The Power of Market Returns


“Compound interest is the most powerful force in the universe.”    - Albert Einstein

While perusing the Wall Street Journal, we came across this delightful article about a retired janitor (Ronald Read) in Brattleboro, Vermont who passed away at the age of 92 and left an estate valued at almost $8 million, mostly in stock certificates of companies that he held for decades.  Of course, the first question that comes to mind is, “How did he do it?” Was he an undiscovered investment genius who trounced the market? What can we learn from him?

From the few details we have about his life and his portfolio, we think the answer is really quite simple. He lived way below his means, never having children other than stepchildren. His top ten holdings (which were the only holdings shown) were all blue chip companies that paid dividends, as he had a strong preference for dividend-paying stocks which allowed him to participate in their dividend reinvestment plans, keeping his brokerage costs to an absolute minimum. He used guides that were freely available at the library (to which he bequeathed a large portion of his estate). He even owned some companies that went belly-up like Lehman, so clearly he had no special insight into the market that the rest of us somehow missed. For all practical purposes, he collected stocks the way his friends may have collected stamps. Furthermore, he appears to have paid absolutely no regard to the pundits who would have told him to sell after the drops that occurred in the eight bear markets during his investment lifetime. He was the consummate example of a buy-and-hold investor whose favorite holding period is forever. 

Just for laughs, we decided to see if we could replicate his results. We assumed that he began his investing career in 1946 with $500 at the age of 24, so he would have missed the terrific returns that occurred during the war years (the total US Market had an annualized return of 23.6% from 12/1/1941 to 12/31/1945). The starting amount of $500 is equivalent to about $6,500 today, based on the changes in the Consumer Price Index (CPI). The $500 was assumed to increase annually based on CPI until 1990 (when he was age 68) at which point it had grown to just under $3,500. Thus, in 45 years of contributions, he would have invested almost $64,000. For his returns, we assume that he simply got the U.S. total market return minus 0.5% for expenses. Under these assumptions, the $64,000 grew to just over $8 million over the 69-year period ending 12/31/2014.

Another question we could ask is whether Mr. Read would have gotten more out of life if he had allowed himself to cash in a few of those certificates and live the way his wealth would have enabled? Clearly, he could have driven a much nicer car than his 2007 Toyota Yaris, but perhaps whatever pleasure he would have derived would not have been worth the pain he would have felt upon parting with one of his stocks.  This particular case is not for us to judge, but we do like to see our clients responsibly enjoy the wealth that they have achieved.

In closing, to us, this is a beautiful illustration of the power of compounding returns over a long period of time. There is no better ally to the patient investor than time and, of course, keeping the silent partners in check. Our hats go off to Mr. Read.