on my day job like so many others do because I have secondary sources of income: rental, online, investments, etc.  Sure I’ve had to make some sacrifices here and there but for me it’s all about finding balance and sacrificing a little bit now so that I can have WAY more later.

Readers, have you read Rich Dad Poor Dad?  What do you think about Robert Kiyasaki’s take on making money and getting rich?  Is it still doable?

If you’d like to support the site, you can use our Amazon affiliate link to purchase this book or any product on Amazon.com and we’ll receive a small commission.

-Harry @ PF Pro

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Through the Eyes of a Beginner: A Book Review of The Boglehead’s Guide to Investing http://yourpfpro.com/eyes-beginner-book-review-bogleheads-guide-investing/ http://yourpfpro.com/eyes-beginner-book-review-bogleheads-guide-investing/#comments Fri, 25 Apr 2014 12:20:49 +0000 http://yourPFpro.com/?p=4619 Editor’s Note: When I started my investing journey four years ago, the first book I ever picked up was the Bogleheads’ Guide to Investing. Looking back, I’d say this book was the absolute best thing that ever happened to me(finance-wise) since it really opened up my eyes to low cost index funds and the basics […]

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Through the Eyes of a Beginner: A Book Review of The Boglehead's Guide to InvestingEditor’s Note: When I started my investing journey four years ago, the first book I ever picked up was the Bogleheads’ Guide to Investing. Looking back, I’d say this book was the absolute best thing that ever happened to me(finance-wise) since it really opened up my eyes to low cost index funds and the basics of investing. In fact, it’s probably the book I recommend the most to anyone just starting out on their investing journey.

I’ve been wanting to review it for a while as part of my new book review series, but since I read it so long ago I didn’t really remember all the important details. Luckily, one of my faithful readers and longtime friend, Erik Sierks, graciously volunteered his time to review the book. Erik is a fellow aerospace engineer and UC San Diego Volleyball Alumnus who is really just getting started on his investing journey. Erik’s been working for a couple years now but he’s been slowly gaining more and more of an interest in personal finance. He was one of the first people I convinced to take advantage of an HSA and based off his review below, it looks like he’s got a great foundation of knowledge to build on going forward.

I’ll be giving away two copies of the book to two lucky readers! If you’d like to be entered to win a copy of the book please leave a comment below. On to the review!

After 15 years of school I have learned a lot of really important skills: I can read and write, add and subtract. I also learned a lot that has been pretty useless (even working full time as an engineer!) like differential calculus and linear algebra. All these skills are supposed to help get me get a job, make money, and become financially independent. So how is it that I, like many other college graduates, made it this far without learning what to do with my money once I start making it?

Unfortunately, there is very little exposure to money management in school. If you are like me, and want to know how to take control of your own financial future, The Bogleheads’ Guide to Investing is a great place to start.

The Bogleheads’ Guide to Investing

What it is: An overview, guidelines, rules of thumb, in layman’s terms: a roadmap to a comfortable financial future.

What you will learn:

  • how to achieve financial security/independence
  • the power compound interest over time
  • the power of saving money and keeping costs low
  • why diversification is important
  • different asset classes and their pros/cons
  • types of investment accounts and their pros/cons

Before you read, it is also important to know what this book is NOT

What it isn’t:

  • how to pick stock market “winners”
  • guide to market timing
  • how to get rich quick
  • flashy exciting market secrets
  • an attempt to sell you any products/services or convince you to use Vanguard

Know Your Starting Point

The Bogleheads’ Guide begins by asking you to lay out the ground rules for a stable financial future. Take an inventory of your current financial situation. Eliminate high interest credit card debt. Set up an emergency fund. It is important to begin down the road toward your financial goals from a firm starting place. Once you have taken care of the basics, then its time to start thinking about the future.

The Magic of Compounding

I know that many people have the “compound interest” epiphany later in life. But the earlier you have it the better! The combination of compound interest and time are extremely powerful! The Bogleheads’ Guide gives a few great example that everyone should be aware of:

A 20 year old investor contributes $31,000 to a portfolio returning 8% annually. Without ever contributing another dime, their portfolio would be worth $1,000,000 dollars when they retire at age 65! To have the same portfolio value with at age 65 with the same annual return, a 40 year old investor would have to make a 1 time contribution of $146,000, and a 50 year old investor would have to contribute $315,000!

A large 1 time contribution may not seem plausible. How about this:

Investing $600 a month for 30 years assuming 10% returns yields $1.2 Million dollars!

It’s a shame that every college student (or even 5th grader for that matter) doesn’t know that fact. If everyone knew the power of compound interest, I think more people would make an effort to put aside a few bucks a month.Try to pack a lunch and cut back on the Starbucks a little bit. You will thank yourself later!

Investing in the Stock/Bond Market

You probably know that saving money is important. But where should that money be invested? An individual company’s stocks can go up or down radically over the short term, and even the long term. However, the overall market has produced an annualized return of around 8% over the last 200 or so years. Here is another great statistic everyone should know. This is with regards to overall market performance:

“Your odds of losing money in any particular year are 32%. Your odds of losing money over any 5 year period dropped to 13%, and for any 10 year period the odds of losing money fell to only 2 percent. There has never been a 15 year period where stocks lost money.”

Considering this, all an investor really needs to do is get their money into the market and leave it there!

That might still seem easier said than done. How do you know what to invest in? Is it worth it to pay a manager?

The Bogleheads’ Guide gives a great recap of the different asset classes. They discuss several different equity and bond. This was probably the driest section of this book (I’ll admit I skimmed through a fair amount of the Bond classes). However, there is a lot of good information there.

One thing I liked about the Bogleheads’ guide is that they quoted tons of long term academic studies. According to countless studies, around 70-80% of index funds outperform actively managed funds.

Warren Buffet said “I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

If Warren Buffet can’t pick stock market winners, what hope is there for the average investor? The funny thing is, when it comes to the stock market it actually pays to be lazy. Invest in low cost mutual funds, and leave your investments alone. Don’t be swayed by talk shows, infomercials, or TV “experts” that claim to know the inside scoop on the next hot stocks. If they really knew what the market was going to do next do you think they’d still be a TV show host? If I knew which stocks were going to have crazy returns, I would invest every dime I had and retire!

Control Your Costs

There are a lot of great low cost index funds out there from companies like Vanguard that offer low cost mutual funds with expense ratios around .2%. No one knows what the market will do next. Portfolio managers will probably charge you a 1-2% fee. That means that they need to achieve returns of at least 1-2% ABOVE the market average to pay off. If 70% of them are underperforming the market, you need to get pretty lucky for your manager to pay off. You can’t control market returns, but you can control your own costs!

The Bogleheads’ Guide also give a great recap of Asset Allocation. A general rule of thumb is to hold your age in bonds.

Ex: a 20 year old holds 80% stocks, 20% bonds, a 30 year old holds 70% stocks 30% bonds. They even give a few examples of potential portfolios for investors of different ages.

Looking Forward

The Bogleheads’ guide gets into all the different types of investment accounts, both traditional and tax deferred accounts. They discuss college funds, and estate planning, how to establish a target retirement amount, how much money you can withdraw in retirement, etc. It’s all great stuff to be aware of, but are probably not the most exciting topics for young investors.

Control Your FutureThe

The Bogleheads’ Guide is a great book for anyone who is new to investing. Everyone should have to read this book or something similar to it in school. It is really a shame that our school systems don’t prepare us for our financial futures. Maybe this is why so many American’s end up with massive credit card debts.

When you are ready to have your investing epiphany, pick up a copy of The Bogleheads’ Guide to Investing, or another similar book. There are tons of theories on how/where you should invest, but they will all agree that you need to have money to invest in the first place! That means being smart with the money you have, and living within your means. Be aware of where your money is going, and take control of your financial future now. Years down the road, you will be happy you did!

Readers, what did you think of the Bogleheads’ strategy? Do you have any other similar books you recommend? Don’t forget to leave a comment to be entered to win one of two copies of the book.

The Bogleheads’ Guide to Investing

(I will receive a small commission if you buy this book from Amazon, thank you for your support!)

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Book Review of the White Coat Investor and Giveaway! http://yourpfpro.com/book-review-white-coat-investor/ http://yourpfpro.com/book-review-white-coat-investor/#comments Mon, 14 Apr 2014 12:40:15 +0000 http://yourPFpro.com/?p=4531 Editor’s Note: Leave a comment below to be entered to win one of two copies of the book! It was right around this time one year ago when we found out that my fiancee had gotten into medical school. She had always dreamed of becoming a doctor and now she was one step closer. For […]

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Editor’s Note: Leave a comment below to be entered to win one of two copies of the book!
Book Review of the White Coat InvestorIt was right around this time one year ago when we found out that my fiancee had gotten into medical school. She had always dreamed of becoming a doctor and now she was one step closer. For those of you not familiar with the process, just applying to medical school is an arduous task. It’s like applying for college all over again but it takes way more time and it’s way more expensive. There are applications to fill out, the MCAT to study for and(if you’re lucky) interviews all across the country.

But in the end, it was all worth it since now she’s one step closer to becoming a doctor. I was ecstatic for my fiancee when she got in, but naturally I started thinking about the financial side of things and how we were going to pay off nearly 200k of debt. One of the resources that has helped me tremendously is a blog called, The White Coat Investor. It’s run by an ER doc named James Dahle but you would never know that his formal training is in medicine based on how much he knows about personal finance.

His background is a lot like mine and that might be one of the reasons why I like his blog so much. I too, come from a non-financial background(aerospace engineering) but at times I feel like I know more about investing and personal finance than I do about my day job. Hopefully Jim knows more about being a doctor though.

Jim recently released his book, aptly named, The White Coat Investor and he gave me a couple copies(one to read and one to giveaway) so I thought it would be the perfect book to review as party of my ongoing series. On to the review:

Book Review of The White Coat Investor

The first thing a casual reader might ask themselves about this book is does it apply to me? Even though it is clearly tailored towards medical students, residents and practicing physicians, there is still a lot of valuable information in there that applies to all high income individuals(think lawyers, dentists and other professionals – even engineers like me).

This book is a must read for anyone involved in the field of medicine. The reason why it’s so good is that it covers everything you didn’t have time to learn during medical school, college and high school. Most people don’t seriously start thinking about their finances and investing until after college(that’s how it worked for me at least) but doctors usually go straight to medical school after college. And trust me there is very little time for learning anything other than medicine during those four years. Most med students are more likely to unwind with a beer and an episode of Real Housewives than pick up an investing textbook.

The path to becoming a doctor just doesn’t allow for much time to learn about investing but you need to make time. I think this book can provide the most value for medical students and residents since the earlier you start thinking about this stuff the better.

Doctors Ain’t as Rich as They Used to Be

The overarching theme that I took away from the book is that although the landscape for doctors is changing you can still live a pretty amazing life. Here are the facts: it’s getting exponentially more expensive to go to medical school and the average doctor’s salary is going down. That means that when you graduate medical school, you’re likely to have a large amount of debt and you won’t be getting paid the same amount as your colleagues from previous years.

One of the things I liked most about Jim’s book is that he doesn’t just tell you the facts, he proves them with numbers and statistics so you know he isn’t full of shit. Here are a few quotes from his book:

When I started medical school at the University of Utah in 1999, in-state tuition was about $10,000 per year(it had been $8,000 just a year or two before). In 2013-2014, in-state tuition will be $32,000 per year.

In a paper published in JAMA in November 2012, Seabury et al. compared median physician earnings from 1996 to 2000 with earnings from 2006 to 2010 and found a decrease from $166,733 to $157,751. This only looked at physicians over thirty-five(since many doctors under this age are still in training) and was NOT adjusted for inflation. If you adjust for inflation, that represents a decrease in real earnings of over 28%.

Those facts may sound kind of grim but the reality is that although doctors are taking on more debt they are still basically guaranteed a job when they graduate and starting salaries can still be in the 200-300k range depending on specialty and location. If you told me I could get paid 300k but have 300k in student loans I’d take that in a heartbeat since I know that debt could be paid off within just a few years if you live like a resident.

Live Like a Resident

It’s tough to sacrifice so much for so long but that’s exactly what doctors are asked to do. They have to give up some of the prime years of their lives in order to pursue education and training so it only seems right that they should be able to splurge once they become an attending and start making the big bucks. But as the White Coat Investor discusses over and over, this is one of the worst financial mistakes you can make. It’s just not practical to take on a mortgage, a car loan and start spending beyond your means in your first year out of residency.

As a newly minted doctor, you have to resist the temptation of instant gratification.  Instead, think about paying off your student loan debt and investing for retirement because doctors are way behind the retirement savings curve. Just look at the example from my latest Ultimate 401(k) Guide, even if a 32 year old first year attending maxes out their 401(k) for the rest of their career they’ll never catch up to someone like me who’s maxed out his 401(k) for the past 8 years. Oh yeah, and I also get to stop contributing the same year the doctor starts. Let that sink in for a while and you’ll realize how badly doctors need to play catch-up when it comes to retirement.

Doctors Aren’t Above Average When it Comes to Investing

Doctors are used to over-achieving their entire lives, they were the best students all throughout high school, college and maybe even medical school. And that’s probably why they are some of the easiest victims for financial advisors. Smart investors know that passive investing will on average always provide for higher returns than active investing due to lower fees and costs.(It’s also simple math since the return of passive investing = the average market return and active investing + passive investing = the average market return, therefore active investing must equal the average market return. Once you take into account the 1-2% expense ratios to pay active fund managers, you come out way behind).

But alas, passive investing will only ever return the average of the market and established professionals like doctors and lawyers aren’t good at just being average. That’s where active managers and financial advisors come in: they are great salesmen. They know exactly what to say to get you to invest your money with them and before long you’ll be underperforming the market and padding their pockets.

The WCI does a great job explaining why doctors should stay away from these financial advisors salesmen. There’s definitely nothing wrong with getting help when it comes to your investments but unfortunately most financial advisors are more akin to salesmen than you know, actual advisors. You have to know how your advisor is compensated(the WCI and myself both recommend fee only planners) in order to eliminate conflicts of interest. If your FA works for Wells Fargo and he gets a 1% commission on all the Wells Fargo funds he sells you do you think he’ll be more likely to sell you a Wells Fargo 500 Index Fund(with an ER of 2%) or a Vanguard 500 Fund(with an ER of .2%). That 1.8% difference can literally cost you hundreds of thousands of dollars over 30 years.

It’s kind of a Catch 22 since if you’re knowledgeable enough to know what a good financial advisor looks like you’re probably capable of do it yourself investing. But if you don’t have the basics yet, you’re probably stuck with one of these salesmen and don’t even know it.  My advice is to read this book or one like it so that you’ll at least have a basis if you decide to go the FA route.

What Did I Learn?

I love reading about personal finance since no matter how much you think you know you can always learn something new by reading other people’s material. One of the topics the WCI touched on that I found very fascinating was the chapter about protecting your assets. Unfortunately, we live in a sue happy society and doctors especially have huge targets on their back.

Imagine a scenario where someone trips on your stairs and hits their head and decides to sue you. In a normal world, everyone would call this person an idiot and move on with their lives. But in America, this is grounds for a lawsuit and you can be held liable for other people’s stupidity. Whether you think it’s fair or not(and it clearly isn’t fair but that’s life) you have to know how to protect yourself from things like this. The WCI does a good job explaining different types of insurance and also goes into detail about life insurance and disability insurance. New attendings are at their most vulnerable at the beginning of their career and that’s when they want to carry the most coverage yet most probably don’t carry enough.

All in all, I thought the book was great. For me, it was a little short but I like to read. It’s probably the perfect length for a busy med student or resident since it can be read in just a few days or 1-2 weeks. My only criticism is that it doesn’t go too in depth into the investing side of things: what to invest in, how to pick your asset allocation, etc. To Jim’s credit though, he does state this fact and gives countless resources to further your investing education. I think he also left the door open for a second book so I’ll be eagerly awaiting that one.

If you’d like to buy the book, please support the site by using my affiliate link and I will receive a small commission from Amazon:

The White Coat Investor

Here are some other books that I think would go well with this one:

The Millionaire Next Door

Boglehead’s Guide to Investing

Readers, what do you think about my review for the White Coat Investor?  Does it sound like something you would like to read?  If so, you’re in luck because I’m giving away two copies of the book(one paperback version and one Kindle version).  

In order to win, please leave a comment and I’ll pick the winners randomly.  Please also indicate whether you would like the Paperback version, the Kindle version or either one.  I’ll pick the winners after a couple weeks and notify them via e-mail.

-Harry @ PF Pro

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A Review of the Big Short by Michael Lewis http://yourpfpro.com/review-big-short-michael-lewis/ http://yourpfpro.com/review-big-short-michael-lewis/#comments Mon, 10 Mar 2014 12:42:33 +0000 http://yourPFpro.com/?p=4079 Before I read The Big Short by Michael Lewis, I had no idea what credit default swaps and collateralalized debt obligations(CDO’s) were. But Lewis does a great job explaining what went on during the years leading up to the subprime mortgage crisis and where it all went wrong. I always knew that the economy got […]

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A Review of the Big Short by Michael LewisBefore I read The Big Short by Michael Lewis, I had no idea what credit default swaps and collateralalized debt obligations(CDO’s) were. But Lewis does a great job explaining what went on during the years leading up to the subprime mortgage crisis and where it all went wrong. I always knew that the economy got royally f’d by the housing market in 2007-2008 but I never really knew why until reading this book.  I was in college during 2004-2009 and the economy was really the least of my worries during that time.

The Big Short follows the stories of several Wall Street outsiders who bet against the housing market using credit default swaps and ended up making hundreds of millions of dollars. It was refreshing to read a non-fiction book that used personal histories and interviews to play out one of the biggest financial crises of the past 100 years. Michael Lewis is best known for his non-fiction sports writing(The Blind Side and Moneyball) but his first best seller was also written from the perspective of a financial insider and was titled Liar’s Poker.

What the Hell is a Credit Default Swap?

I went in to the book thinking it would be more of a dry historical type novel but I was pleasantly surprised. There’s not really a main character but the book instead follows a group of traders around as they learn about CDO’s and credit default swaps and try to figure out a way to short subprime mortgages. For the complexity of the topic, Lewis does a great job explaining what these little known financial instruments are and how they work. In fact, he constantly points out that most of the people involved in the business at the time didn’t even know how these things really worked.

One of my rules of investing is: only invest in that which you know and understand. Yet these Wall Street traders and CEO’s made billion dollar bets on instruments like CDO’s that turned out to be some of the most complex financial pieces of crap we’ve ever seen. They were more concerned with the short term profits that bundling up these mortgages and selling insurance on them provided than figuring out how they worked and what the long term effect would be.

Subprime Mortgage Crisis Cliff Notes

For those who don’t know, essentially what caused the crisis was a rash of unqualified borrowers taking out adjustable loans way beyond their means with the inability to ever pay them back. The guys in the book who shorted the housing market saw this fact early on and figured out a way to bet against it using a credit default swap. A credit default swap is basically like insurance that paid them if the CDO’s(basically mortgage bonds) defaulted. The craziest part about credit default swaps is that you didn’t even need to own the asset in question in order to buy insurance against it. That would be like if you saw a fire approaching your neighbor’s home, you quickly went out and bought insurance on it and once it burned down, you collected your money.

There was a lot of blame to go around for the subprime mortgage crisis but ultimately the main cause was greed. Homeowners who took out way more than they should have. Banks and lenders who loaned the money to increase their profits. Wall Street who kept the demand high for new loans from the banks and lenders and profited the most out of anyone. And the government/rating agencies who basically had a thumb up their ass the whole time.

My Favorite Character

The book follows a few stories but my favorite character is a guy named Michael Burry. Burry was a Stanford trained neurosurgeon turned hedge fund(very small one) manager with Asberger’s syndrome. He’s also one of the first guys to realize that the teaser rates homebuyers were offered would end in two years and that’s when the defaults would start to happen. He knew that the securities(CDO’s) formed by these shaky mortgages would start to go bad and so he bought as much insurance(CDS) against the CDO’s as he could.

While waiting for the loans to default, Burry faces immense pressure from his investors since his fund is losing money(due to the insurance premiums) while the S&P is going the other way. Even though Burry’s fund had returned 200% higher than the S&P the two years before he started making these bets, at the first sign of trouble, his investors started to revolt. Ultimately, he was proven correct and made hundreds of millions of dollars for his clients but almost none of them ever said so much as thanks. This part of the book was sad because it only illustrated how greedy Burry’s investors were: when times were good they didn’t give him so much as a pat on the back but when times were bad, they all wanted to pull their money out.

Greed vs Stupidity: Who Wins?

The book was a little depressing in the sense that everyone on Wall Street got rich. The people who were making the trades got rich, the people facilitating the trades got rich and even the banks that lost money were eventually bailed out by the US government. Personally, I don’t think the government should have stepped in because it only promotes bad behavior. The biggest losers were probably the every day people like you and I who actually took out the mortgages. Although homebuyers share some of the blame, they were definitely the ones most taken advantage of.

The one takeaway that relates to me on a personal level is that the markets are wildly unpredictable. Reading the book, it seems so obvious that we were headed for record high mortgage defaults yet only a handful of people were able to predict it. Everyone from the Wall Street Banks to homeowners to government rating agencies had no idea that this avalanche was coming.

I talk to people on a daily basis who tell me about their latest hot stock or some new investing fad. For some unknown reason, they think they can predict a market that is wildly irrational and unpredictable. If the best of the best when it comes to investment professionals did not see one of the most obvious financial bubbles in the history of the modern market why would some idiot walking down the street think he can predict where interest rates are going to go or what the housing market is going to do?

Sometimes it’s ok to admit you can’t predict the future. I look at empirical evidence and data when it comes to my investments. In other words, I do the math: if the math makes sense, then it’s a good investment. Investing on a hunch or investing based off emotion isn’t investing, it’s gambling. You can go to Vegas for that.

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Readers, what do you think about The Big Short and the subprime mortgage crisis in general? This book was actually very easy to read and was also a great resource to learn about what went on during that time. If you’re looking for a non-fiction book packed full of drama, comedy and knowledge I suggest you give it a try.

Editor’s Note: If you’re an Amazon Prime Member, you can actually rent this book for free through the Kindle Library. If you’re not a member yet, sign up for a free 30 day trial and get started.  Btw, I also get a small referral free if you buy anything from Amazon using one of my links so happy shopping.

 

-Harry @ PF Pro

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