The Book in Three Sentences
- Craig defines wealth as the ability to live on the money you make from your money, rather than the money you make from working.
- If you’re not making money from investing, you’re getting poorer every day.
- Few people become wealthy because they rarely spend time researching and never properly try their hand at investing.
How to Own The World’s Fundamental Truths
- No one is better placed than you to make the most of your money.
- You have significant and inherent advantages over many finance professionals.
- Making money from your money (investing) is far easier than you’ve always thought.
- If you managed to learn how to drive, you can look after your money. It is no harder.
- You can make far more from your money than you ever thought possible.
- It is realistic for you to target making more from your money than from your job. This is the money secret understood by virtually every rich person in history.
- Achieving the above is possible almost no matter how much you currently earn. The good news: doing this today is easier than ever before.
- The tools available to you are the most powerful and the cheapest they have ever been. The bad news: it has never been more important to take charge of your financial affairs.
- If you are under the age of about fifty, there is no chance that you will receive a government-funded pension you can actually live on after retirement.
How to Own The World Summary
The best definition of a truly wealthy person is that they are able to live on the money they make from their money, rather than the money they make from working.
If you do not have a solid grasp of what is happening in the world at the moment then it is very likely you are becoming poorer, and this process is only set to accelerate.
“Things” have been getting more and more expensive in terms of most of the paper currencies on the planet, which means that unless your salary is going up by at least as much or you’re making money from investing, in reality, you are getting poorer every day.
Any money you have is gradually being destroyed. If you have any savings in the bank you are losing real wealth every day, and losing more than you think. This is one of the many reasons people are feeling poorer without really understanding why.
With very few exceptions (Norway and Australia, for example), wherever you live in the world today you absolutely cannot count on being able to live on handouts from your government for the rest of your life when you stop working.
The average British adult has about £30,000 saved by retirement (or less than £10,000 for women and just over £50,000 for men).
If you want to have a pension income equivalent to the average British salary of roughly £27,000 per year you will need to have saved up a pension pot of around £675,000 when you retire rather than the £30,000 which is the current UK average as mentioned above.
So few people optimise their finances and become wealthy is because they don’t spend time trying their hand at investing.
One of the fundamental truths of capitalism is that capital makes a great deal more money than labour—people who own businesses tend to make far more money than people who work for them.
It is not an exaggeration to say that virtually every very wealthy person in history has accrued far more money from their investments than from being paid for their work.
According to the “efficient market hypothesis” (EMH), no one can outperform the stock market by choosing the right investments. That is to say that averages are important in financial markets and no matter how much training you get you will never be able to beat them.
The price of any asset will always be exactly where it “should” be because there are lots of intelligent, professional people involved in any given market who are reacting to a wealth of reliable information about where that asset should trade. The hypothesis proposes, then, that an investor will never be able to gain an edge or advantage such that they might buy a given asset and make a greater return than the market as a whole.
However, according to Craig, there is a vast amount of evidence and academic work demonstrating that the theory simply doesn’t hold up.
The main reason that the EMH doesn’t work in reality (and why you can hope to make great returns on your money) has to do with human nature and the existence of what is called “asymmetric information”. The key point here is that people involved in markets demonstrably do not have perfect information about the things they are investing in, as the EMH would have you believe. Some people have far more information than others—that is to say, information is “asymmetric”.
It is abundantly clear that no company should ever be worth twenty-five times the value of its sales or a few hundred times the value of its profits.
Investing in financial markets without knowing what you are doing is like driving on a motorway before you have learned how to drive.
Arguably the most important reason why most people fail at investment is that they fail to own a sufficiently wide range of investment products. Having a wide range of shares from all over the world, as well as property, bonds, and commodities, gives you the best chance of consistent success.
One of the most successful investing strategies over many years is being properly diversified. This means that you should ensure you own a wide variety of assets rather than just shares or just property, for instance.
Those who understand money and end up with lots of it tend to be those who understand that little and often is the road to success.
Another reason why so many people fail at the money game is that they use far too much debt in their life.
You have never been in a better position to make money out of a good idea than you are today.
Two Crucial Themes of How to Own The World
- The world economy keeps on growing. You need to own the world in order to make superior returns on your money.
- There is significant real inflation in the world because of quantitative easing (QE).
The Boskin Commission concluded that the consumer price index (CPI) overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996. In other words, today’s inflation numbers are essentially fiction.
There are three particularly dubious ways in which governments ensure that inflation numbers end up always being lower than the true increase in your cost of living (so you think you are wealthier than you actually are and they get to pay out less in social security, given this is linked to the “official” inflation numbers).
These dubious mechanisms are called:
- Geometric weighting
- Hedonic adjustment
Substitution is very simply when the statisticians replace something that is going up in cost a great deal with something that isn’t.
Geometric weighting is where the authorities include something that has gone up in price a lot as an inappropriately low percentage of the calculation.
Hedonic adjustment is when an item is reduced in price for the purposes of the inflation calculation because the authorities argue that you’re getting more for your money and you are therefore effectively paying less.
Another source of the “hidden inflation” that doesn’t make it into the official numbers is sometimes called “ghostflation” or “shrinkflation”. This is where a company gives you less of a product for the same price “on the sly”, something that has been prevalent in the last few years.
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”—John Maynard Keynes
The actions of many governments in recent years have led to a situation where we are in the throes of significant monetary inflation. And when there is significant inflation, the value of cash falls as the price of “things” increases.
The smart investor benefits from inflation by making sure he or she owns the very things that are going up in price. As a basic rule of thumb, this includes precious (monetary) metals, commodities, and property.
Live on less than you earn and invest the rest.
If you want to win at the money game, it is absolutely imperative that you create financial surplus in your life and invest that surplus in a good variety of assets.
You are going to be best off saving and then investing a minimum of about 10 percent of your monthly income.
It is best to be aware of anchoring and other similar behavioral traits each and every time we consider a market.
“Money illusion” is our tendency to not take inflation into account (sufficiently or at all) when thinking about changes in the value of something.
If you want to build wealth you must always be thinking about comparative value and purchasing power.
Of the sixteen biggest trading currencies in the world, the pound has been the worst-performing currency against the US dollar for the last five years.
When the pound weakens against other currencies, many of the things we need to spend money on become more expensive, usually after a small time lag.
The pound sterling price of your property is a poor indicator of what is happening to your real wealth.
One of the most useful ways of trying to work out if a property is cheap or expensive is the return it would generate for you if you were to rent it out.
Rental yield is the number you get if you divide the assumed annual rental income from a property by the assumed value of that property. It is a number that you can then use to compare the returns on property to any other asset you might be thinking about, including shares, commodities, bonds or alternative properties.
Net Rental Yield + Capital Gain = Inflation
Property generates a great deal more work than nearly all other investments.
If the average person in Britain is earning £30,000 and the average house costs £180,000 then this ratio is obviously 6:1.
“Mean reversion” is essentially the fact that anything measured will tend to go back to its average price over the medium to long-term.
It is worth knowing that the average ratio of house prices to salaries over the last several decades is actually between 3:1 and 4:1. This tells us that when the ratio is 6:1, house prices are arguably fundamentally expensive and likely to fall; when it is 2:1, house prices are fundamentally cheap and more likely to rise, all other things being equal.
Many people who look at the pound value of their property today and say that their property is worth the same as it was in 2007 are suffering from money illusion.
The endowment effect is when an individual believes the current price or value of something they own must be the same or more than what they paid for it—or, frequently, what their highest perceived value of it was (Dan Ariely discusses the endowment effect in detail in Predictably Irrational).
In France, with very few exceptions, the basic approach is that the total of an individual’s monthly mortgage payments should not exceed one-third of the buyer’s gross monthly income.
If you find yourself looking for houses and the only ones that you like are priced at six times the combined income of you and your partner or spouse, then you should almost certainly consider renting for the time being.
Interest rates are the lowest they have been in 300 years and mean reversion tells us that there is a high probability that they will be higher in the future.
The sooner you arrange your affairs so that you can create some savings to invest in assets other than property, the sooner your wealth will start growing meaningfully.
Negative equity means that if you were to sell your house you would end up with less than you need to pay your mortgage back.
If you are going to flourish financially you need to have a much better than average grasp of the type of accounts available to you and the best ones among them.
Craig’s advice with your main bank is simply to keep as little money with them as possible.
No matter what your political inclinations, no matter how you view the role of government, the simple fact is that they can’t afford to pay for society’s pension and healthcare requirements the way we have for the last few decades.
If you don’t already have a pension and if, like most people, you have less than £1,270 a month to save and invest (the current annual ISA allowance divided by twelve), you might actually consider not organizing a pension at all.
If at all possible you should aim for at least 10 percent, of your salary after tax being automatically paid into your investment pot every month.
After you get used to it and you start seeing your pot grow, you might even consider upping the percentage to 12 percent or even 15 percent.
An ISA account is simply a type of investment account in which the government lets you invest a certain amount of money each year.
If you are to have any chance of making a real return on your money, you need to invest in things that have a chance of outperforming inflation.
There are several main categories of financial product, otherwise known as “asset classes” or “investment vehicles”, with which you can store (and hopefully build) wealth.
The main types of individual investment vehicle we are interested in are:
- Property (or real estate)
- Shares (otherwise known as stocks or equities)
- Insurance products
To a lesser extent, there are two further categories that are of interest to the more expert investor:
- Foreign exchange (often called forex or FX)
A fund allows you to own a large basket of any of the other products on the list or even a mix of them from several categories.
Dividing your resources among the different investment vehicles is what is known as “asset allocation”.
When you are young, you want to be looking to grow your money. As you age, however, you will want to ensure that you are investing more and more safely to preserve the pot you have made and be able to earn a decent income from it.
The older you are, the more of your wealth you should hold in bonds and cash—and the younger you are, the more in shares (equities).
Many people in the UK and USA have almost all their wealth in property—and in the long run, this is inadvisable.
To give yourself the best chance of becoming truly wealthy, you need to ensure that you are aware of, and are exposed to, the other asset classes – particularly shares, bonds, and commodities.
When considering how safe your money on deposit at a bank or building society actually is, you must understand the difference between the interest rate your bank is paying you (the “nominal rate”) and the interest rate your money is actually earning (the “real rate”). The difference is inflation.
If your money on deposit is earning 1.44 percent when inflation is running at around 10 percent, then you are losing more than 8.5 percent of your wealth every year in real terms.
The calculation is very simple: real interest (return on cash) equals nominal interest (what your bank is paying you) minus inflation.
It is important for your long-term financial success to keep as much of your wealth as possible in assets that have a positive real return.
When real interest rates are negative, as they are now, you should look to have only as much cash as you need in order to pay for things in the short term.
Work out what you need to live on each month, add any other purchases or expenses you think will crop up this year (holiday, car, university tuition), add a margin of error for safety and invest everything else in assets other than cash.
One of the ways of getting exposure to overseas and/or commercial property is through owning a fund, and this may be worth considering.
A bond is a loan divided into many pieces so that it can be made by lots of people
The interest paid by a bond is referred to as its “coupon.”
There is basically no other way for a government to raise money other than from taxation or from selling bonds to investors.
Lower bond prices mean higher interest rates and vice versa. They are two sides of the same coin.
QE keeps bond prices up (and therefore interest rates down) but it also creates inflation (devaluing the dollar and the pound) so the effect is still negative.
If you have basically the same amount of “stuff” in an economy and the quantity of paper money doubles, the price of that stuff will double (after a certain time lag).
Those who understand QE are destined to make money from it, and those who don’t are destined to suffer.
Given the relative rarity of government default, bonds have traditionally been viewed as the safest financial investment you can make—similar to keeping your money in a deposit account.
Stock market investment is not the preserve of the wealthy; it is available to anyone who is willing to find out about it and get involved—many of whom will then become wealthy.
To work out how much you are paying for a share in real terms, you must think about how much profit a given company is making now (and is likely to make in the future), and compare how much you might have to pay for your share of that profit to how much you might pay for the same share of another company’s profits. This is known as “earnings per share” (EPS).
“Price to earnings ratio” is known as “P/E” for short.
A lower P/E ratio means that you are paying less for the same entitlement to profit.
The P/E ratio is arguably the single most important thing you will ever learn about shares.
The P/E multiple is widely available online and in the financial press; it is your first step to understanding whether a share is expensive or cheap.
The earnings yield of a share is easily calculated by simply dividing 1 by the P/E ratio and multiplying it by 100 to get the percentage.
The book value is simply the value of all the assets a business owns, as added up by their accountants, and it is yet another way we can compare the value of one share to another.
The book value can be divided by the number of shares to give an idea of the value of existing assets that each share is entitled to. This ratio is called “price to book”.
A fascinating thing to be aware of is that it is entirely possible for some shares to be trading at less than book value.
Dividends are another very important aspect of shares to be aware of.
Earning yield is the amount of profit you are entitled to each year, expressed as a percentage of the price you paid for your shares.
Just as with earnings yield, dividend yield is simply the percentage return you get if you divide the money you have invested in your shares by the money you get from your dividend. When you look at a company, it is important to look at how much that company has traditionally paid out in dividends and what analysts think it might pay out in the future.
Wikipedia describes a “commodity” as, “A good for which there is demand but which is supplied without qualitative differentiation across a market.”
It is absolutely essential that you think about and have exposure to commodities if you want to grow your wealth in the next few decades.
For the majority of people, funds are the most relevant (and appropriate) investment vehicle.
Buying the right funds at the right price will make a huge difference to your life.
Active funds are funds where an individual (known as a fund manager) tries to use his or her skill to pick the best shares (or other assets such as bonds or commodities) to make the best return possible for investors in that fund.
There is a wealth of research that says that, on average over the long run, passive funds outperform active (after accounting for costs).
Passive funds are where a fund management company copies the performance of an index (see below).
An index is simply a method of measuring a stock market in some way.
The FTSE 100 is an index. It is simply an invention of the London stock market; it adds up the price and size of the biggest 100 companies in the UK in order to generate a number, which is known as the “level” of the FTSE 100.
Faster-growing companies will often have faster-growing share prices, which means you may have the opportunity to make higher returns with successful smaller companies than very large companies.
If you think something will fall in value, you are often able to make money out of that too. This is called “shorting”.
Smart beta-funds aim to give you the low cost and breadth of a passive or tracker fund but with the improved performance you would hope to achieve with an active fund.
One problem with many tracker funds is that they are what is called “market cap weighted”. This means that the bigger the company is within an index, the larger it is as a percentage of that index and, therefore, as a percentage of any tracker or index fund that attempts to replicate the index. Therefore any money you invest into such a fund owns much more of the big companies than the small companies.
An equal-weighted index of the FTSE 100 or S&P 500 can outperform a market cap weighted index.
Smart beta funds aim to give you the performance of an active fund for the fees of a passive fund, and you should certainly consider them once are ready to invest.
ETFs are almost all passive funds.
Investment trusts, by contrast, tend to be active funds run by a fund manager with a particular focus such as smaller British companies or Japanese equities (Japanese shares).
There are also many thousands of other funds that do not trade like shares. These funds are usually what are called open-ended investment companies (OEICs) or unit trusts.
There are basically three types of fee or charge you will need to be aware of when considering whether or not to buy an unlisted fund (one that doesn’t trade like a share): the initial charge, the annual management charge (AMC) and the total expense ratio (TER).
It is crucial that you understand all relevant fees and costs before you invest in anything.
When you are considering the purchase of a fund, you should always find out the total expense ratio.
Quite simply, a performance charge is an extra percentage of your money that will be paid to the fund manager if your fund goes up by more than a certain percentage.
If you own a fund that generates income from dividends or coupons you can choose to have that income paid out to you in cash (as would be the case in an income fund) or you can elect for that money to be plowed back into units in the fund you own. This is called “accumulation”.
Very often you will be able to choose between income or accumulation versions of the same fund.
Unless you need the money, for example, if you are retired, it is best to choose to own the accumulation fund.
Ploughing the income earned back into your fund will maximise the effect of compounding on how your money grows.
The great thing about the foreign exchange markets is that “there is always a bull market somewhere”.
Annuity rates today are about 4 percent. At the most basic level, this means that when you retire, whatever lump sum you have in your pension can be exchanged for an annual income equivalent to about 4 percent of that lump sum.
When I talk about “owning the world” I mean: You should own a wide variety of investment products or assets. In the long run, you will want to have cash, shares, bonds, commodities, and property, not just one or two of these. You should aim to own assets from all over the world, not just one geographical area such as the UK or US.
Owning the world means that you end up being diversified both geographically and by asset class.
“Geographically diversified” simply means that if one part of the world is having a difficult time, perhaps Europe or the USA, you still have a good chance of making money because you have exposure to another part of the world that is going up a great deal, for example, certain emerging markets or Japan.
One of the biggest mistakes people make with their investments is that they tend, in the main, to own assets from their own country.
“Diversified by asset class” means that in a year when shares fall off a cliff, as most of them did in 2008, you won’t lose a vast chunk of your money like everyone else.
In the long run, it is much easier to own a mixture of assets so that you have a better chance of owning something that goes up when another type of asset crashes.
Exposure to monetary metals and commodities will enhance your overall performance without complicating matters or being prohibitively expensive.
In general, I would suggest you allocate 60 to 70 percent of whatever you are able to invest monthly into owning the world, 20 to 30 percent into owning inflation, and keep 10 percent in a bank account as cash.
Craig suggests you do not begin to invest money into the above financial assets you are looking at until you have first cleared any expensive (non-mortgage) debt and have saved at least a month’s salary to keep as cash, and possibly more.
One method of owning the world is to buy one fund for each geographical area and one or two for each asset class. You could buy a FTSE 100 tracker to own UK shares and an S&P 500 tracker to own the US, for example. You might then do the same for Europe, Asia, Latin America and Africa and then use other funds to get exposure to real estate, commodities and the bond market.
If we want to own inflation, we just need to own some commodities.
Given the general commodity exposure you will have by virtue of owning the world, Craig firmly believes that the best assets for you to buy to gain additional exposure to commodities—and therefore to “own inflation”—are precious metals.
Today, people all over the world can buy gold with the click of a mouse button.
A better way of looking at establishing gold’s value is to compare it to other key assets over time.
The point here is that the smart money will always be looking at relative value in the long run.
When interest rates are high, owners of gold miss out on this return. Economists call this the “opportunity cost” of owning gold.
In the UK market Craig believes the best provider available is a company called BullionVault.
If you already have a lump sum you would like to invest (a very good idea) and if you want to keep things very simple, then Craig suggests you divide that sum into twelve and pay one-twelfth of it into your chosen investments each month for the next year, along with what you intend to save monthly.
One of the reasons relatively few people succeed in making big-picture asset allocation decisions is quite simply that relatively few people take the time to understand and look at all asset classes, or even to work out how to invest in them.
As you get older you should be thinking more about the return of your money than the return on your money.
Even if you think you’ve become quite good at short-term trading, it might be an idea to allocate your money something like this: 40% longer-term investments in shares and share funds 25% in precious metals and other commodities 10% in bonds 10% in real estate (not including your primary residence) 15% to “wing around”, trading more risky assets (perhaps small, higher-risk shares, or trading forex and other assets with a spread betting account).
Craig says Trade Your Way to Financial Freedom should appear in any list of the best investment books of all time.
If you believe that you can make money from your money, this is an important step on the way to true wealth and financial freedom.
If you take only one action, take the time to read Trade Your Way to Financial Freedom by Dr. Van K. Tharp.
Given Craig’s own top-down analysis of what is going on in the world at the moment, his personal top ten at the time of writing is:
- Precious metals and precious metal mining funds and companies Oil/energy/oil services funds and companies
- Healthcare, pharmaceutical and biotechnology funds and companies
- Emerging-market infrastructure: water, railways, automotive, agriculture Potentially explosive frontier markets: Zimbabwe, Mongolia, Burma/Myanmar “Rich” country funds (bonds and shares): Singapore, Qatar, Norway, Canada, Australia
- The world’s best technology companies: Microsoft, Oracle, Intel, Apple
- The world’s best consumer goods companies: P&G, Unilever, etc.
- The world’s best tobacco, gambling and brewing companies (“sin” investing)
- Clean energy/new energy technologies that don’t require government subsidy: uranium, thorium, rare earths, etc.
Never be afraid to put things in the “too hard bucket” and move on to something that is easier to understand, especially given how many opportunities there are out there.
Do not be afraid to take your time when building your shopping list of themes and companies.
Fundamental analysis is when you assess the inherent or fundamental value of an asset in order to work out whether it is cheap or expensive.
One of Craig’s favorite valuation tools in this respect is something called the PEG (price/earnings to growth) ratio. It is worked out by dividing the P/E of a company by its estimated earnings growth.
The lower the PEG the better, as the number implies you are paying less to “own” more profit growth.
Once you have chosen a theme and made a list of companies you might consider to give you exposure to that theme, the next piece of the jigsaw puzzle is to find out these numbers based on the company’s current share price.
For each company, you should find the current year’s P/E, PEG, dividend yield and price-to-book ratio (i.e. book value per share).
Bonds, property and commodities have their own distinct characteristics and we must evaluate them in a different way as a result.
We can think about a property’s total return as a function of the assumed net rental yield (after costs, void periods, etc.) plus any assumption you might make for capital growth.
This percentage return number can then be compared to return numbers for other asset classes: the interest rate on a current account, the dividend yield (plus expected capital gain) of a share or the yield on a bond, for example.
Basically, a moving average takes a number of prices (for example the closing price) over a number of time periods and computes the average.
If you only read one book to inspire you about technical analysis, Craig recommends Big Money, Little Effort by Mark Shipman.
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