Book Review: The New Coffeehouse Investor

If there is one certainty in the financial world, it’s that things can get tricky quickly. There are thousands of stocks, thousands more mutual funds, and tens of thousands of sources of advice on which are the best for you. With all this information out there, how do you decide how best to manage your money?
The New Coffeehouse Investor tries to give an answer, providing a way to ‘build wealth, ignore Wall Street, and get on with your life’. It’s certainly a pretty bold claim. Does the book manage to meet that claim, or does it fall short? As always, let’s read on to find out.

Summary

The New Coffeehouse Investor starts out with an introduction including the story of Bob, an investor during the tech boom with a hefty amount of technology stocks, who watched his net worth plunge during the tech bubble bust. It then introduces some of the basic principles of building wealth (don’t put all your eggs in one basket, there is no such thing as a free lunch, and save for a rainy day).

The first chapter covers the three basics principles of smart investing, namely proper asset allocation, achieving the stock market average, and the importance of saving. There’s also some discussion of one of the book’s recurring points, ignoring Wall Street propaganda during your investing. Chapter two looks more at the concept of risk, a major consideration for any investor. There is discussion of the importance of looking at inflation risk (that in the future things will be more expensive) rather than stock market risk (that our investments will decline in value in the short term).

Chapter three looks at how to approximate the stock market average with your investments. The basic concept, using indexes to meet your needs, is a pretty sound one, illustrated with an interesting mental game called ‘Outfox the Box’. The fourth chapter goes into more depth on creating a common stock portfolio, mainly focusing on which types of index funds to include within your stock portfolio.

The fifth chapter, interestingly titled ‘My Favorite Piece of Pie’ looks at the power of compound interest, and its power to greatly boost your investments’ value (particularly if you reinvest dividends consistently). Chapter six talks about the importance of saving, so you have some money available to invest. There’s even a worksheet to help you figure out an appropriate amount that you should save in order to meet your retirement goals.

Chapter seven looks at fees associated with investing, noting how by keeping the fees on your investments to a minimum, it is possible to end up with hundreds of thousands of dollars more at retirement than you would have with even moderately higher fees. Chapter eight tries to reinforce some of the lessons of the prior chapters, in particular the importance of not falling for the desire to seek better returns by putting all your money in the latest hot stock funds.

The ninth chapter looks at how situations change over time, and the importance of monitoring your investments as time goes on and making the needed adjustments. There’s also discussion of monitoring your ‘burn rate’, the amount you spend to maintain your lifestyle (and a term taken from aircraft terminology, given that the author’s younger brother is a pilot).

Chapter ten looks at the rising trend of Wall Street creating more and more variations on index funds, from ETFs to specialized index funds that invest only in particular regions, business markets, or other factors. The main thrust of the chapter is the need to stick with your investment plan, and not getting drawn in by all these new types of investments. At least, not getting drawn in with too much of your portfolio; chapter eleven relaxes things a bit, providing advice on how to attempt to ‘beat the market’ with a small (5-15%, at most) portion of your portfolio.

Chapter twelve rounds out the book, reviewing the principles covered at the start of the book, and providing further encouragement to those who stick with the principles of the Coffee House Investor. The book ends with an appendix including several index funds that meet the qualifications listed in the book.

Pros

The New Coffeehouse Investor is a fairly simple, straightforward guide to investing and organizing your money to be able to do so. The book is interesting and quite an easy read, particularly when the author is discussing some of his mountain climbing experiences. The advice is definitely solid for the individual investor.

Cons

The idea of investing in index funds and not trying to beat the market is a fairly common one nowadays (at least, if you spend much time reading the typical personal finance blog); chances are, you’ve heard these suggestions before, even if you don’t follow them yourself. The book is also a bit on the simplistic side, although given its focus on keeping investing simple, this might be more of a pro than a con.

Overall

The New Coffeehouse Investor is a solid beginner’s investment book. It’s quite interesting and provides plenty of good investment advice. If you’re already investing passively in a mixture of index funds, chances are there isn’t much new here for you, but for it could be the perfect book for that cousin of yours who just won’t stop talking about his latest hot stock tip.

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