The American Dream: Millionaires on Minimum Wage
Well, it finally happened! Now, every kid in the U S of A is virtually guaranteed the ability to retire a millionaire!
A kid who starts earning the minimum wage ($7.25) on her fifteenth birthday, does so for 40 hours a week ($290), and puts aside only the normal deduction for Social Security and Medicare (7.65%, or $22.19) each week, for the next 45 years, can be a millionaire at age 60.
Leaving it to compound, it would take an average return of less than 10%—that of the S&P 500—for that investment to produce a million bucks by the time that child reaches age 60!
Because investing our way consistently beats the S&P 500, this means, without ever saving any more than what’s taken from every working person’s paycheck for Social Security and Medicare, a kid who invests as we propose can realize the American Dream and then some, with no risk, and without ever doing anything but flip hamburgers!
And, of course, Congress will handle (read "contribute to") inflation by increasing the minimum wage to compensate for it. What a fantastic country we live in!
Current Events, Food for Thought, Investment Concepts, Successful Investing
“Because investing our way consistently beats the S&P 500, this means, without ever saving any more than what’s taken from every working person’s paycheck for Social Security and Medicare, a kid who invests as we propose can realize the American Dream and then some, with no risk, and without ever doing anything but flip hamburgers!”
Ellis,
Do you have evidence that stock picking, on average, will produce results that exceed the performance of the S&P 500? In any given year, we know that the majority of professional money managers of mutual funds are not able to out-perform the S&P 500. And those who do in one year tend not to continue to repeat year after year.
Data available on Bivo shows that investments clubs have trailed the total market by approximately 6% annually over the last ten years. It is a pitiful example of stock picking.
I realize it is extremely difficult to gain access to broker accounts of individuals, thereby making it almost impossible to know whether or not individuals are superior investors to professional money managers. I would not bet on it. Further, I strongly suspect most individual investors do not have a clue as to how well their portfolios are performing with respect to a benchmark such as the VFINX or VTSMX or some other appropriate benchmark. If one does not know how well their portfolio is performing with respect to a benchmark, it is difficult to make any performance claims.
I am trying to build a case for beating the benchmark with an asset allocation approach to investing, but my date is limited both by the number of portfolios (19 at present) and the time for which I have accurate information.
Lowell Herr
Lowell,
“Investing our way” involves more than relying upon the market value of one’s portfolio to grow steadily and double every five years, because it won’t! So long as the herd is driving the market price, there’s no way to rely on making steady money by playing the stock market——trying to buy low and sell high in the short term.
You make the valid point that most professionals cannot beat the S&P 500. But they are constrained by many factors from doing what we can do and should be doing. And, by doing it, we can beat the pros and the indices.
“Investing our way” means acquiring ownership of viable companies that will continue to produce their goods and services and earn money for their owners regardless of what the stock market does.
It’s understanding that the value of what you own reflects the companies’ earnings retention and equity appreciation (which continues unabated in the companies we learn to select). It’s realizing that, should the market be depressed when you would like to sell, you might have to wait a little longer for the herd to sell their shares to the enlightened investors who will inevitably begin to restore the shares to their rational value and interest the herd in buying again.
It’s recognizing that the true, rational value of the shares in your portfolio is all that matters, when it comes to placing a value on that asset, because that appreciation is an earned value and not merely a perceived value.
We will consistently beat the indices because we will buy only the best companies. And we can invest this way with virtually no risk, because we are not required to sell when the market is depressed. Nor do we measure the risk by what we might have to accept for its shares should we be forced by our own circumstance to sell at an inopportune time.
Losses occur only when they are captured. (Or if we’re not diligent in watching for that 20% that’s going to reach up to bite us in the fanny)!
My own investment experience has shown this to work for me. And anyone can replicate it by simply shifting their focus from the conventional view of “investing” (gambling) to one of enlightened business ownership.
I’m satisfied with the common sense of this approach and will leave to you the challenging task of finding some way to produce the empirical evidence it will take to satisfy the scientist in you. But you’re right. You simply can’t find a standardized universe of data to prove the point.
I’m not satisfied that any of the club performance accurately reflects the efficacy of this method because a) not all clubs are as diligent as they should be; b) stock selection and decision-making is a subjective thing in many cases (unless they all use Take $tock as you did); and c) using the meanderings of market value to assess history instead of calculating the rational value begs the issue entirely, so far as I’m concerned.
ET
It’s even better since the employer matches the 7.65%! That would make them multi millionaires! Oops! 1.45% from both the employer and employee are lost to medicare so if will be a bit shy of 2 million.
Unfortunately, at the bottom of the Social Security benefit estimate I receive each year this statement appears: Your estimated benefits are based upon current law. Congress has made changes to the law in the past and can do so at any time. The law governing benefit amounts may change because, by 2042, the payroll taxes collected will be enough to pay only about 73% of scheduled benefits. :-(
My biggest gripe with BetterInvesting is that they have no product to sell. Not even one to give away.
They need a national cirriculum with individuals certified in it’s content.
I find most BI members don’t understand the simple theory behind the methodology.
I’m sure most clubs don’t come close to practicing BI investment philosophy.
There used to be an organization called something like the Canadian Shareholder Organization led by John Bard or Bart that held investment principles very similar to BetterInvesting’s.
This company evolved into a mentoring company that instead of just selling books and computer programs, began to engage the investor.
For a $1,000 fee you received the software, online data, series of educational seminars (live or recorded) and a year of personal coaching on your portfolio. The only problem was they used largely Canadian stocks.
$1,000 sounds like a lot, but it included pretty much everything you’d need. If you look at BI and consider a national event, the cost is similar and you would not get the personal coaching.
Let’s look at the BI philosophy.
Half the stocks in the S&P 500 are above the average and half are below. Common sense says if you just pick stocks from the top 50%, you should beat the average.
H. Bradlee Perry in his 1999 book, Winning the Investment Marathon, may have hit on the problem with this common sense idea. If I understood him corectly, the problem is the top 50% is constantly changing. Companies are constantly going from the top 50% to the bottom 50% and that’s why it’s really hard to beat the averages.
When I factor in P/E expansion and contraction in addition to the fundamentals of sales and earning per share, I can understand why it’s hard to beat the averages.
Ellis, I liked your video on YouTube. I think you should start an investment service like the fellow did in Canada. I’d join!
“We will consistently beat the indices because we will buy only the best companies. And we can invest this way with virtually no risk, because we are not required to sell when the market is depressed. Nor do we measure the risk by what we might have to accept for its shares should we be forced by our own circumstance to sell at an inopportune time.
I’m satisfied with the common sense of this approach and will leave to you the challenging task of finding some way to produce the empirical evidence it will take to satisfy the scientist in you. But you’re right. You simply can’t find a standardized universe of data to prove the point.”
Ellis et. al.,
As you know, I am less than satisfied with statements such as “we will beat the index” or “we will pick only the best stocks from the S&P 500″ and by this approach, we will out-perform the index. I need to see evidence that stock picking investors can do this on a consistent basis.
Jim Thomas provided us with a tool to actually measure whether or not we are adding alpha to our portfolios. Bakul and I have added features to Jim’s original spreadsheet to where one can not only compare the Internal Rate of Return (IRR) of the portfolio, but also compare that return with a reasonable benchmark. Within the last few months, I came up with a method where one can actually measure the performance of the portfolio with a benchmark that is customized to each portfolio. We now have a tool to test the statement – “we will beat the index.”
I suppose my motto is – “Mistrust and Verify.” (g) My Saturday blog posts generally contain a data table that shows the performance results of 19 portfolios. These are real, not fictitious, portfolios I watch over for friends, relatives, and endowments. I would like to see similar results from portfolios that are built around stock picking.
Lowell Herr
http://www.lherr.org
Lowell,
Until you factor in the Rational Value of those portfolios, you will not have properly measured their performance. In fact, you will not have accurately valued the portfolio.
All you are doing is measuring the value the herd happens to place on those stocks at any given moment. This plays right into the trader mentality and ignores the fact that a portfolio of stocks has a real value that’s based upon their equity plus the potential for growth of that equity—its profitability. That value is not all that volatile and a beta based upon rational value should be enlightening.
I challenge you to use Rational Value for your study right now and see how you come out. I’ll make a believer of you yet! ;o)
@Anonymous
My point here is that the kid, instead of relying on the Social Security System to provide that return, can invest the same amount of money the government grabs, and become a millionaire!
Congress refused to allow even a small part of the social security funds to be invested in private industry and is depriving contributors of the opportunity to make the extra money. And this is because there is universal misunderstanding of what “investing” really is, and how little risk is involved, on the part of our representatives.
That’s just one an example of what motivates me to make this effort.
@Gary Simms
Gary,
I know John Bart and his Canadian Shareholders’ Association. For a while, he was even selling the Investors Toolkit to his “flock.” He’s a grand fellow and an astute academician. And we have always enjoyed a great relationship which was spiced by good-natured give and take.
His was/is (?) a business model and he ran his organization like a business. NAIC/BI is trying to learn how to do that while still rebuilding and retaining the culture that was responsible for its early success (before it was badly damaged by an incredibly foolish attempt to convert to a business paradigm while managing to egregiously offend its customers). I think they’re on the right track and they’re working very hard at creating a product that will be of increasing value to its members. The recent acquisition of ICLUBcentral is an excellent start, IMO.
As for the remainder of your comment, you make the point that, as Bradlee points out, the constant excursion of the top half to the bottom half, makes it difficult to beat the average: I would disagree. In fact, I would submit that it makes it easier!
That phenomenon tends to keep the performance of the average down, as does the dilution resulting from the fact that it consists of 500 stocks!
So, we can easily beat the S&P 500 because we are not restricted to the stocks in that index. We can pick the best of all the companies out there; and we can hold them only so long as their fundamentals perform to our satisfaction. We don’t have to retain them like the index does. So there’s simply no competition!
Thanks for your comment, Gary. And thanks for your vote of confidence and kind words, too.
@Ellis
“Until you factor in the Rational Value of those portfolios, you will not have properly measured their performance. In fact, you will not have accurately valued the portfolio.”
The problem is that one cannot sell “Rational Value.” I think you are very much alone when it comes to measuring portfolio performance against a benchmark using “Rational Value.”
Lowell
Lowell,
You couldn’t be more right! That is the problem and a huge one! And I’m trying very hard to be “less alone.”
The concept may be non-mainstream but it is no less correct because of that! I’m convinced that it’s the core concept that validates George Nicholson’s contribution and NAIC’s methodology.
The main reason I’m so “alone” is because the full faith, power, and resources of the securities industry have been consistently behind the effort to build a nation of traders who will continue to mindlessly buy and sell as often as possible, which is the foundation of that industry’s compensation model. “Li’l ol’ me” is a very tiny David who’s trying to slay a humongous Goliath.
All I have to fall back on here is logic and common sense! It would seem simple enough for people to be able to contemplate the steady and growing operation of successful companies and the value of their shares (which enjoys the same steady growth over time), and compare that with the herd’s fascination with trying to catch the prices of their shares on the way up and down in a totally unpredictable market that’s driven by such a diversity of unrelated and irrelevant events.
The well-managed companies simply don’t falter and fail because the price of their stock goes down (unless they’re unduly dependent upon growth being continually financed by dilution of shareholder interest). When times are bad, they cut their costs and keep on being profitable. Only the people who don’t recognize this risk losing their money. Warren Buffett—all of the notable fundamental investors would agree, I believe.
We NEED TO SELL “Rational Value”! If only to bring investment for the average individual within the realm of sanity.
I should reiterate that I am not opposed to including individual stocks in a portfolio. However, rare is the investor who can develop a portfolio that covers the world market, and this is where ETFs play a major role in portfolio construction.
For example, I am not skilled in selecting stocks in the developed international market let alone emerging markets. REITs, commodities, international REITs and bonds are other asset classes where I do not have the skills or the analytical skills to select individual stocks. To reduce portfolio risk, I participate in these asset classes through ETFs.
I consider risk to be as important as return, and that is why I focus on the Information Ratio when measuring portfolio performance.
Lowell
You make a good point about investing in foreign equities, economies, and emerging markets. If you want to do that, then I agree that the EFT is probably the way to go to minimize the risk. I would question, though, whether the fact that the EFT includes the good and the bad to minimize that risk, whether the net effect isn’t to reduce the potential return below where it’s worth the trouble.
Frankly, I’m content to stay home. I don’t have any interest in the adventure. So long as I can get the 10% – 15% return I want from domestic companies and ADRs, which I can, I’m content to stay in my own backyard where I’m familiar with what I’m doing and getting and where I have confidence in the reporting (notwithstanding the flaws that continue to surface, which remain comfortably accounted for in our “rule of five”).
If you’re looking for more than 10% – 15% return, you’re gambling IMO, wherever you go to find it. And your concern about risk remains wrapped up in what I believe is an unnecessary and misguided dependence on appraising the value of your holdings by the market value at any given moment.
“If you’re looking for more than 10% – 15% return, you’re gambling IMO, wherever you go to find it. And your concern about risk remains wrapped up in what I believe is an unnecessary and misguided dependence on appraising the value of your holdings by the market value at any given moment.”
I’m looking for far less than a 15% return. I have yet to see evidence that investor are turning in 15% returns. Remember our little wager? And that took place over a rather robust market period.
Lowell
“The main reason I’m so “alone” is because the full faith, power, and resources of the securities industry have been consistently behind the effort to build a nation of traders who will continue to mindlessly buy and sell as often as possible, which is the foundation of that industry’s compensation model. “Li’l ol’ me” is a very tiny David who’s trying to slay a humongous Goliath.”
The passive approach I advocate results in far fewer trades than any other plan I’m aware of. The Passive Portfolio I watch over averages about one in and out trade per year. This portfolio turns ten next month. That is a commission expense of $14 per year. I consider that to be very low. Wall Street is not getting rich off passive index investors. (g)
Tomorrow I hope to have the performance data table posted on my blog showing the current results of eight or nine portfolios. When the broker statements come in next week I will have all 19 portfolios updated. Don’t expect to see a lot of 15% IRR values as I still think that percentage of growth is an unreasonable number, particularly when the historical market average is six to seven percentage points below that value.
Lowell Herr