Book Review: Guide to Financial Independence – Simple Solutions for Busy People

I just finished reading an older book written by Charles Schwab called Guide to Financial Independence: Simple Solutions for Busy People. (aff)

While the book is a bit dated, originally published in 2000 and then revised in 2004. It does provide some basic tenets of personal finance and investing that many investors will still appreciate.

My favorite chapter in the book is Chapter 4 which discusses investment in individual stocks.  In this chapter Schwab makes a remark that many of know all too well about becoming an investor.  I know that since I began investing several years ago that I know see every store that I enter and every business that I visit in a slightly different light.

Instead of simply visiting a store to purchase an item that I need, I inherently find myself analyzing the store and wondering how it makes money!  What are the profit margins?  How many people are in the store?  How does its location affect business? What are the primary products? Are the staff knowledgeable and do the provide good service?

Schwab indicates that a consumer’s shopping experience is changed in this way as soon as they become investors – I totally agree!

Throughout the chapter Schwab outlines about 12 pieces of sound advice for investing in individual stocks. Here they are in no particular order:

  • Buy what you know
  • Only buy stock in companies that you want to hold for many years
  • Don’t invest more than 10% of your portfolio in one stock
  • Don’t over-invest in the company you work for
  • Do your research.  Don’t bypass research just to get in quick.
  • Investing on a “Hot Tip” isn’t investing, it’s gambling – pure and simple!
  • When you’re ready to invest $2000.00 in stocks, invest an equal dollar amount in 4 stocks that look promising. (I would personally invest in a low-cost ETF until I had at least $10,000 to invest in a basket of individual stocks.)
  • Don’t believe the hype about new issues (IPO’s). Do your due diligence.
  • You can measure the quality of a stock by its earnings per share. (This is only one of several metrics that should be considered).
  • The chief yardstick of a company’s value is the price/earnings or P/E ratio. (one must also consider the growth rate of the company and you may want to consider the PEG ratio in your analysis).
  • Penny stocks are the worst quality stocks you can buy.  you get what you pay for!
  • Impatience is your biggest enemy as an investor.

I agree with some of these points more than others, but you can see that Schwab is certainly schooled along the same lines as Warren Buffett and Peter Lynch.

We must remember that Schwab is the founder of a brokerage, so naturally he is going to want you to start investing (and paying brokerage fees) as soon as you have the money to do so.  However, I hardly think it is smart to split $2000.00 up into 4 different stock purchases costing $10.00 per purchase.  That is the equivalent of paying $40.00 in mutual fund fees for the same $2000.00 investment – or a 2% management expense ratio (MER).

The last tip about impatience is very applicable to Dividend Growth Investors. The investment strategy certainly works, but it involves a lot of waiting! Waiting for the compound growth of the dividends to work their magic takes resolve.

So what do you think? Are these 12 suggestions still relevant today?


  1. All of my accounts are at Charles Schwab. I get the best advice, this this post, without having to pay a fortune for a stock broker or financial planner.

  2. Tyler,

    Thanks for the great review. I personally enjoyed the comment about thinking of consumers when it comes to purchasing decisions when those consumers own stock in the business they are dealing with.

    I also agree with you that if you don’t have at least $10K, you should not deal with individual stocks!

  3. I agree with most of what you have written. I dont think you are correct about the 2% MER. If you follow what Schwab says and hold it for 10 years, then the fee does not seem that big does it. It will be .20 MER which is perfectly acceptable. If you include 40 dollars to sell, then it will be a .40 MER assuming the stock did not go up at all.

    Please note that I don’t suggest you invest with just 2000 dollars.

  4. Well-timed post, Tyler! Recently I decided I am ready to start researching companies… I have been doing just the kind of thinking you mention when I go out. Hopefully I can get some good, solid picks in while the market is in such a state.

  5. Pingback: Weekly Dividend Investing Roundup - October 4, 2008 » The Dividend Guy Blog
  6. Pingback: Weekly Links: Carnivals & Articles – October 10, 2008 | Dividends Value

Leave a Reply

Your email address will not be published. Required fields are marked *