No. of Recommendations: 14
Just to put Whitney Tilson's article "Want to be a millionaire?" into perspective, I would like to quote from the book "Fooled By Randomness", which I highly recommend, by Nassim Nicholas Taleb, commenting on the bestseller The Millionaire Next Door:


Quote

"I will set aside the point that I see no special heroism (author's emphasis) in accumulating money, particularly if, in addition, the person is foolish enough not even to try to derive any tangible benefit from the wealth (aside from the pleasure of regularly counting the beans). I have no large desire to sacrifice much of my personal habits, intellectual pleasures, and personal standards in order to become a billionaire like Warren Buffett, and I certainly do not see the point in becoming one if I were to adopt Spartan (even miserly) habits and live in my starter house. Something about the praise lavished upon him for living in austerity while being so rich escapes me; if austerity is the end, he should become a monk or a social worker - we should remember that becoming rich is a purely selfish act, not a social one. The virtue of capitalism is that society can take advantage of people's greed rather than their benevolence, but there is not need to, in addition, extol such greed as a moral (or intelectual) accomplishment... Becoming rich is not directly a moral achievement, but that is not where the severe flaw in the book lies.

As we said, the heroes of The Millionaire Next Door are the accumulators, people who defer spending in order to invest. It is undeniable that such strategy might work; money spent bears no fruit (except the enjoyment of the spender). But the benefits promosed in the book seem grossly overstated. A finer read of their thesis reveals that their sample includes a double dose of survivorship bias. In other words, it has two comppunding flaws.

The first bias comes from the fact that the richj people selected for their sample are among the lucky monkeys on typewriters. The authors made no attempt to correct their statistics with the fact that they saw only the winners. They make no mention of the "accumulators" who have accumulated the wrong things (members of my family are experts on that; those who accumulated managed to accumulate currencies about to be devalued and stocks of companies that later went bust). Nowhere do we see a mention of the fact that some people were lucky enough to have invested in the winners; these people no doubt would make their way into the book...

As to the second, more serious flaw... The story focuses on an unusual episode in history; buying its thesis implies accepting that the current returns in asset values are permanent (the sort of belief that prevailed before the great crash that started in 1929). Remember that asset prices have (still at the time of writing) witnessed the greatest bull market in history and that values did compound astronomically during the past two decades. ... Virtually all of the subjects became rich from asset price inflation, in other words from the recent inflation in financial paper and assets that started in 1982. An investor who engaged inthe same strategy during less august days for the market would certainly have a different story to tell. Imagine the book being written in 1982, after the prolonged erosion of the inflation-adjusted value of the stocks, or in 1935, after the loss of interest in the stock market.

Or consider that the United States stock market is not the only investment vehicle. Consider the fate of those who, in place of spending their money buying expensive toys and paying for ski trips, bought Lebanese lira denominated Treasury bills (as my grandfather did), or junk bonds from Michael Milken (as many of my colleagues in the 1980s did). Go back in history and imagine the accumulator buying Russian Imperial bonds bearing the signature of Czar Nicholas II and trying to accumulate further by cashing them from the Soviet government, or Argentine real estate in the 1930s (as my great grandfather did).

The mistake of ignoring survivorship bias is chronic, even (or perhaps especially) among professionals. How? Because we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we don't see.(my emphasis)"

Unquote


Sometimes a different perspective is refreshing, isn't it?

pr
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No. of Recommendations: 7
What an idiot.

Being frugal is relative -- i.e. you need to live below your means to accumulate money. By doing this, your means will grow -- which of course means that you will be able to spend more while still living below your means.

The wealthy spend more than the non-wealthy, which doesn't seem like such a sacrifice to me.
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No. of Recommendations: 3
The mistake of ignoring survivorship bias is chronic, even (or perhaps especially) among professionals. How? Because we are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we don't see.

I agree. Consider that only those with extra time on their hands would return the survey. I would argue that there is a correlation between spending habits of millionaires who have "extra time" on their hands, whereas the millionaires without time on their hands are probably too busy making money to be respond to the questionnaire - hence we get an unbalanced view of the group.

Similarly, look at the most well touted professions in the book. The authors highlight the self employed owners of junk yards, towing companies, construction companies, etc. "Boring" businesses. Now that may have been successful for them, but the book does nothing to set a context for future professions. Yet, no credit is given to early career professionals in the tech industry.

And the implications for future wealth builders is ridiculous.

"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

A 30 year old such as myself making $110k should have a net worth of 30*110/10 = $330,000. If you include spousal income, we should have a net worth of $570k. At 30 years old??? Give me a break.

Or how about the college grad right out of school making $45k at 25 should have a net worth of $112,500. How likely is that without an inheritance?

Let's face it, the author's equation is perfect for people in their 50s and is absolutely useless (statistically) for anyone under 50.

I would much rather see a study on frugality and over/under-accumulation of wealth over time and how those traits lead to wealth and quality of life.

To their credit, the authors do a good job of debunking the myth of the "ritzy" millionaire, for which I am grateful.

Just my 2 cents.
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"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

A 30 year old such as myself making $110k should have a net worth of 30*110/10 = $330,000. If you include spousal income, we should have a net worth of $570k. At 30 years old??? Give me a break.

Or how about the college grad right out of school making $45k at 25 should have a net worth of $112,500. How likely is that without an inheritance?


Glad to hear someone else was thinking almost exactly as I was. (I actually had $100K and $40K - because I'm lazy w/ numbers like that.) There are a couple of problems with this equation:

1) It makes those of us who are young, earning decently & saving plenty in a bad light. And can begin to put it as if we'd already fallen behind. ($100K worth at 25 years old, I mean come on.)

2) This equation MUST be exponential if it is going to be at all accurate. They are giving a linear equation after all those lessons on "The Power of Compounding." With the rote memorization on the Fool, they didn't think we'd forget so easily. I'm not going to suggest one either. It seems to imply the single road to wealth, upon which we should all strive to tread.

-4Sale
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No. of Recommendations: 2
Tilson wrote: "According to a fascinating book I highly recommend, The Millionaire Next Door..."


Earlier this year I read the book for the first time. It was one of those things where you've already heard so much about it, that you just had to finally stop and read it (kinda like slowing down and gawking as you pass a car accident). So in that sense, the content wasn't much of a surprise to me.

Although it was a decent book, I found it to be on the boring side. Way too many graphs and tables and charts, then followed by the dry, lifeless info explaining them all. Yawn. It wasn't all like that, but it might as well have been.

After I finished, however, naturally I was curious about the sequel, The Millionaire Mind, written by just one of the authors. After flipping through it at the library, my interest was piqued, so I checked it out. I gotta say, that one was MUCH better! I learned a heck of a lot more from that one, as it seemed to go much more in depth... almost like the story behind the (original) story. More meat to it, not just boring lifeless facts and figures. I recommend it.

Not sure if The Millionaire Next Door is necessary to read prior to "Mind," but it wouldn't hurt, as it simply gives a decent background to start from.


Just my couple copper Abes
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No. of Recommendations: 5
To their credit, the authors do a good job of debunking the myth of the "ritzy" millionaire, for which I am grateful.

This is about all I got out of this book. Good thing I didn't pay for it.

I read it about a year ago or so and so did my wife. What we loved was the authors bashing the lawyers and doctors for owning new cars and expensive suits. Well, my wife is a lawyer and we run a small firm. If ANY of our clients saw us in a cheap ratty suit we'd be fired. Also, when she visits clients they are not at all subtle about checking out our car (we bought it new and sprung for the leather seats and all). Clients of professionals want to be able to see that their hired help are successful and they look for very materialistic things to guage that. This was not addressed at all in the book. In fact the authors went so far as to say that the lawyers and doctors were "wasting" money on these items. Argh!

Anyway, that equation was crap too.

Simon
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After I finished, however, naturally I was curious about the sequel, The Millionaire Mind, written by just one of the authors. After flipping through it at the library, my interest was piqued, so I checked it out. I gotta say, that one was MUCH better!

For me, it was the other way around. I loved The Millionaire Next Door (although you were right about some boring parts), but I was really disappointed by The Millionaire Mind, which I was foolish enough to purchase.
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What we loved was the authors bashing the lawyers and doctors for owning new cars and expensive suits. Well, my wife is a lawyer and we run a small firm. If ANY of our clients saw us in a cheap ratty suit we'd be fired. Also, when she visits clients they are not at all subtle about checking out our car (we bought it new and sprung for the leather seats and all). Clients of professionals want to be able to see that their hired help are successful and they look for very materialistic things to guage that. This was not addressed at all in the book. In fact the authors went so far as to say that the lawyers and doctors were "wasting" money on these items. Argh!


Actually, I believe it was.

; )
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Me: ...This was not addressed at all in the book. In fact the authors went so far as to say that the lawyers and doctors were "wasting" money on these items. Argh!

Markoose: Actually, I believe it was.

Yeah, okay. Revisionist history. I just remember thinking this way for a long way through the book. Anyway, they sure seemed to be promoting trades over professions talking about all the money professionals "waste". Now don't get me wrong, I think the trades are great, but they shouldn't be knocking professionals for what they need to do.

Simon
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No. of Recommendations: 2
Anyway, they sure seemed to be promoting trades over professions talking about all the money professionals "waste". Now don't get me wrong, I think the trades are great, but they shouldn't be knocking professionals for what they need to do.>>
>>

But everyone knows that professionals can make decent money, etc etc. I liked the book for pointing out that millionaires could just as easily be the plumber and carpenter down the block.

But you're right--a lawyer must consider his $5000 (minimum) wardrobe a requirement for the job. Just like a carpenter considers his $5000 (minimum) tool set and pick-up truck a necessity.

David
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good post ,
but off topic, but Taleb couldn't be a billionaire if he wanted to be,
his intellect jumps out seeing things many don't but he is too smart for his own good, and can't accept some simple realities.

there is NO way I would invest in his hedge fund.

option premium melts away over time, even if now and then it blows sky high.

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susan400

apart from the question if it would be advisable to invest in Taleb's hedge fund (I wouldn't, either), I don't think you really would want to enter into a technical discussion about options with him - after all, he is the author of "Dynamic Hedging" (just have a look at it: http://www.amazon.com/exec/obidos/tg/detail/-/0471152803/qid=1040721945/sr=1-1/ref=sr_1_1/103-0007927-2026254?v=glance&s=books) and was inducted into the Derivatives Strategy Hall of Fame. Not that he is infallible, but I doubt if a casual remark like "option premium melts away over time, even if now and then it blows sky high." does his experience and depth of thought in that particular field justice... ;-) I am all for removing him from his pedestal and treating him like a normal human, though - but one should be prepared to enter into specifics, and I doubt we would get far, honestly speaking, because he'd probably show us that we have to do a little bit more homework, I suspect.

But, that's just an opinion.

pr
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