InvestorsFriend Inc. Newsletter
April 6, 2012
Getting rich through investing
is simple but, unfortunately, neither quick nor easy.
The mathematical steps to get
rich through investing are quite simple and are as follows:
1. Gather and set aside
money to be committed to investing for the long term. Repeat this each
month or year.
2. As it is accumulated,
periodically allocate the money into investments that are expected to
earn the highest possible long-term return without taking unacceptable
risks. Monitor and reallocate periodically.
Amazingly enough, that is it.
Yes it will take a long time to become rich this way. But the time will pass by
whether you follow these steps or not.
When it comes to Step 1,
setting aside part of your income and dedicating it to be invested for the
long term, the percentage of income that could conceivably be saved and the resulting
dollars being saved will vary all over the map depending on circumstances
A teenager who is really
committed to getting rich might be able to invest at least half of every
dollar they take home. Similarly a high-income professional who is single
and willing to live frugally might be able to save a large percentage of
take home pay. (Remember, I said this is not easy).
But what about the average
working guy? Well, really almost no one is truly average. The take home pay
of families varies enormously as does their living costs. There is really
nothing average about the amount that people can save.
What is realistically
I did a comprehensive
analysis of what would happen to someone who invested $500 per month or $6,000 per year for 30 years. The amount invested was increased for inflation
each year. I looked at investing this money at the start of each year into
either 100% stocks or a traditional balanced mixture of stocks and bonds. I looked
at actual annual returns - after inflation for each possible 30 calendar
year period all the way from 1926-1955 to 1981-2010.
This means that in real
dollars, adjusted for inflation, a total of $180,000 was invested over 30
years. (Realistically, someone starting this in 1926 would likely have
invested closer to $600 per year than $6,000 but in terms of the resulting
percentage increase in dollars over time the result is the same.)
Here are the results, in real
dollars adjusted for inflation, if all
the money was invested in stocks:
Lowest ending portfolio
value: $277,471 (1952-1981), 46 times annual savings of $6,000 for 30
Average ending portfolio value: $758,942, 126 times annual savings.
Highest ending portfolio value: $1,374,265 (1970 - 1999) 229 times annual
If the money was instead
invested in a traditional balanced fashion of 60% stocks, 35% bonds and 5%
cash then the inflation-adjusted results were as follows:
Lowest ending portfolio
value: $202,559 (1952-1981), 34 times annual savings of $6,000 for 30
Average ending portfolio value: $494,252, 82 times annual savings.
Highest ending portfolio value: $860,218 (1970 - 1999) 143 times annual
The above ending portfolio
values are fully adjusted downwards for inflation.
27, 2007 edition of this newsletter also covered some mathematical
examples of how much initial money, return and time was required to amass $3
million. (Why think small?)
Warren Buffett, world champion
saver and investor
By the age of 12, Warren
Buffett had read every book on investing in the Omaha Library. At age 12 he
bought his first ever shares of stock, 3 shares that cost him a total of
$114.75, essentially his life savings at that point. He studied compound interest tables. He announced to a friend
that he would be a millionaire by
By age 12, in 1942, Warren
Buffett not only hoped to get rich, but he had a plan of how to do it. He
would find every possible way to make some money, he would save that
money and invest it in stocks where it would compound and grow. Because he
had this clear plan, I believe he not only hoped to get rich,
he knew he was going to get rich.
He earned and saved around $5,000 from delivering a massive amount of newspapers mostly when he lived,
with his family, in
Washington D.C. for about four years as a teenager. When he finished college he had a net worth of
$9,800 amassed from savings and investment.
Upon graduation from college
Warren worked for a time in Omaha at his father's small brokerage
office and then worked for a short period of time with Benjamin Graham in
New York. He returned to Omaha in 1956, at age 25 with a net worth of
$174,000. He was married and had at least one child by then. But he had no
plans to look for a job. They could live on $12,000 a year and his net worth
would still grow through investing. He then started a partnership, initially
with friends and family only, to invest additional money. The rest, as they
say, is history.
He ended up earning
substantial performance fees from his partnership funds from 1956 through
1969. He lived frugally.
After 1969 his wealth grew
almost entirely due to growth in his own investments. He has never taken
more that $100,000 per year in salary from Berkshire Hathaway. He owned
roughly one third of Berkshire, and that, after a time, represented over 99% of his net worth.
But even the remaining less than 1% of his wealth was invested and
eventually amounted to some hundreds of millions. I believe he would have
earned some money from sitting on corporate Boards over the years as well.
But the vast vast majority of his wealth came from investing and compounding
the wealth that he had amassed by 1969. In March 2012,
Forbes magazine pegged him the third richest person in the world at $44 billion.
And this is after he gave away approximately $2 billion per year in each of
the last 6 years.
Warren Buffett became one of
the world's richest people by following a simple plan that was well formed
in his head by the time he was 12 years old. It consisted of earning and
saving up an initial seed capital and investing his capital at the highest
returns he could find while not taking undue risks.
Where to Invest?
While Warren Buffett is best
known for investing in stocks he is perfectly willing to invest in
bonds but only when they represent the better investment.
In most circumstances stocks
are the better investment.
I recently updated two
articles that compare the long-term results of investing in stocks versus bonds.
versus Bonds, Cash and Gold: since 1926 and for selected 20-year periods
versus Bonds and Cash over all possible 30 calendar year periods since 1926
And for good measure here is
a detailed article on investing in stocks versus bonds versus a balanced
portfolio for every possible calendar 30-year period from 1926-1955 all the
way to 1981-2010.
This shows not only that
stocks won in the end but, importantly, it shows the ugly volatility along
stocks versus Balanced Approach over all possible 30 calendar year periods
since 1926 and including the Volatility along the way.
Is it too late to Invest?
No, it is not too late to
The P/E ratio on the Toronto
stock exchange is 15.8, which is close to historic levels. A P/E of
15.8 is an earnings yield of 6.3%, which compares very well to 10-year
government of Canada bonds which yield about 2%.
The P/E ratio of the S&P
500 stock index in New York is 15.3, for an earnings yield of 6.5%, which
compares well to 10-year U.S. government bonds that yield 2.1%.
What are some Good Stocks to
We have some ideas available
for those who subscribe to our stock research.
The cost is just
CAN $13 per month or $120 per year. I don't think even Warren Buffett would
consider that to be an extravagant price. As of April 6, our Strong Buys are
up by an average of 10.4% each in 2012.
Shawn Allen, President
To see older editions of this newsletter, or to
get off of this email list , click here.