Do you remember how much you paid for your first home? Pretty amazing how things have turned out, don’t you think? If you bought back in the 70s, you probably spent some multiple of your annual salary that wasn’t outrageous. Yes, you probably carried a mortgage with an interest rate many multiples higher than today’s, but did you ever think you’d be where you are today? Did you think interest rates would be this low? Probably not. You were too busy. You were your own survival guy.
You most likely didn’t buy a home to sell it to some sucker at a higher price. You bought it because you needed shelter for your young family. You were living your own American Dream, not speculating about flipping it. When I see speculators flipping their silly condos disguised as an “investment,” the entire foundation or premise is on shaky ground—it’s banking on the next sucker theory—which may or may not ever happen.
For you, I want generational wealth. I want you to be like John Dutton on the show Yellowstone (watch it) looking after your ranch for the next generation of your family. You don’t do that looking to make a quick buck. You do it by looking across your holdings and making decisions daily on how best to preserve them.
In speaking with a client this week at his not-too-fancy home in Wyoming (one of his three houses around the country), he said: “E.J., I can buy a $5+++ million home in Jackson Hole, or drive a Ferrari. But I just don’t want to.” When you’re building your own compound/ranch, then why in the world would you invest with every other Tom, Dick, and Harry in index funds, ETFs, or any other groupthink investment vehicle? Choose your own way with the investment counsel you trust. Seek counsel from a Prudent Man.
For years my father-in-law Dick Young referred to the Prudent Man in his monthly strategy report, Richard C. Young’s Intelligence Report. As Adam Smith wrote in “The Theory of Moral Sentiments” (1759):
The prudent man always studies seriously and earnestly to understand whatever he professes to understand, and not merely to persuade other people that he understands it; and though his talents may not always be very brilliant, they are always perfectly genuine. He neither endeavours to impose upon you by the cunning devices of an artful impostor, nor by the arrogant airs of an assuming pedant, nor by the confident assertions of a superficial and impudent pretender. He is not ostentatious even of the abilities which he really possesses. His conversation is simple and modest, and he is averse to all the quackish arts by which other people so frequently thrust themselves into public notice and reputation. For reputation in his profession he is naturally disposed to rely a good deal upon the solidity of his knowledge and abilities; and he does not always think of cultivating the favour of those little clubs and cabals, who, in the superior arts and sciences, so often erect themselves into the supreme judges of merit; and who make it their business to celebrate the talents and virtues of one another, and to decry whatever can come into competition with them. If he ever connects himself with any society of this kind, it is merely in self-defence, not with a view to impose upon the public, but to hinder the public from being imposed upon, to his disadvantage, by the clamours, the whispers, or the intrigues, either of that particular society, or of some others of the same kind.
You may be familiar with Ronald Read’s story. It’s a story worth telling over and over and over again to anyone you know. My father-in-law Dick Young wrote in May 2015 in Richard C. Young’s Intelligence Report:
Hard to even comprehend, but this great story, courtesy the WSJ‘s Anna Prior, recounts how Ronald Read accumulated an estate valued at almost $8 million. Mr. Read, who passed away at the age of 92, made a modest living pumping gas for many years at a Gulf gas station in Brattleboro, Vermont.
A Five-Inch Stack of Stock Certificates
How did Ronald Read manage to become a multi-millionaire? Mr. Read invested in dividend-paying blue-chip stocks. As Ms. Prior writes, Mr. Read took delivery of the actual stock certificates and “left behind a five-inch-thick stack of stock certificates in a safe-deposit box.” At his passing, Mr. Read owned over 90 stocks and had held his positions often for decades. The companies he owned paid longtime dividends. And when his dividend checks came in the mail, Ronald Read reinvested in additional shares. Apparently Mr. Read was the master of the theory of compound interest. Not surprising, his list of stock holdings included such dividend payers as Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), J.M. Smucker (NYSE: SJM), and CVS Health (NYSE: CVS), all names I write about for you regularly. No high flyers for Ronald Read, and certainly no technology names.
Protect, Preserve, Patience, Perspective
Obviously Ronald Read had been a staunch practitioner of my PPPP theme, featuring the basics—Protect, Preserve, Patience, Perspective. Focus on those traits for success.
Now in August of 2020, in The Wall Street Journal, Jason Zweig writes the following on the book, The Psychology of Money by Morgan Housel.
It isn’t often that I receive a new book I feel I have to read, but I couldn’t wait to dig into “The Psychology of Money.”
To be published next month, this 242-page, easy-to-read book by Morgan Housel isn’t about investing. It’s about how to think about investing, and it’s one of the best and most original finance books in years.
Mr. Housel, 36 years old, is a blogger and venture capitalist who writes beautifully and wisely about a central truth: Money isn’t primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.
Mr. Housel begins with a shocking anecdote he witnessed himself: A technology multimillionaire handed a hotel valet thousands of dollars in cash to go buy fistfuls of gold coins at a nearby jewelry store. The executive then flung the coins, worth about $1,000 apiece, into the Pacific Ocean one at a time, skipping them across the water like flat rocks, “just for fun.”
To that man, money was a plaything. (He later went broke, Mr. Housel writes.) To Ronald Read, however, money was possibility. Mr. Read spent decades pumping gas and working as a janitor in Brattleboro, Vt. After he died in 2014 at the age of 92, his estate was able to give more than $6 million to local charities—because he had scrimped and put every spare penny into stocks that he held for decades.
How, asks Mr. Housel, did a janitor “with no college degree, no training, no background, no formal experience and no connections massively outperform” many professional investors?
Investing isn’t an IQ test; it’s a test of character. Unlike the man who chucked coins into the sea, Mr. Read could defer gratification and had no need to spend big so other people wouldn’t think he was small. From such old-fashioned virtues great fortunes can be built.
Analyzing two of the biggest stock-market winners of the past few decades, Mr. Housel says Netflix Inc. returned more than 35,000% between 2002 and 2018. Monster Beverage Corp. gained more than 300,000% from 1995 through 2018.
Yet, along the way, many investors quit; each stock spent at least 94% of the time trading below its previous all-time highs.
Action Plan: The Prudent Man never gets old. We all need to be grounded in times like these. Let’s stick together: sign up here for the latest RAGE Gauge.
P.S. Read my September RAGE Gauge by clicking here.
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E.J. Smith - Your Survival Guy
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