We have Andrew Hallam with us for this interview. He is a Canadian living in Singapore and teaching at the American School. I got to know Andrew and his investing ideas through his book, “Millionaire Teacher”. I love his book and would definitely recommend it to you. It has been one of the bestsellers in the bookstores so do look out for it.
Andrew, is there a double meaning to your book title, “Millionaire Teacher”? Firstly, you became a millionaire with a teacher’s salary and secondly, you are teaching people how to be a millionaire. Was it intentional?
You are actually the first to point out about the double entendre in this title. Initially I just wanted “The Nine Rules of Wealth” but my publisher insisted to promote me as a teacher who became a millionaire. It would push more sales for the book and I was willing to adopt this title after realising there is a double meaning to it.
You do not look like someone who would desire a high standard of living, so why do you focus so much on your finances?
You’re actually relying on your job so that you can eat, drink, house yourself, keep healthy with proper nutrition and medical care. I think the really nice thing is to ensure that at no point you really go absolutely crazy with your finances. Make sure there is always that financial buffer in case you eventually find yourself losing your job, or having your portfolio dropping 30-40% during a significant economic down turn.
You had battled bone cancer in the past. Had that experience changed your life or your approach to money?
Quite a few people have asked me that and I think it’s pretty common when somebody overcomes something like cancer. A lot of people come out of the woodwork and ask whether it had actually changed your perspective on life but it really hasn’t for me. A workaholic who I know quite well, asked about this and I said no, but for a guy like him, it will probably change a great deal. I was just one of these goofy guys with a smile on my face and every day for me has always been a gift. Maybe I’m delusional. In terms of the money, I think money just gives me options to know that if I end up getting sick, I can afford the medical care and even stop working. We’re all in this position where every single one of us will die eventually. I know it sounds like a crazy thing to say but, we just don’t know, none of us know when the end is going to be. It might be this week, or tomorrow. I think it’s very important to live for the moment, but also have complete financial freedom to just stop working as an option. Knowing that I have the financial backing have helped me with the recovery process.
And your investment philosophy is you believe that an average earner can be a millionaire if he starts investing passively early enough. He should just buy three types of index funds. First, equity index of his home county; second, equity index of the world; and third, index of government bonds. He just needs to maintain a specific ratio in this portfolio once a year and do not try to time the market. Am I right to say that?
Yes absolutely, but it’s a hard thing to do. You could be one of those people who set out a nice diversified portfolio of indices and when the markets start to soar, you are thinking of putting fresh money in the market. Your natural inclination is to say to yourself, “oh look my international stock market index is just absolutely boring. I’ve got to put more money in it, it’s doing so well!” Over the past decade, I have realised how hard it is for people to have the disciple not to chase the winning asset class. It is really easy for me to lay this out on paper and guarantee you will beat 95% of professional investors if you follow this strategy. Everybody from Warren Buffett to a whole school of Nobel economic prize winners, know it is an academically irrefutable fact. When stocks are rising, you’ll see so many people on television, and you’ll see so many people writing articles about it in The Wall Street Journal telling you the market is going to go so much higher. Likewise, if stocks start dropping, you’ll get the same kind of mass pessimism that show up on CNBC and on The Wall Street Journal. It is quite frightening for people to rebalance their portfolio. What they have to do is literally be a little bit greedy when everybody else is fearful and a little fearful when everybody else is greedy. On paper we know this, but psychologically very few people seem to actually have the aptitude to follow through with such a plan and that’s a shame.
Yes, I totally agree with that. Recently, the property market in Singapore is very hot and surprisingly, I heard from a friend who doesn’t invest at all got interested in property. That just tells me there is euphoria in the Singapore property market.
Yes. Have you heard of Joe Kennedy before? Joe Kennedy was President John F. Kennedy’s dad and he was a famous speculator in Wall Street in the 1920’s. He had this great saying, when even the shoe shining boy is starting to give stock tips or advice and telling you that he’s winning, it’s time to get the heck out of the markets. And it’s a funny thing because, the widespread euphoria and optimism, really ends up transferring through every age, every sort of level, professionals and working class alike. It is almost like a bizarre optimistic disease that spreads like a pandemic. It is so fascinating because I see real estate at nose bleed levels in two places in the world right now. One would be Singapore and the second would be Australia. The irony is that there are so many people lining up to buy real estate in Singapore, thinking it’s a good investment because it has done well in the recent past. Likewise in Australia, there are so many people lining up to buy the Australia real estate because it has done well in the past. If we look at two hundred years in history, you can pick whatever asset class and you’ll find that people will end up bandwagoning on an asset class because it has been rising exponentially over one year, five years or six years. Typically, those people will end up getting burnt. Most of them pay really, really high price for it. Let’s just assume you bought a property for a hundred thousand dollars and you have collected seven thousand dollars in rent. That is a seven percent yield. This is higher than historical real estate yield. When they rent significantly below or significantly above that, there would be a reversion to the mean. Eventually something ends up going back to what has historically been the standard. If I take this place that we’re renting now, the owners rental yield on this property isn’t around the 7%, but it is closer to 2%. The thought of buying real estate right now from an investment perspective borderlines on insanity, and it’s not far from what we actually see in places like Melbourne. But the sad thing is these places are very popular right now. Conversely, we have extraordinary rental yields in the United States. We have house prices that have plummeted exponentially. To give you an example, on my website I ended up citing a woman I know. She is a financial blogger and writer named Paula Pant. She recently bought a foreclosed three bedroom house in Georgia for twenty one thousand dollars. She put about another ten thousand dollars of work into the home, to paint it and put in new carpets. She hopes to rent it for a thousand dollars a month. Think about the yield on that, she’s going to get twelve thousand dollars a year in rent and her yield was close to 30%. Again, that’s not likely to continue either. At some point in time, homes in the United States, as Warren Buffett suggests, will rise exponentially. US homes will probably be the best value for your money in terms of any investment currently in the world today. But again, are people lining up to buy American real estate? No way, they are lining up to buy Singapore and Australia real estate because they like buying things that have just become expensive.
Totally agree. In your case, how do you keep yourself sane among this euphoria?
I learned a lot and I have some fabulous mentors. I can’t recall whether it was Jason Zweig or Jonathan Clement, who suggested that the financial media is financial pornography. Its job is to seduce you and get you doing things you really should not do. Its job is to entertain you as well, so I have learned to chuckle a little bit. It is both interesting and frustrating for me. I have a friend who has read my book, and attended my seminars yet he said, “hey my emerging market index has risen quite a bit and my bond index hasn’t. I’m actually thinking of selling some of the bond index to chase the emerging market index.” I had to try and talk him down. It was like a guy standing on a ledge about to jump and I had to stop him.
Basically you have to be a contrarian.
If you look at the world’s greatest investors who had long documented track records of success, have actually been quite contrary in nature. Guys like Warren Buffett, Benjamin Graham, and Michael O’Higgins, have definitely been contrarians. The people who were buying Singapore real estate in the year 2003-2004 were contrarians and they are laughing all the way to the bank today.
Who had great influence on your investment philosophy?
I would say Warren Buffett even though I have only met the guy once. I have read everything published about the man even though he has never written a book. He only writes the annual letters to the shareholders. It is just fabulous and I can recommend those letters for they are an amazing read. There is so much calm and absolute wisdom among chaos, and this is a wonderful anchor that I think most investors would be wise to grab hold of. And of course I mentioned in my book, I have also been really inspired by the millionaire mechanic I met when I was working at a part time job. I mentioned him numerous times and I just can’t give him enough credit. It’s just so inspiring to know that if I learned like he did, to manage my money effectively, I didn’t have to sell my soul for a big paycheck or for a job that I don’t like. He loved working on engines and he became a millionaire. So, that was inspiring knowing I could emulate him and love working as a teacher.
Right, so your advice to people is to follow a passion, to do what you love and invest in indices?
Agreed. If I said I’m going to give you three hundred and fifty thousand dollars, would that actually interest you?
Okay, here is the deal. I’ll give you three hundred and fifty thousand dollars, but by making a deal with the devil, imagine I get to take fifteen years off your life, would you actually go for it? Now here is where I connect the dots. If you’re doing a job that you hate, are you really living? We spend at least eight hours a day working. If we hate it, then our employer is actually purchasing our lives. You would rather be spending time with friends and family, hanging out at the beach or doing something that you actually love rather than work, right?
So when I ask this question, “would you give up fifteen years of your life for an extra three hundred and fifty thousand dollars”, everybody says no. Yet so many people would choose a mind numbing job just for the money and unfortunately, they really don’t get it.
We know that not all index funds are created equal. Are there any pitfalls we need to look out for when we invest in them?
I think a lot of financial service companies are jumping on the index bandwagon as they’re starting to recognize that people who know a little bit are actually making steps towards purchasing index products. The industry can actually pull the wool over their eyes, and offer index funds that are actually quite expensive. There’s an organization in Singapore offering an S&P 500 index but you need to pay about 1% per year for the management fee. That’s crazy because it is about ten times more than people ought to be paying for an index fund. Not only that, they charge 2% commission up front.
As the investor gets smart, the mutual fund industry would develop counter measures to mask their products and to trick the investors again. Educators like you will have to teach it all over again to improve the understanding of these products.
Yes it’s frustrating isn’t it? Likewise in UK, there is a well known company that charges about 1% annually as well. So in contrast, my index fund in the US charges about 0.09%. UK investors are paying eleven times more than I am for the same product.
Besides cost, are there other things that we need to watch out for? For example, non-Chinese citizens are not able to own Chinese A shares. There is an ETF in Singapore where you can get access to the top fifty Chinese stocks but I understand the ETF is just buying futures to replicate the actual share performance. The transactions would definitely load costs on the fund. Are there many such synthetic ETFs that we need to watch out for?
There are some and you have to look under the hood of the ETF. You are right, an ETF in some cases do not actually own the equities within that index. There is just that extra element of risk and much of this is based on the solvency of the company you’re buying the index from. Investors should just buy transparent and simple index funds because you never really know what could end up happening with these more complex products.
You mentioned in the book that we need to have a global equity index in the portfolio as well as our domestic index. Since the stock markets are pretty correlated, would it suffice just to own the domestic index alone?
Some people do. Looking at two markets that are closely correlated historically, like Canada and the United States, a portfolio containing 50/50 of both indices will become less volatile and yield a higher return than either index in isolation. You could also take look at 2011 where most country indices dropped double digits during that year but the US market gained 2%. So there are still these differences.
I see. This sort of smoothes the returns and I believe the same reason for the bonds in your portfolio. Most people would find bond returns are unimpressive. Besides reducing volatility, what is the main role of bonds?
It is good that you mentioned this question because I get asked this a lot. People suggesting that the bond returns are only 1% or 2% annually and they don’t want to get into that. First I see bonds as a stabilizer and secondly, perhaps more importantly, my bonds are incredible potent dry powder. They are absolutely wonderful to own when markets plummet. Not because it will prevent my portfolio from dropping as much as the market, I could care less if my portfolio drops or not. When the market really plummets, we have really nice discounts and I can sell those bonds and buy stocks cheap. Having that bond allocation on paper looks like I have got a conservative portfolio, but for me, it was like rocket fuel.
Are you suggesting stock price and bond price are inversely related? During a stock market crash you can sell bonds dear and buy stocks cheap?
They generally are over a long term but not every single day or every single year. I have found that historically, when people are scared and they’re selling stocks, they will put money into mattresses, tin cups, savings accounts and bonds. In each case that I rebalanced my portfolio over the past decade, I found coincidently my bonds had risen in price. For me, it was the Canadian bond index. It was that easy, but again, you have to be emotionally dispassionate enough to do it and that is the hardest part.
Yes, talk is cheap, walking the talk so more difficult than anything else.
You emphasized a lot about rebalancing your portfolio in your book. If you see your bond component getting a bigger in your portfolio, you actually sell some of them and buy more stocks. It is true conversely. Just by rebalancing your portfolio, you are actually buying low and selling high in the process.
Buy low sell high is the ultimate investors’ mantra.
When did you have this conviction that index investing is the way to go and nothing else?
Well, I read John Bogle’s book, Common Sense on Mutual funds, probably twelve years ago and I had a lot of respect for the method itself. But like many young people, I wanted to buy individual stocks. When Warren Buffett suggests you buy quality companies when they are on sale or a company with short term problems, I was able to follow and made those kinds of purchases. My investment results were very good and I was quite reluctant to build a 100% indexed portfolio. My bonds and international equities were fully indexed. Only my US component was individual stocks picked by me. But the more reading and research I did, I discover many stories where guys who are a lot smarter than me and with far better track records of picking individual stocks, eventually ended up getting force fed a huge piece of humble pie. Eventually their accounts got hammered and they actually paid for their audacity of trying to beat the market. Warren Buffett says, “it is always better to learn form mistakes of somebody else rather than learn from the mistakes yourself”. That’s when I stood back and thought – I am already half indexed, I might as well go fully indexed and I will be guaranteed to beat 90% to 95% of professional investors. If 50% is index and 50% is individual stocks, I will never know how I am going to end up doing. But history says eventually I would end up paying the piper, so I ended up indexing the entire portfolio just a year and a half ago.
That was fairly recent. I thought you would have done index investing for a long time.
It was very recent. To keep it in perspective, I did have nearly a million dollars indexed. Even though I was picking individual stocks, I really did have a large part of my portfolio indexed. The individual stocks at the time probably amounted to seven hundred thousand dollars and I actually wrote about it on my blog the day that I sold them all and it surprised a lot of people. I know that it was certainly the right thing to do.
Many people believe they can beat the market, and everyone else except him is the average investor.
They were, but it’s funny because as a financial writer, occasionally I would write these articles on how to beat the market with individual stocks. These are the kinds of articles that actually sell magazines. The investment club’s portfolio that I managed was actually beating the market and some of the similar stocks were recommended in my articles while some were getting killed by the market. These losers could have ended up in my portfolio if I continue to pick stocks. Some people will say they have beat the market for five years or eight years. Comparing it to an overall lifetime of investing, that’s an absolute bleep.
I believe many people have come to you for advice, what were the common problems?
The biggest problem other than not saving enough money would certainly be chasing asset classes. Feeling really good about things that are increasing in price is the biggest problem people face when investing.
Is there a difference between the way Asians and Westerners handle money?
I thought so. I went to an investment fair in Singapore and Robert Miles was speaking and he had forty people to hear him speak. On the other side of the investment fair, it was almost like a big gymnasium where some guy from Hong Kong had some kind of day trading platform, promising to turn your ten thousand dollars into ten million dollars in five years. There were people spilling out of that place and everybody wanted the quick easy profits that they could dream off. I went out that night with Robert Miles and I said, this got to be an Asian thing. I have not seen anything like that before and surely if we held this in New York, Robert would get the big numbers wanting to invest like Warren Buffett. But he actually said, “no Andrew, you’re kind of wrong in that respect, people all over the world are the same. They want the fast, easy buck so whether it was in New York or whether it was in Singapore, you would get more people going for that fast easy dollar promise.”
Is it too late for someone in their fifties to start index investing?
Someone on their fifties who expect to live until they are eighty-five will have thirty-five years to invest. When they retire, they may not be adding money to the markets but they will be selling off some of their portfolio each year to cover living expenses. But they are still going to have their money in the markets in some way for a thirty-five year period Many people in their late years tell me it is too late for them and it really doesn’t matter how much they are paying in terms of investment expenses because the possibility of compounding huge sums of money is completely over – I should have started when I was in my twenties. When I punch my compound interest calculator and show them the money over the next thirty-five years they can make by saving 2% in investment fees simply blows their minds. So to answer your question, it’s not too late.
I understand that you are a runner. Are there similarities between running a marathon and investing for the long run?
Definite similarities. There are runners who just hope to run a marathon someday and they may train whenever they feel like it. What are their odds of actually being prepared to complete a marathon on any given day? It may be a dream, but unless they write it down, set a plan, have an objective and work towards their goal, they’re not going to do it. Many investors actually invest like that. They have no idea what they want at the end of the day, they have no idea how much money they actually need when they retire, and how much money they actually need to invest on a monthly basis to reach those goals. So running and investing require very similar traits in terms of the planning process. Now I am sitting on this couch after pulling an Achilles tendon, and in about ten days time, there is a really big race that I have trained for six or seven months. But I will probably just enjoy a jog instead of running as hard as I can. Life is very unpredictable and I think you cannot rush it. In investing, when people have set backs like losing their jobs, rather than rushing to take extra risks with their investments, people just need to step back, analyze the situation and then logically get back on track without rushing the process.
Are you leading a mini financial revolution out there?
If the entire world read my book, absorbed the material and recognized the superiority of investing indexes over active management, at best only 20% of the worlds’ people would actually bother with indexing. Because with indexing, you will never beat the market and very few people are genetically wired to accept. Maybe a little revolution of sorts, this is only for the people who are actually ready to accept it and emotionally wired to venture down this path. But unfortunately for the majority they will still chase the active management.
In a way, if everyone does index investing, it probably would not work anymore.
Yes, maybe. It would certainly become entirely based on supply and demand, wouldn’t it?
After this book, what is next?
The publisher wants another book for sure. At this stage, I’m just enjoying writing my articles for Canadian Business, the Globe and Mail, and the Asset Builder. I am really enjoying teaching my students and personal finance class. I would also be spending time with my beautiful wife this summer. All these things are keeping me crazily busy.
Thanks Andrew for coming to the show and I wish you a speedy recovery.
Yeah, will do, take care Alvin and good luck with your blog and everything.