Review: Learn to Earn

Each Friday, The Simple Dollar reviews a personal finance book.

learnI’ve wanted to review one of Peter Lynch’s books for a long time. I’ve leafed through them many a time: One Up On Wall Street, Beating the Street, and Learn to Earn are all considered modern classics of stock investing and personal finance.

Why? A big part of it is the author himself, Peter Lynch. He was, without much argument, the best mutual fund manager of all time. From 1977, when he took over managing Fidelity’s Magellan fund, to 1990, when he retired, that fund grew from $18 million in assets to $14 billion. In those thirteen years, a share of the Magellan fund increased 900% in value – a 29.2% annual return – and outperformed the stock market by 13.4% annually. It is without much question the single greatest run of more than ten years ever by a mutual fund manager, and it’s the reason Lynch is an investing legend.

While I plan to eventually review all three of his books, I decided to start off with Learn to Earn for several reasons, mostly summed up by the subtitle: A Beginner’s Guide to the Basics of Investing and Business. Sounds like a pretty worthwhile place to start.

Does Lynch offer up enough knowledge in this book to make it worth reading, or should an efficient reader find another book with which to spend his or her time? Let’s dig into Learn to Earn and find out!

A Look At Learn to Earn

One: A Short History of Capitalism
This first chapter is a ninety page history of the development of business and stock investing in the United States, starting clear back with the Pilgrims. Honestly, this is not material I expected from this book, but it turned out to be incredibly compelling. I got engrossed in this portion of the book, taking about ten notes on every page and turning to Wikipedia and to other sources many, many times during the reading to increase my understanding of what Lynch was describing.

Some are obviously going to ask what purpose this section serves. It doesn’t teach much directly about how to manage your money today. Instead, it puts investing, money management, and other basic elements of personal finance into the context of American history. For many people, the obvious question will be “Why read it?” and for some the answer will be obvious. Personal finance, as we know it today, is the outgrowth of thousands of years of hard work by our ancestors, and along the way they learned mountains of valuable lessons. Those lessons, sadly, are often ignored and their mistakes are still repeated today: deep personal indebtedness, following a herd mentality when investing, getting involved in complex business schemes without any idea of how they work. All of those things happened time and time again in the past, and they happen again today.

The value here is to show, in a very interesting and authentically American way, that the basic tenets of personal finance have always been true. Always spend less than you earn. Never invest in things that you don’t understand. Never just blindly repeat the investment strategy of the people at the country club. Always plan for bad news in the future. Hard work, intelligence, and diligence almost always pay off. These tenets work – they’ve worked over and over again throughout American history.

Two: The Basics of Investing
This chapter really breaks down into three parts. The first part is incredibly simple: spend less than you earn, do it now, and invest the remainder. This is basically a commandment in this book and for good reason – following it is pretty much the only sure way to financial success.

The second portion outlines the five places where most people can put their money: cash (savings accounts, CDs, foreign funds), collectibles (including metals), real estate, bonds, and stocks. Lynch is obviously a stock investing advocate, but he does a good job outlining the other areas of investing as well. In general, he recognizes cash and bonds to be relatively safe, seems to not like real estate investing much at all (too much manual work and too much risk), and finds collectibles to generally be far too speculative.

The rest of the chapter focuses on stock investing, where Lynch is an expert. There really is a lot of good advice in this section, much too dense to really discuss in detail. Lynch (and Rothchild, who I suspect is probably the ghostwriter at least to a degree) is very good at making this information breezy, so the forty five pages or so that discuss stock investing are simultaneously quite informative and very readable. If Lynch’s more stock-oriented books are similarly readable, I look forward to reading them.

It’s important to note that Lynch assumes the reader doesn’t have much knowledge at all about the stock market. It is written from a beginner’s perspective – if you want detailed info on how to pick stocks, this isn’t it. What it does do is explain very clearly how to invest in individual stocks and how to gather information about them. It details what a brokerage is, how it functions, why you may or may not want an expensive stockbroker, how to gather information about companies and decide whether to invest in them, what dividends are and how they work, and so on.

Three: The Lives of a Company
This short section describes the life cycle of a company, starting with the germ of an idea inside of someone’s head until it’s a publicly traded “value” stock, subject to the cycles, bulls, and bears of the stock market. Along this path, there are different ways to invest in companies, different reasons for doing so, different risks, and different rewards – clearly, a greater view of the growth of a company is valuable information.

Why is this information here? Most people view stocks as an investment game unto itself, neglecting the idea that stocks represent real companies that grow and mature and change. Take Apple, for instance. Once upon a time, it was two guys in a garage. In the early 1980s, it was growing like gangbusters after a huge IPO, clearly a growth stock. It stagnated in the late 1980s and 1990s, then turned back into a growth stock again recently. It was born, grew up, had a midlife crisis, and made some changes. At each stage of the company’s life, the risks and rewards of investing were different – it was a growing stock, a steady stock, a value stock, and a growth stock again at various points along the way. Lynch does a great job of explaining this relationship of a company to its stock, making the connection very clear.

Four: The Invisible Hands
The book closes with an impassioned argument that it’s the leaders of businesses, the people who make intelligent and informed decisions, that drive the success of these companies. Lynch puts a lot of credit on company leaders in determining the success or failure of a company, going almost so far as to say that a company’s leadership is the single most important aspect of a company’s success.

In the end, you have a direct, strong connection between the leadership of a company and the value of that company’s stock. This takes a lot of forms, from the “rock star” status of the leadership (think Steve Jobs or Jack Welch) to the raw leadership ability (like Lee Raymond, the man who built ExxonMobil into a dominant company) or, in some cases, both (Lee Iacocca, the man who saved Chrysler and later became their pitchman). On the other hand, a bad CEO can deeply damage a company (Gil Amelio at Apple and Bob Nardelli at Home Depot come to mind).

Again, what does that mean to the investor, or the person learning about personal finance? A great leader means you’ll have a valuable stock – a bad leader means you’ll have an underperforming stock. Lynch puts a lot of value in this, and he provides a lot of interesting examples and evidence for the argument.

Buy or Don’t Buy?

Learn to Earn was quite enjoyable to read. It provided some food for thought in some sections and was purely entertaining in others. Lynch and Rothchild take material that could be incredibly boring but instead bring it to life with colorful language, humorous anecdotes, and a fast pace.

Another interesting note: Learn to Earn was actually more “basic” than I expected it to be. This is a great introductory book on business, stock investing, and the connection between the two. It’s written in a breezy and simple enough tone that a thoughtful teenager would enjoy it, yet meaty enough that, if you don’t have a good grounding on the basics of business, stocks, and investing, you will learn something new from it.

While I was already familiar with much of the content in the book, the quality of the writing and the respect I have for Lynch make me strongly yearn to read his other two books. When you close a book feeling that your time was well spent but you’re also yearning to read more, that’s a sure sign that something’s right within the covers.

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10 thoughts on “Review: Learn to Earn

  1. That One Caveman says:

    I like Lynch’s teaching. I have made it part-way through Beating the Street and he writes in a way that speaks well to me. It’s good to see that it’s not a fluke and that I can continue to expect good things from him.

  2. A great book, Beating the Street is the perfect follow up.

  3. Just a thought…rather than us buying and paying for their books, don’t these financial experts and pundits personally have blogs that they write for on a regular basis where readers can receive free knowledge and information daily? Is the information you receive in the books really all that different from what they’d blog about?

    -Raymond

  4. Trent says:

    Blogging is a difficult model for most book writers to achieve – they require vastly different skill sets.

    Blogs are more like “idea factories,” and it is incredibly tough to write multiple compelling articles each day – that’s why often the writing is often somewhat unpolished. Good bloggers focus on the ideas alone and enough structure just to explain the idea, but there’s not enough time to polish it up with perfect grammar, elegant choices, and such. People that criticize word choices, for instance, in a blog posting usually aren’t thinking about the challenge of writing that much original content, day in and day out.

    Book writers take a handful of compelling ideas and polish them and scrub them and hone them. This is a very intense work process, one that simply wouldn’t be lucrative or sensible in a blog format. Lynch and Rothchild likely spent several months fact-checking and carefully polishing the words in this book into a very enjoyable and readable piece. Blogging simply doesn’t offer the kind of financial return that would be needed to justify that kind of work.

    Blog writing enables a deep connection to the audience, but the advice is often transient. It’s more like a conversation. A book, on the other hand, is timeless – Lynch’s books have been in print since the early nineties. The effort in polishing that advice and making it shine pays off because it’s compelling even a decade and a half later.

    Another challenge: blogging is a meritocracy where everyone can publish and the audience chooses what to read – the cost of entry for the writer is very low, at least to begin with. That’s why there are a lot of blogs – and a lot of very bad blogs. Book writing, at the level of quality required to get a publishing house interested, requires the devotion to write a book, the talent to come up with the ideas, and the effort to fact-check and to polish. The end product of a book is usually of higher quality because of the threshold of entry.

    Which is better? It really depends upon you, the reader. I like a mix of both in my reading diet, along with well-executed periodicals.

  5. I always look forward to your Friday posts, Trent. Thanks for another great review.

  6. J.D. says:

    Trent wrote: Good bloggers focus on the ideas alone and enough structure just to explain the idea, but there’s not enough time to polish it up with perfect grammar, elegant choices, and such. People that criticize word choices, for instance, in a blog posting usually aren’t thinking about the challenge of writing that much original content, day in and day out.

    Hm. I disagree with this. I don’t think daily posts are any excuse for poor spelling and grammar. Now I make plenty of mistakes myself, but I spend a lot of time on editing, striving for clarity, efficiency, and correctness. In fact, the “editing” portion of my day takes more time than the “writing” portion. I read each post aloud. I cut cut cut words as much as possible.

    Again, I’m not perfect. I don’t pretend to be. But I don’t think it’s true that “good bloggers focus on the ideas alone”. In fact, I think the success of my site is largely because I focus on communicating effectively. I’m not an idea man. I’m a communicator.

    I also disagree with this assertion: Book writers take a handful of compelling ideas and polish them and scrub them and hone them. This is a very intense work process, one that simply wouldn’t be lucrative or sensible in a blog format.

    Are you aware of the economics of book publishing? For most authors, it’s not a lucrative venture. They’d be better off blogging. Over the past year, as I’ve prepared to explore books of my own, I’ve spoken with several writers. All of them have confessed that it’s no way to make money. They all have other jobs to make ends meet, and squeeze the writing in where they can.

    The people I talk to spend several months to a year on each book, and expect only to earn $5,000-$10,000. Unless a book is very successful, it’s not going to earn back its advance. Every one of the writers I’ve spoken with has expressed the wish that they could trade positions with me.

    And you know what? From what I can tell, I work more at my blog than these writers do at their books. (And that’s not gloating or criticism, it’s just an observation.)

    While I agree that blogging is more like a conversation than reading a book, I disagree that the information in books is more timeless. There are plenty of transient books, even personal finance books.

    Have you picked up a pf book from the mid-80s? The advice is mostly useless because things have changed so much. Conversely, some of the things you and I write (your financial armageddon pieces, for example) are more timeless than that which you’ll find in modern personal finance books.

    Finally, it’s a mistake to believe that publishing houses are interested in quality. Yes, that’s one aspect of the equation. But what publishers want most is content that will sell. Their goal is to make money. They’ll publish dreck if they think people will buy it. A huge audience is a better barometer of a possible book deal than the ability to write well.

    Most of the time you and I agree on things, Trent. This is one case where we don’t. I disagree with almost everything you wrote in that comment! :)

    (Raymond, there are personal finance writers — and other writers — who keep blogs. Check out Liz Weston. Check out Andrew Tobias. Check out Freakonomics. Check out Malcolm Gladwell.)

  7. jana says:

    are you sure american history is “thousands of years” old?:)))))

  8. Penny says:

    Trent I want to address your Grandmother and her gifting. I lost my Grandmother years ago and she was the perfect Grandmother. Above all else she taught me about love and about Jesus. Now besides that she had many Grandchildren. She never forgot to send cards on every holiday even St. Patricks’ Day. :) I believe your Grandmother does this because she knows she can count on you. My suggestion would be to pay her electric bill annomously and relieve her stress of making ends meet. There are so many ways to give to her without her feeling she must repay you somehow. If she is stubborn about her love for you and she is still in your life count your blessings. Money is down the list compaired to the love your Grandmother shows you by her thoughtful gifts.

  9. Penny says:

    I posted on the wrong place. I think I’ll just stick to just reading and enjoying your following and ideas and insights. HAPPY NEW YEAR

  10. Cal Sturdevant says:

    I am looking forward to your review of Beating the Street, especially after your excellent reviews on Learn to Earn, and One Up on WallStreet. When should I expect to see your review on Beating the Stereet, or have you decided not to review it.

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