Kenneth Jeffrey Marshall is an author, professor and value investor. He is the author of the McGraw-Hill book "Good Stocks Cheap," which was also published in Chinese, and the "Small Steps to Rich" personal finance series. He teaches value investing and personal finance at Stanford University, industry analysis in the masters in engineering leadership program at the University of California, Berkeley and investing in the masters in finance program at the Stockholm School of Economics in Sweden. He holds a bachelor's in economics, international area studies from the University of California, Los Angeles and an MBA from Harvard University.
Roque: What is your view on being rich? What does it mean for you?
Marshall: Ooh, that’s a good one. A student of mine at Stanford actually asked it during my first personal finance course there. What is rich? To me, it’s the ability to make any reasonable choice without material financial penalty. It’s being able to do something—buy a house, pay tuition, quit work and paint—without having to worry about any economic fallout. The book starts with that point. It’s the first line of the preface. And it may turn some people off, because it doesn’t square with their conception of rich. They may think rich is about bling, or about being waited on hand and foot, or about making other people jealous. But it’s not. It’s about freedom. That’s the goal: freedom.
Roque: Your first book, “Good Stocks Cheap,” presented a model for selecting stocks to hold for the long term. But this second book, “Small Steps to Rich,” focuses on personal finance. What led you to write about this topic?
Marshall: Two things, really. First, there’s a hole. There’s a hole in our education. We’re not taught how to manage our money, by and large. In high school we’re taught geometry, history, biology—we’re taught all sorts of things. And they’re worthwhile things, but we’re not taught personal finance. And that’s unfortunate, because as adults we take an exam on that subject every day.Whenever we use a credit card, or pick a fund, or buy insurance, we’re taking a personal finance exam. And most of us get an F. We get an F because we never learned how to get an A. So it’s not our fault. We’re trying to win at tennis having been taught only checkers.
Second, there’s a gap in the literature. There are many personal finance books, and some of them are good. They do their level best to plug the hole in our education, but I’d never read one that got to the real root of financial insecurity. I kept asking myself, why do I get this stuff and most people don’t? I’m not a genius, and I’m not hyper-disciplined. Yet I get this. Why?
What I came to see is that most people are financially insecure because they’ve never been shown the big economic truths. There are eight. They underlie everything. Fade, for example. That’s an umbrella term for what economists would call diminishing marginal utility and diminishing marginal return. It’s about how each incremental unit of something delivers less—less satisfaction, less money—than did the last.
Someone who goes from homeless to a 1,000 square foot house is happier. Those incremental 1,000 square feet really delivered. But someone who goes from a 9,000 square foot house to a 10,000 square foot house isn’t happier. Those incremental 1,000 square feet didn’t deliver. Why?
Fade. More square feet are great when you’re starting from zero. But not when you’re starting from 9,000. The utility fades.
Try making your way in the economy without an understanding of fade. It’s impossible. You’d miss why the last money into a startup bubble returns miserably, for example. You’d miss a ton.
Anyway, there are eight fundamental truths like that. Folks that get them enjoy a real advantage in life.
Roque: What are the other fundamental economic truths?
Marshall: Besides fade there’s odds, or probability; growth, which is essentially compounding; needs, as in meeting them while ignoring fleeting urges to spend; dependence, as in avoiding it; risk; bias; and incentives.
Several of these come straight from the value investing world. Incentives, for example. Charlie Munger (Trades, Portfolio) said that he appreciates the power of incentives over human behavior as well as anyone, and yet he still underestimates it.
Roque: How important were the courses you teach for the structuring of this book?
Marshall: Very. The book actually started as notes for my Stanford personal finance course. There’d be no book were it not for that course.
My last book started that way, too. It began as notes for my value investing course. That’s a great way for a book to start. It’s great because I got to try out different things: different examples, different phrasings, different graphics. I got to test everything on wave after wave of students. They let me know what worked, and what didn’t. They left no doubt.
Comedians do that. They test. When we watch a comedian on HBO or Netflix (NFLX, Financial), they’re perfect. But that’s because they’ve weeded out all of the duds from their act. They did hundreds of standup routines in tiny comedy clubs. They tried different bits. They saw what worked, and what bombed. So by the time the television crew tapes their big show, they nail it. I tried to learn from that.
Roque: What are the most common and more costly mistakes that you think individuals make when they deal with their personal finances?
Marshall: Fees. That’s a big one: financial advisory fees. A lot of people pay some underqualified, overdressed dingbat 1% every year to run their portfolio. That’s costly. The book shows how after 30 years it can leave clients with only three quarters of the wealth that they deserve. Three quarters! That’s expensive.
Actually, it’s probably worse than that. It’s worse because most financial advisors aren’t fee-only, and they aren’t fiduciaries. They get spiffs from promoters of trashy funds, and they put their clients into those trashy funds. Of course, good financial advisors do exist. They’re easy to spot. They’re fee-only, they’re fiduciaries and they clearly describe their services. They don’t gussy it up with tangled concepts in some pathetic attempt to trick you into thinking that they’ve mastered something that you never could.
I don’t use a financial advisor myself, as you might expect. I do it myself, but I accept that some people like having a professional run their money. So the book describes how to find a great advisor. But since most people don’t learn how to pick out the heroes from the clowns, they wind up paying too much in fees. And not for a service. For a disservice.
Another costly mistake is debt. Carrying a balance on a credit card or drawing from a home equity line of credit is expensive. Most people get that. But they don’t get just how expensive. It guts net worth. Viciously. They mistake a canyon for a ditch.
Look, I appreciate that some people take on debt because they have to. A relative gets a serious disease, and some evil insurance company doesn’t want to pay for treatment, so the choice becomes borrow or die. I get it.
So the book doesn’t get preachy. It accepts that life sometimes requires borrowing. But it does lay out the practical implications of owing money. And optimistically, it shows how paying down debt is actually the same thing as earning incredibly high investment returns. That’s good. Good, and doable.
Roque: In the book you propose an actionable model for individuals to manage their personal finances. How will this model stand out from others in this vast, varied field?
Marshall: Oh, it’s pretty different. It has three parts: think, see and do.
Think we already talked about. It’s those eight fundamental economic truths, like fade. So this first part is about developing the healthy mindset that naturally yields smart money choices.
The second part, see, is about using that mindset to correctly view the different spheres of personal finance. There are seven: working, spending, borrowing, saving, investing, insuring and planning. Once you have the right mindset, each of those spheres comes into focus. It’s really something. The spheres used to look fuzzy, but now they’re clear.
The third part is do. It’s about what to do in each of the seven spheres. What debt to pay down first, for example, or how much to keep in cash, or what kind of retirement account to contribute to, or when to pick a mutual fund instead of an ETF. The book covers a lot of actions. And by that point they make sense. After the think and see parts, they resonate.
Roque: So in this three-part model, which part is the most important? And why?
Marshall: That’s easy. The first: think. Once you have the right mindset, it’s hard to mess up. Wise moves become intuitive, and destructive moves become revolting. Thinking correctly just makes all the right actions happen. Not automatically, perhaps. But naturally.
A big challenge for me was writing the think section in such a way that readers wouldn’t lose interest. After all, when someone picks up a personal finance book, they expect to read about mortgages, stocks, retirement; you know, personal finance stuff. And yet I start with psychology.
So I peppered the think section with enough examples to show how relevant—how vital—mindset is. Plus it’s the shortest of the three sections. So hopefully I won’t lose anyone.
Roque: Does value investing play a role in personal finance? How?
Marshall: Well, value investing is buying things for less than worth. We know that. It’s buying a stock worth $10 for $7. That’s a useful mentality to bring to spending. And spending is one of the seven spheres of personal finance. When we buy things, we’re wise to find good deals. We don’t need to go overboard and get three bids every time we shop for groceries or anything like that. But it’s smart to bring a basic value orientation to spending.
Same with insuring. That’s another sphere of personal finance. When we pick an insurance policy, we don’t want to overpay. So yes, value investing plays a role. But that role is limited. My first book is about value investing in stocks. To those inclined to stock pick, it’s worth reading.
But most people aren’t inclined to stock pick. And “Small Steps to Rich” is for most people. It has a bigger target readership than my first book, so it doesn’t push value investing in stocks.
Of course, it does advocate owning listed equities, but through low-cost stock index funds, not through individual securities. The book lays out how to make those investments at set time intervals, easily. It’s simple.
Roque: The title of this first edition of the book ends with a year: 2022. Why is that?
Marshall: Yeah, that’s really different. I should explain.
When I started travelling internationally—in 1987—I relied on a guidebook series called "Let’s Go." It’s still around, but in somewhat abbreviated form. Anyway, it was aimed at the thinking backpacker, you might say.
"Let’s Go" published different editions for different places, obviously. There was one for Greece, one for Mexico and so on. And each of those editions was rewritten every year. The first one I bought was “Let’s Go Mexico 1987,” for example.
Now, of course, Mexico didn’t change completely between 1986 and 1987. The peso was still the money, and Spanish was still the language. But some things changed. And those things mattered. Some new hostel opened, some area became safer and some route changed.
For example, there used to be a luxurious night train between Mexico City and Guadalajara. I took it. It had a velvet-walled dining car and private sleeping compartments. It was magnificent. But one year it just stopped operating.
So it was always useful to have the newest "Let’s Go." In fact, if you compared the newest "Let’s Go" to its nearest competitor, the competitor looked archaic. Inept, even.
Personal finance is like that. Year to year, many things stay the same. But some things change. And those things matter. For example, books from a few years ago talked about the interest you could earn from high-yield online savings accounts, but rates have plunged. If you went looking for those high rates now, you’d get frustrated. They’re gone. You’d be standing on the platform waiting for your luxury Mexican night train, but it ain’t coming.
So even the best personal finance books age. They cite deductions, mortgage limits and contribution amounts that haven’t been relevant in years. So the idea is to update “Small Steps to Rich” annually.
That’s a lot of work, especially since there’s time pressure. The edition for one year needs to come out by early December of the prior year. But the last piece of required data—the conforming mortgage loan limits—isn’t released until late November. That leaves only a week between final manuscript and on-sale. That’s tight.
Roque: When defining portfolios for investors there are different asset classes available, and new ones appear every year. Do you think cryptocurrencies will have a role in investors’ portfolios going forward?
Marshall: I don’t know. But I can see why people are interested in them. There’s two reasons.
First, some cryptocurrencies have soared in price. They’ve occasionally plunged too, of course. But huge runups in price always make people take something seriously.
Take wing nuts. At my local hardware store they cost around a dollar each. If the price of wing nuts surged from $1 to—I don’t know—$100, suddenly there’d be investor interest in wing nuts.
I can see it now. There’d be a subreddit called "WingNutWealth." Brokerages would sell wing nut futures. There’d be the North American Hot Forged Wing Nut Index. And none of this would be because wing nuts had been found to cure cancer, or put out wildfires, or be fashionable as earrings. It would just be because the price spiked.
Second, there’s a distrust of fiat currencies. The dollar used to be backed by gold, but now it isn’t. So theoretically the government could just fire up the mint and devalue each dollar. That’s unnerving. But it seems to me quite a leap to go from hating fiat money to adopting stateless digital tokens.
But again, I really don’t know. I might not be able to appreciate cryptocurrencies because my home currency, the dollar, is relatively stable. It works fine. But to someone from a country with shaky money, cryptocurrencies may look safe. To them an algorithm may look more trustworthy than a central bank.
Roque: Your new book is focused on the U.S., and the proposed actions are essentially just for U.S. citizens. Do you expect to launch a new version of the book for people outside of the U.S.?
Marshall: Yes. I had about a dozen people proofreading various parts of the book, and luckily, several of them live abroad. They made that suggestion. It’s a good thing they did, because a lot of folks that know me from “Good Stocks Cheap” are in Asia and Europe.
So yes, next year I hope to publish an edition that’s stripped of all of the U.S.-specific content. That’s a lot of content, unfortunately. The global edition may wind up being only about two-thirds the length of the original, but it should still be useful. An experience I had a few years ago made that clear.
In January, I teach in a master’s program at Berkeley, as you know. I’ve done that for years. I usually get around 200 students, and they’re almost all international: from Taiwan, from France, from Brazil—from all over the place.
Anyway, one year in class we drifted from our normal discussion into some personal finance topic. I forgot exactly what it was, but I’ll always remember the look on students’ faces. They were mesmerized. You’d think I was revealing the secret of the universe or something. So I asked how many of them had ever taken a personal finance course. Nine raised their hands. Nine out of 200. That’s nothing.
So there’s a need abroad as well, but it’s going to be a challenge to write something that works as well in, say, Australia as well as it does in Germany, or Canada, or India. Different countries have different retirement savings plans, tax structures and health insurance programs. Very different.
But the foundations are always the same. The eight economic truths are universal. And the actions that stem from them really pay off.