Important Lessons From a Humble Janitor
“The four most dangerous words in investing are: this time it's different.” ― Sir John Templeton
In the present Covid-19 crisis, the pandemic and its effects on the economy have become common topics of interest and speculation. Friends, family members, acquaintances, economists, investment strategists and strangers on social media have all newly styled themselves as virus experts, all too eager to share their logical-sounding opinions, cures, and warnings about why this is "the end of the world".
However – as our opening quote from Sir John Templeton's book, 21 Steps to Personal Success and Real Happiness, suggests – doing so would mean ignoring history at their own peril.
We often hear people saying that times have changed and the old rules no longer apply. This is true in the markets as well, particularly at present. Major market crises typically occur when people believe that the current market conditions are justified by the changes happening in the world, and the conditions that govern it.
However, if we were to look closer, we would find that every single crisis in the past was borne out of different and exceptional circumstances. Expectations were shifted. Prices were adjusted. There was temporary pain, but still the markets continued to function as normal.
The chart below illustrates how $1 invested in global stocks has evolved over time and as the world lurched from crisis to crisis. Looking back from the vantage point of today, we can see that all of those past events were merely a blip in the overall scheme of things. There is no reason to expect that this crisis will be any different.
The twin powers of compounding and staying invested are vital to investment success. These lessons were brought to the forefront in this incredible story of janitor Ronald Read.
Ronald Read lived in a county of 45,000 residents in Vermont. He worked as a janitor and was known for his frugal, modest lifestyle. When he died at the age of 92, his friends and family were thus astounded to discover that he had left behind an estate of USD$8 million – the majority of which he donated to a local hospital and library.
They never would have guessed that he had amassed so much wealth. So, how did a humble janitor manage to gather such a fortune?
1. Save
Robert Read was a fanatical saver who spent as little as he could. If you earn $1 and spend $1, you will be stuck living hand-to-mouth with no way out. It would be worse if you spend $1.50 or $2 – money that you don't have.
Many people stretch their funds beyond their means, putting themselves into a debt trap that can be near impossible to get out of, such as this 62-year old with a $3k monthly income servicing a $100k debt.
To further compound the problems of debt, a local study by researchers at the National University of Singapore found that being in debt hampers one's ability to make good decisions.
While you may not be able to afford to save a substantial amount, saving just 5 or 10 cents of every $1 you make will still be better than nothing. Over time, these savings will grow.
2. Don't Gamble
Gambling in Singapore has been on the rise. If you don't have much savings to begin with, throwing away what little you have in the hopes of a quick buck – be it Toto, 4D, a fancy-sounding investment, horses or the casino – is the wrong way to accumulate wealth (but a very effective way to lose it).
While the rare possibility that you might win something may be exciting, the reality is that almost all gamblers will end up losing much more than they gain.
If you absolutely do feel the need to gamble and it is a thrill you can afford, set aside a separate account for this purpose. Keep it strictly independent from every other aspect of your financial life, and that way, any losses would not risk plunging you and your family into financial despair and upending all your long-term goals.
Alternatively, if it is a habit you cannot afford, why not regularly set aside your gambling funds into a long-term investment account? That way, in a few years' time, you can check out how much they've grown and enjoy your guaranteed pile of 'winnings'!
3. Invest, Don't Trade
One of the secrets to Robert Read's investment success was how difficult it was for him to liquidate his funds. He kept his stock certificates locked up in a safe deposit box in his bank. If he wanted to sell his stocks, he would thus need to go to his bank, retrieve his certificates, take them to his brokerage, and then make the trade.
The sheer hassle of doing so (compared to simply tapping a few buttons on an app) would probably deter many active traders today, or at least give them second thoughts.
Far too many people confuse investing with trading. By purchasing stocks, an investor owns a share in companies around the world. By purchasing bonds, the investor lends money to those companies.
You wouldn't switch between owning different companies on a daily, weekly or even annual basis, would you? And yet, many investors do just that by frequently buying and selling their assets based on their emotions and what they read in the news.
Businesses take months, even years, to generate cash flow and returns. It is thus a mistake to buy and sell our shares in those same businesses in a matter of minutes or even seconds. If you want to see real returns on your investments, you need to be patient.
4. Invest, Don't Speculate
Another common mistake is to speculate, rather than invest. With the way the stock market is portrayed in the public imagination, it's easy to mistakenly assume that we could make a lot of money just by buying the right stock at the right time.
During this pandemic, especially, we're seeing no shortage of theories and strategies enticing people to make a punt. "Buy gold, because money printing and Quantitative Easing will cause a rise in real asset prices!" is one such theory. Or, "We are in a new era, and the recession will last longer than you think – so sell your assets now and wait for a further drop before going back in." Or, "Consumer staples like grocery retailers and pharmaceutical companies are the hottest trades to make."
Who is right and who is wrong? Who should you believe when they contradict each other?
The truth is that no one really knows. The only thing that is certain is that if you end up falling for that allure of supposed riches and bet your life savings on the wrong strategies, you're only going to end up much poorer.
Of course, there's the off-chance that you could be lucky. But is it really necessary to take such a huge risk with your hard-earned money, and risk shattering all the dreams that rest upon it?
Surely there is a better way to invest.
5. Seek a Long Time Horizon and its Effects on Compounding
It certainly helped a lot that Robert Read lived to be 92 years old. His investments had decades to generate returns and compound over the time period, as well as produce dividends that he then reinvested into the portfolio.
The chart below shows how even a 10 years difference can make a significant impact on your end result and how much you'll need to contribute.
If you are getting on in years and no longer have the luxury of time, fret not. You can still pass on this simple but important lesson to the next generation (or the one after).
Whenever you think about your investments, keep in mind these humble but valuable lessons. They will keep you on the right path to financial success.
