The Millionaire Next Door: A Book Review. By Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D. Published by Longstreet Press, Inc. 1966. 258 pages, with 3 appendices, including one of all 1966 model cars listed in order of cost per pound. This book is the most comprehensive attempt to study a much envied but little understood culture: the US millionaire. Stanley was a professor of marketing at Georgia State University, and Danko is associate professor of marketing at State University of New York, Albany. The authors surveyed 11,000 millionaires to gather the data for this study. To qualify for the study, only those with over 1 million dollars in total wealth (assets minus liabilities) were included. The average (mean) household net worth of those studied was $3.5 million, about 6% had over $10 million. Over a thousand answered a 249 question survey, and over 500 were interviewed. The results, presented in this book, were a surprise to the authors, and may be to you as well. NOTE: the November '97 issue of READER'S DIGEST has a condensed version of this book. It summarizes the practical steps to take to become a millionaire. Mason Clark has dismissed this study as being of only "middle class millionaires" and claims that today, with inflation, it takes 20 million dollars to be a "millionaire". At any rate, it does provide some insight about just who the US millionaires are, and how they got their money. About 3.5% of the 100 million US households qualify as millionaire (by the Stanley-Danko Standard). SURPRISES The first surprise (for some readers) is that about 80% of the subjects were born to families that were "not rich". They earned their wealth, typically by founding and operating their own business. While less than 20% of US workers are self employed, about two thirds of the millionaires are. 80% of them are college graduates and 83% went to public schools. But 55% send their own kids to private school. The average age of the millionaires in this study was 54.4, but no figures are given about the age distribution. Two thirds of them work between 45 and 55 hours per week. The average work week in the US was 34.5 hours for September, 1997. I will note that a 1892 study of 4,047 American millionaires is cited in the book: it had a similar result in that 84% of them "were nouveau riche, having reached the top without the benefit of inherited wealth." And these were REAL "millionaires", none of this "middle class" stuff. The next surprise is that most of the millionaires live a rather frugal live style. They are rich less because they earn a high income, than because they save and invest a high fraction of what they earn. The median family income is $131,000. About half of the wives work outside the home; the number one occupation of the wives who do work is teacher. They tend to drive a several year old US made car, and spend little more than the national average on clothes. They use VISA and Master Charge, but pay the balance before interest is charged. They live in middle income rather than wealthy neighborhoods. When the authors were preparing for their interview with the first group of subjects (men with over $10 million of net wealth) they wanted their rich subjects to be comfortable in the interview environment. So they rented a penthouse with a great view and provided expensive French wine. When the first subject arrived, they asked if he wanted a glass of 1970 Bordeaux. He asked if they had any Budweiser. This proved to be typical of how the authors had not understood their subjects before they did the study. WHO ARE THEY, WHERE ARE YOU? What is the ethnic background that produces the highest rate of US millionaires? Many think English, since they have been here the longest of the non-Native American population. But actually, English rank 4th, behind Russian, Scottish and Hungarian. (I wonder how many of the Russians and Hungarians are Jewish, but that is not given). The book provides a "self test "guide to what your total wealth should be: Your age times your pretax annual household income, divided by 10. As a minimum; to be well positioned, it should be about twice that. TAXES AND PEROT, THE POSTER BOY PAW The book describes two kinds of high income families: PAW (Prodigious Accumulators of Wealth) and UAW (Under Accumulators of Wealth). One important feature of a PAW is the ability to minimize taxes and taxable income. Ross Perot is given as the Poster Boy PAW. Last year (1995?) he had $230 million in pretax realized income, but paid only 8.5% of that in income taxes. They contrast this with the example of a doctor with $200,000 income who paid 31.6% of it in income taxes. A real UAW. If you want to be a PAW and keep your taxable income low, there are many ways to do this: see my review of PEDDLING PROSPERITY for some of the obvious ones. INCOME MOBILITY If you read my review of Paul Krugman's PEDDLING PROSPERITY, notice that my main disagreement with Krugman is over the income mobility of the US population. He thinks there is little chance for poor or middle income people to gain in income: that the US is a relatively static society. I think this is a relatively fluid society where it common for people to move up the income/wealth ladder. I cite the Hubbard Study (INCOME MOBILITY file) and he disputes it, and counters with numbers that I see as being consistent with high mobility. Well, I see this book as supporting my view. The authors comment that "In fact, America has always been a land of opportunity for those who believe in the fluid nature of our nation's social system and economy". Take that, Doctor Hotshot Economist! ,,,,,,, _______________ooo___( O O )___ooo_______________ (_) jim blair (jeblair@facstaff.wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. COMMENTS: Mason Clark: A study in which only 9% responded and 4.5% were interviewed is highly suspect. What was the implicit selection process? As a starter, I'll suggest that the 500 interviewed were rightly proud of their million. What about the other 10,500? There are those who would summarily reject such a biased report as meaningless -- but a good way to make money with a book. Mason C. WHO ARE THE RICH? jim blair: Both C Post and Mason Clark point out that the sampling may not be representative. True. But with 3.5 million of them, how can there be any way to get a representative sample? >C Post wrote: >Classically, personal wealth studies were done on the basis of value of >assets transferred at death. Hi, Two problems here. This study was of the habits and behavior of millionaires. How did they get that way? How do they select a car? They asked all kinds of questions that dead people can't answer. >Well, there you have it: the kind of questions they were asking will >not be answered by those either unable _or_unwilling_ to respond. And, as they point out, many of the rich not only avoid paying taxes while they are alive, they also avoid having much taxable wealth when they die. I will note that a 1892 study of 4,047 American millionaires is cited in the book: it had a similar result in that 84% of them "were nouveau riche, having reached the top without the benefit of inherited wealth." And these were REAL "millionaires", none of this "middle class" stuff. >It was a different country then. For one thing, there was no income >tax. For another, the wealth of many of the wealthiest Americans of >1860 had vanished in the Civil War, and was subsequently snapped up by >the carpetbaggers. Well many of the rich in 1892 were immigrants, if that is what you mean. Andrew Carnegie for example. As the book says, at the time of the American Revolution, most of the wealth was land owned by Americans of English descent. Now most wealth is not land, and English rank 4th. WHAT IS WEALTH? It is common to hear that the top 1% own 39% >Close enough. (or 22%) >This is an older number. Actually, it is a current number: one arrived at by counting more "things" as wealth, in this case including Social Security assets. See below. These are all "true" depending on how "wealth" is defined. Usually houses, cars, appliances, clothes (and just about everything that many people own) is EXCLUDED: only stocks and assets that only a few own are counted as "wealth". >Cars, appliances and clothes account for a microscopic fraction of all >assets, the latter two being barely liquidatable at all. Most wealth >studies I have seen _do_ include houses, although some do not include >cars. As I see it, stocks and bonds and such assets are just pieces of paper and/or numbers in a computer. They may be "assets" but they only become real when they are converted INTO appliances, clothes, cars, travel, etc. The claim to future Social Security is also omitted. >It cannot be liquidated, and is therefore not an asset. I am planning to retire in about a year. I checked with SS, and they say that I can expect from $12,000 to $13,000 per year (depending on when I retire). Now for me, this is almost exactly the same as having $240,000 in the bank and drawing the interest from it at 5% (I would actually get about 7%, but I would TAKE only 5% so the principle would grow at the rate of inflation, and I could draw on it "forever". Of course, if I had invested all those social security "contributions" in mutual funds, they would be worth a lot more than $240,000 now. And THAT would be an asset! The $240,000 cash would have more flexability in that I could take from it in an emergency, but I have IRA money for that. In one way the SS account is BETTER than the $240,000; what I draw from it will go up with the CPI if there is higher inflation that the current 2%. And it is backed by the US government ;-) >IRA money _is_ an asset. This is a good example of where I think the definition is "wrong". The SS claim is of the same practical value to me as a $240,000 IRA, and if I had put the SS "contributions" into an IRA it would be worth even more and it WOULD be an asset. But because of the definition, one IS, and the other is NOT, an "asset". They earned their wealth, typically by founding and operating their own business. DOES A HOUSE MAKE YOU RICH??? >No, they typically just pocketed the land value increments government >threw at them. >Here is a better test of wealth, and it is an easy one: did you buy a >house before 1970? While buying a house was (and is) a good idea. But not everyone who bought one before 1970 is a millionaire, or even rich. And one difference between PAW's and UAW's is that typically a UAW invests in a big expensive house, while the PAW's live in modest houses in middle class neighborhoods. A house is both an investment and an expense. In Wisconsin, property taxes are quite high for example. The book advises against having too big of a house. >But about 99% of the rich bought houses before 1970... I doubt that. MANY of the current rich were not even born in 1970, or were younger than ten. Look at the roster of every NBA, NFL, NHL and major league baseball team. And all the computer geeks. Lots of multimillionaires, and few if any that are over 40. >A few thousand individuals (most of whom have not had the time or the >expertise to accumulate over $1 million in net assets in the face of >income tax). Out of millions of "millionaires." You'll have to do >better than that. I wonder about that. There are now specialists in the management of pro athletes assets. They contact kids in college and even high school who have "big league" potential. They know how to invest and avoid taxes. When Paul Molitor was traded from the Brewers to the Blue Jays a few years ago, there was an interesting item in the paper about how the Blue Jays were negiotating with not Paul himself, but with the Paul Molitor Foundation. It manages his career, pays all of his expenses, and even pays him (Paul Molitor) a modest salary. But of course his SALARY is taxable ;-) HOW OLD ARE THE RICH?? The average age of the millionaires in this study was 54.4, but no figures are given abiut the age distribution. Since the average age of those surveyed is "only" 54.4, this brought the following from C Post: >The self-selection bias indicated by that number alone is enough to >discredit the whole study. _Every_ reputable study of wealth has shown >it varies strongly with age. A claim that the average US millionaire is >under 60 is simply laughable. MY REPLY: I agree that wealth correlates with age. But this book claims that not much is known about the "rich", which is why the did the study. Give me the reference for another study that claims that millionairs are older. TIME'S 52 "TOP 50". Just last night I came across the September 15, 1997 issue of TIME. Devoted mostly to Princess Diane, it had an insert that bears on this topic. TIME lists what they call the Cyber Elite: 50 people who have made a big impact (and made a lot of money) using computers. There is a short biography of each, and it includes their age. Billed as the Digital Worlds Top 50 Shakers, it actually lists 53 names (three from Microsoft, and two from Broadcom Corp count as only "two" in the TIME system). Since one (woman :-) does not list an age, there are 52 ages. Since the group is not "self selected", it may be more representative than the Stanley and Danko sample in the book. Of course it IS small, but there are ways to deal with the uncertainty in a small but random sample. At any rate, the TIME group cannot be dismissed as mere "middle class millionaires"; the wealth values are typically from tens of million of dollars to billions. It does include some names I did not associate primarily with computers, namely Steven Spielberg and George Lucas that I think of as "movies" and Rupert Murdoch, that I associate with newspapers. But I guess they also use computers to make their money. At any rate, they range from 23 to 72 Years old. The distribution of ages is : 2* (under 30) = 3 3* (30 to 40) = 7 4* (40 to 50) =18 5* (50 to 60) =16 6* (60 to 70) = 6 70+ = 2 The group's mean age is 48.5 years. ASIDE: I was a good student and won a National Science Foundation fellowship to go to graduate school where ever I wanted. I got a good job with DuPont, but quit after 2 years to teach at a small college. I get by. My younger brother was kicked out of one college, and just barely graduated from another. He was hired by a big company, but after about a year he quit to stay home and write a computer program, then started a 2 man company to sell it. He made his FIRST million before he was 30; many years and many millions of dollars ago. Check out his company web page at: http://www.cyborg.com/ HOW DO THEY GET RICH? The authors comment that "In fact, America has always been a land of opportunity for those who believe in the fluid nature of our nation's social system and economy". Well, I see this book as supporting my view (that the US has a mobile society). >Laughable.... but I was referring to the quality of the "support" >the book gives your view. The book does not PROVE my view, but it is evidence for it. >You mean, "for those who have found themselves in a position where they >are able to benefit from government activities without paying for them." They don't FIND THEMSELVES in this position: they PUT THEMSELVES in this position. >A few consciously took advantage of opportunities to pocket specific >unearned benefits, but the majority were just asset owners who naturally >and automatically pocketed the benefits government shovels at asset >owners. People who were born to poor or middle income families who just accidently became millionaires? Without even trying? Except by working much longer hours than average? So I would say it differently: most of the PAW's are not pocketing unearned government benefits; most of them are just keeping more of the money that THEY earned. Bud Selig excepted (See my web page BREWER file). Also, see the Politics section of my web page, under "Class" the Millionaires file for a "not-self selected group" of VERY RICH PEOPLE who have an average age of 48.6 years. -- A final PS: How many millionaires are there in the USA? There were 1.5 million in 1988 http://oregonstate.edu/Dept/pol_sci/fac/sahr/nummil.htm and 8.9 million in 2005 http://money.cnn.com/2005/09/28/news/economy/millionaire_survey/?cnn=yes Note that in 2005 their average age was 56, average household income was $119,000 ($82,000 of that from wages or professional fees) and their wealth from real estate investments has been declining. Random Chance? Nassim Taleb’s book Fooled by Randomness (Texere 2001) has chapter 8 titled "Too Many Millionaires Next Door". He describes The Millionaire Next Door as "extremely misleading but almost enjoyable". His take on the book is three fold. He sees the main point of the book as being that the rich today got that way more by living a low expenditure lifestyle and saving, than by either having rich parents or having high incomes. But he asks what is the point of BEING rich if you don’t LIVE rich? A sort of reversal of the moral of the fable of the ant and the grasshopper. But many of the millionaires in the book saved when young so they could enjoy a richer life when they were older. Taleb’s second comment is that it was easy to become rich by saving and investing during the time period studied. From Reagan through Clinton stocks were in an extended Bull Market and income and capitol gains taxes were low, so many people of modest income and frugal habits became millionaires. But that does not mean that they could have done that at either earlier times (1920’s to 60’s) or since. He has a point here. Taleb’s other comment is that the book studied only those who did get rich, not the people who saved and invested in companies or stocks that collapsed. What he calls "Survivor Bias". He cites relatives and friends who saved Lebanese lira or Russian Imperial bonds signed by Czar Nicholas II and who did not become rich. So he says frugality does not assure wealth. True. He does not mention another common element to the millionaires studied: that they disproportionately started their own small businesses rather than work for others. Can people still become rich by doing that today? And "Survivor Bias" applies even more to start up business. Stanley and Danko did not include the many who started a business but saw it go broke. The book is how the rich got that way, and is not an infallible guide to becoming a millionaire. To claim that it is would be misleading. Taleb sees events in life as being more the result of random variation than the result of planning, foresight or behavior. He compares stock trading with Russian Roulette. A trader can become rich and gain the reputation of being a financial wizard by having the hammer fall on an empty chamber many times. But if they do it one time too many they lose all they gained. His book reminded me of the opposite world view that I saw expressed when I first came to Madison and joined the UW Hoofer Sailing Club. The manual on rigging the M-20 racing scow opened with a quote by Thomas Carlisle to the effect that "The weak believe in Chance and Circumstance. The strong believe in Cause and Effect". Checking the rigging carefully before a race does not insure that you will not have the "bad luck" of an equipment failure. But it does improve your odds of avoiding one. But yes, the subjects studied by Stanley and Danko were blessed by Chance and Circumstance in that they lived in the US during the Reagan Economy, when circumstance favored "the rich" (or as I see it, favored getting rich ;-) and it was possible for people born to families of ordinary means to become millionaires. But they also did things and lived a lifestyle that Caused the Effect of their prosperity. ,,,,,,, _______________ooo___(_O O_)___ooo_______________ (_) jim blair (jeblair@wisc.edu) Madison Wisconsin USA. This message was brought to you using biodegradable binary bits, and 100% recycled bandwidth. For a good time call: http://www.geocities.com/capitolhill/4834