A Stock Growth Miracle (Not Really)

Psst: Do you want to hear about a neat investing trick a family friend showed me? She started with $250. Through alchemical magic – well, a mixture of time, compound interest, and an important dash of negligence – she turned that $250 into an investment today worth $135,000. She still owns it, so results may vary in the future, but her gains are amazing.

I imagine you’d like to learn her trick. How ever did she do it? What financial wizardry did she employ? It was probably Bitcoin, right? Or some lesser known cryptocurrency? Or a hot commodity tip?

My friend requested I not identify her. I’m going to call her Ruth, although that’s not her real name. That’s her mom’s name.

The story starts in 1965. Ruth was newly married. As much as possible, I’ll let her tell it:

“I lived in the State of Washington, and my grandmother used to buy stocks, even though she was a middle-class person. She thought it was good to buy local, and Seattle was dominated by Boeing Co (BA).”

“At that time people thought you were supposed to buy 100 shares of everything. I didn’t have enough to buy that amount, so I bought less than that initially.

I invested around $250 at the time…It was probably 20 shares, no more than 40. I remember the broker criticized me for not buying 100 shares.”

compound_interestOk, that’s the beginning of Ruth story. Are you ready for the magical part? Then Ruth did nothing for 53 years. That’s it. That’s the whole magic.

Never sell.

In 2018, her initial $250 investment in “20 or 40” shares of her local company Boeing has turned into 400 shares through stock splits and the reinvestment of dividends. Her initial investment is worth, at the time of this writing, $134,800. Through Ruth’s benign neglect. The dividends alone on her shares pay around $2,700 per year, or more than 10 times her original investment.

At least three important lessons and clarifications of the lessons of Ruth’s story are necessary.

First, this is the story of a particular investment in Boeing that happened to be headquartered in Ruth home state, but you could substitute hundreds of successful companies from 1965 into that same story, with similar results. The point is not “I wish I’d bought Boeing in 1965,” but rather “I wish I’d bought a tiny amount of shares of any number of successful companies, and then done nothing further, for 53 years.”

Second, I was kidding earlier about magic, just to get your attention. This is actually the most normal thing in the world.  Turning $250 into $134,500 over 53 years is not magical at all, but rather a mathematical result of time and compound returns. To be precise, Ruth’s initial investment – through reinvestment of dividends, splits, and stock price gains, grew on average 12.6 percent per year for 53 years, from 1965 to 2018. And that’s a good return. It’s above average.

But it’s not ridiculous for a successful US multinational company from that period to today. The annualized return from the S&P500 since 1965, including reinvestment of dividends, was 9.87 percent. If it had been technically feasible to invest $250 in the S&P500 in 1965 (note: it wasn’t realistically possible then) and then let it compound for 53 years, the stake would be worth $36,689. That’s not as cool as Ruth’s $134,800, but it ain’t nothing either.

Third, Ruth is no genius investor. She’s pretty typical. The really funny thing is that while she told me her story, she continuously bemoaned her lack of investment savvy.

“I feel embarrassed talking about Boeing because I could tell you about a lot of mistakes, and even stocks that went to zero.” Which is charming, and no doubt true, but doesn’t negate her success. Remember: She turned $250 into $134,800. (Psst.If you are still in your twenties, so could you. Start with $250. Then do absolutely nothing for 50 years or so. That’s the hard part.)

Also, the part of the story I didn’t tell you yet is our whole conversation started because Ruth had initially described to me selling 500 shares of Boeing in the beginning of 2017. She’d bought those particular 500 shares at some point in the 2008 crisis. She saw a market price of $175 per share in February 2017 and thought to herself: “That can’t go any higher.” Nearly a year later the price has almost doubled. Ruth was kicking herself in the initial part of our conversation for that sale a year ago.

“I know I’m doing it wrong, when the price goes up and I’ve already sold, and I could have sold at a higher price. It’s not the first time it’s happened…It’s hard to know how to time a sale.”

She wanted to know when was the right time to sell. She felt like she blew it as an investor.

boeing_stockAlso, she’d been tempted to sell a lot earlier.

“Sometime a few decades ago my husband and I talked about selling our stake in Boeing, taking the money out and building a swimming pool. Our whole stake was worth $30,000 and we thought it couldn’t go any higher.”

“How do I know when to sell?” she asked me, probably four or five times in our conversation. “Never,” I answered each time, or some variation on “never.” But still Ruth wanted to figure out how to properly time the market. Which is impossible. Ruth feels like she gets a lot of things wrong with her investing.

It’s better to be lucky than good we always say on Wall Street, and of course Ruth got lucky buying a small amount of the world-class stock from her home town. But she was also good, in that she didn’t sell that stock for over 50 years.

Stock Disclosure: I own zero Boeing stock, and zero individual stocks for that matter, preferring to invest in equity index mutual funds. And so should you, for that matter.

 

Please see related posts:

 

Never Sell! as Churchill would say, if he were a stock investor

The magic of compound interest

Video: Compound Interest – A Deeper Dive

 

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Are Stocks Like A Casino? No. But YES!

poker_losses
I hate money

I hate money. Apparently the feeling is mutual.

I know this because I am writing this from a hotel room near the Golden Nugget in downtown Las Vegas, following a typical encounter between a poker table and me.

Here’s how this usually goes, and also how it went again today:

I sit down, feeling relaxed and ready to have a fine time with my close personal friend, money. A few minutes or hours later my money – that ungrateful Judas – goes home with someone else.

Gambling is evil

I should stop at this point to state the obvious. Gambling is terrible for you. It’s terrible for society.

When I am finally appointed Lord of all Catan and get to set the rules for everything everywhere, gambling will be outlawed in this country except in tiny pockets of sin like Las Vegas and Atlantic City. Like many, I see a big difference between what’s “fair for me” – I personally like to play poker – and what’s “fair for society” – most people should never gamble.

In the same spirit, I deliver the following Public Service Announcements: Kids, don’t do drugs! Also, definitely avoid intimate contact until marriage!

Anyway, like I said, gambling is terrible. (Also, its super fun!)

All joking aside, I have an important message today – a non-hypocritical Public Service Announcement – inspired by my visit to the Golden Nugget.

Market as Casino?

When I taught a course for adults recently called “Get Rich Slow” one of my students asked whether the stock market ‘just represented one big casino.’

stock_market_not_a_gamble
Appears like gambling, but if done right, it isn’t

A retired widow herself, she commented that young people see investing in stocks as a ‘a rigged game, only benefitting the wealthy.’ Is it true, she asked?

She is dead wrong.

Also, she is righter than she knows. I feel very strongly about this, both ways. I’ll explain.

Dead wrong

Investing in stocks is not gambling at a casino.

Investing in stocks for the long run, in fact, is the exact opposite.

Stocks (in particular diversified stocks) held over the long run (at least 5 years, but 20 years is better) will make you money.

Gambling at a casino, in the long run, guarantees the gambler will lose money. In the long run, the more you gamble, the more likely you are to see your money go home with someone else.

I’ve played blackjack, craps, and roulette. I’ve played poker and sat down in front of slot machines. I’m not proud of any of this.

Roulette Board

The casinos understand the odds, and they set all of these up as unwinnable games, over the long run. Casinos simply don’t offer games that lose money for them in the long run.

We can summarize this idea as “the house always wins.’

I’m not saying I haven’t walked away from a roulette table richer than I started, because I have. On any given day, of course an individual gambler can come out ahead. It happened in the Dominican Republic to me once, involved witchcraft, and it’s a long story I won’t recall here. But that just represents the improbable and occasional victory of witchcraft over math.

Just remember, the more you gamble at a casino, the more the mathematics work against you. There’s just no way around it.

Righter than she knows

The widow from my class is right in a difference sense, however, that investing in stocks is a rigged game. Here’s my strongest statement on the topic, addressed specifically to the young person wondering about the stock market:

In our capitalist system, the stock market is a ‘rigged game,’ in the sense that over the long run, stocks always win.

hot_stock_to_buy
Always ignore garbage like this

Let me clarify what I mean by stock market investing for the long run. By “stock market investing for the long run” I don’t mean that particular form of gambling shilled by the Financial Infotainment Industrial Complex that you can watch on MSNBC, CNBC or Fox News after the closing bell. I don’t mean what’s referred to by the nonsense headlines “Hot stocks to buy now!” or “Best Fund Managers 2015!” being sold by Hot Money Magazine or whatever glossy garbage rots on newsstands this week. I really, really, don’t mean the ‘investing tips’ of day-trading e-news updates filling up your browsers on a moment-by-moment basis.

I specifically mean purchasing a broadly diversified, low-cost (probably indexed) mutual fund, and never selling. I mean a holding period of at least 5 years, but preferably for 20 years or more. I mean purchasing diversified stocks with no end date, no sale date, in mind.

pocket_aces

Stock markets go up, stock markets go down. Businesses grow and businesses die. People buy and people sell. It doesn’t matter if you’re the long-term owner of stocks, because you will make your impressive percentage return on your money in the long run, no matter what.

Please understand: If you are a long-term investor in the stock market, you are not the gambler, you are the house, and the house always wins.

 

Please see my post on my visit to downtown Las Vegas and the “Downtown Project.”

Tourists, and the Antidote – Exploring Las Vegas’ Downtown Experience

The downtown monoculture problem – Las Vegas and San Antonio

The limited role of government in curing a downtown monoculture

and an upcoming post, The role of the visionary billionaire in curing a downtown monoculture

Please see other related posts:

Book Review: Simple Wealth, Inevitable Wealth, by Nick Murray

Book Review: All The Math You Need To Get Rich, by Robert L Hershey

Sin Investing

Interview With Mint.com – I Give ALL The Answers

A version of this post on casinos and stocks appeared in the San Antonio Express-News

 

 

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Midlife Muppet Crisis

With the impending release of Greg Smith’s tell-all book about his time at Goldman Sachs, it’s finally time for me to vent a little about his ridiculous New York Times Op-Ed last Spring.

Immediately following the online release of the New York Times Op-Ed that would launch a thousand Muppet jokes , I printed it out and handed it to my editor in chief[1] because I knew she would be interested.  I knew everyone would be interested.  Smith nailed the 2008-2012 financial Zeitgeist [Goldman is greedy!] and he made a credible witness as an insider.[2]

Now, there’s three things that must be said about Smith’s bombshell of an Op-Ed, two of them complimentary and the third one, not so much.

First, Smith’s letter, compared to Lloyd and Gary’s dead-speak corporate response, was an unfair fight the likes of which we haven’t seen since Mike Tyson took down some of his patsy opponents in the late 80s.  Smith can write some interesting sentences, while Lloyd and Gary, just as clearly, cannot.  Their passive voice construction, reference to a workplace poll about employee satisfaction, and clear put-down of his status at the firm[3] simply did not respond to Smith’s main accusation.

Second, and most importantly, Smith’s main accusation is absolutely true.  Yes, Goldman collectively only cares about the money.[4]  Yes, you get promoted at Goldman for profitable behavior.  Yes, higher complexity products have a greater chance of being profitable than lower complexity products, so you will be rewarded for trafficking in higher complexity products.  Yes, Goldman employees tend to favor their employer’s needs over the needs of their clients in the long run, and sometimes, in some cases, even in the short run.  All true, although I’m not sure why any of this is news.

Third, and most problematic, however, is Smith’s assertion that “Goldman has changed” during his ten year career from 2002 to 2012.  That, my friend, is complete malarky. [5]  Goldman didn’t change.  Goldman was like that when I started there in 1997.  Goldman was like that in 1985.[6]  Goldman was, no doubt, like that in 1931.  Goldman didn’t change.  Greg Smith changed.  He became a middle-aged guy who no longer wanted to compete and win at everything, at all costs.  He grew up.

And yet, he does still need to compete, and that’s the worst part.  There’s a kind of pathetic part of Greg Smith that does want to compete and win at everything, so he must tell New York Times readers about his scholarship to Stanford, the bronze medal in the Maccabiah Games in table tennis, and about being a finalist for the Rhodes scholarship.[7]  He must enumerate the size of his hedge fund clients and their assets under management.  After ten years he has evolved enough to know there is more to life than ripping clients’ faces off, yet he can’t quite break the habit of telling you how much size matters to him.

I wish you well, Greg Smith[8].  But I sense this is going to take some time for you.



[1] Mom

[2] albeit on his way to becoming an untouchable outsider in record time.

[3] Their roundabout way of highlighting what a no-status worker Smith was: while commenting that 89% of clients found service from the firm positive, and “for the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high.” Very clever, Lloyd and Gary.  We get it, Smith is a Vice President nobody in your eyes.

[4] If this is too blunt, we can treat you like a child and tell you the opposite: Yes, Virginia, there really is a Santa Claus, and yes, your friendly bankers at Goldman really want what’s best for YOU.

[5] As Joe Biden would say, to his good friend Paul Ryan.

[6] See e.g. Michael Lewis’ Liar’s Poker

[7] On the one hand he’s bragging.  On the other hand, the evil voice in me has to say: The what games? Never heard of them.  In table tennis, you say…Is this a joke?  Are you trying to undercut yourself?  And you’re bragging about being a Rhodes finalist?  And this is what you’re most proud of ten years later?…let’s just move on.

[8] But forgive me if I don’t rush out to read the book you’ve produced with a reported $1.5MM advance, chock full of descriptions about the size of your client base.

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