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How do people get rich?
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One of best books I've read about personal finance is The Richest Man in Babylon. The lessons in it describe how to get wealthy.
The opening to that book describes a 50 year old chariot builder, Bansir, who is wondering how he isn't rich, thinking about how he's spent his life working hard and has nothing to show for it. He thinks of his friend, Arkad, who he had gone to school with, who wasn't in any way different from him but who is per the title, the Richest man in the city. He wonders how in the hell he got rich and he didn't. He goes to find out and he get's the story from Arkad himself. It's basically about disciplining yourself to live below your means. Paying yourself first being one of the basic tenets. If you earn 10 coins, save 1 and spend the remaining 9. You pay yourself first. The title character, Arkad, was working as a labourer and asked a rich gold lender how he became wealthy and if he could do the same. He tells him to pay himself first.
I found the road to wealth when I decided that a part of all I earned was mine to keep.
Arkad thinks that's too simplistic but listens and learns. The gold lender is rich, he wants to be rich, he listens and tells himself that he'll try.
After a while the gold lender asks him how he's getting on. Arkad says he is saving a sizeable sum but he's not rich yet. He is told to invest it and is advised to lend it to a local business which makes and sells shields. They use Arkads savings to buy bronze and pay him a rental on the money for doing so from their profits. (in the book he actually loses a years worth of savings by investing in what he thought were jewels but were actually glass, having failed he is told to not give up but to start again and does so, which makes the gold lender offer him advice where to invest it this time).
When the gold lender finds out that Arkad is actually spending the rental income on fine food and fine clothes, and wants to buy a donkey in time, he admonishes him, telling him to loan it back again to the Shieldmaker to increase his rental even more, he can still live on the 9 coins as he has always done but at the same time to continue saving to invest more again and so it goes with more savings, more rental income.
Money makes money and the money that money makes makes money.
Arkad does this as a matter of habit, he lives below his means, and now that he is 50 he is now a very wealthy man. He became a gold lender himself just like his mentor still applying the basic principles he learned by simply asking him initially. He still lends money to shieldmakers but obviously branched out over time, lending money to many.
I have an interest in common stocks and it's one of the most reliable ways for people to become rich through capital appreciation and the dividends such stocks throw off over time, taking advantage of compounding. Just like Arkad, you pay yourself first, as much as you can afford to but at a mimimum 10% to accrue savings to invest. You look for the highest quality companies on the planet that offer you the chance to own a part of them and you narrow down the list to about 20 to 40 common stocks.
The big blue chip companies, the household names where when you buy a share in them, like the shieldmaker, they do business with that money. You get your rental as a dividend from them. A good indicator of quality are companies that increase their dividend annually. The longer they've done this for then the better the quality. They're labelled dividend aristocrats.
For me, my diversified and focused list of quality dividend paying companies is the below.
Exxon, Apple, Chevron, Conoco, Royal Dutch Shell, BP, Pepsi, Coca-Cola, Kimberly Clark, Colgate Palmolive, Microsoft, IBM, Emerson Electric, Johnson & Johnson, Procter & Gamble, Nestle, Clorox, Wal-Mart, US Bancorp, Anheuser Busch, Diageo, Kraft, Abbott Labs, 3M, Aflac, Brown Forman, Visa, Pfizer, Mastercard, Kellogg, Boeing, American Express, Unilever, JP Morgan, Becton Dickinson, Hershey, Philip Morris International, AT&T, Disney, McDonalds, Church & Dwight, Realty Income, Campbell Soup, Wells Fargo, and General Mills.
However, it's one thing to recognise quality, it's another to get good or fair value for it. Just like anything else you don't want to over pay for the stock and see it languish for a couple of years or decades. It's not a case of I drink Pepsi every day so I'll invest in that.
A basic method of valuation for me is to look at some fundamental indicators. For me, firstly it must be quality (see above list); then it must have the following to get me to invest in it. If it doesn't, I ignore it. I will wait until it is.
1. The price earnings growth ratio must be less than 2.00 (based on the Peter Lynch book 'One Up on Wall St')
2. The trailing and forward price earning ratio must be below 20. Trailing is the last known earnings/forward is based on analyst estimations)
3. The beta (i.e. the volatility of the stock price) must be below 1.50. Better if below 1.00
4. Finally, the stock price must be trading at or near to the 12 month low. To give a margin of safety.
If all good, then, that 'pay myself first' savings are invested in the stock adding to a growing portfolio, it will never be sold as we collect the dividend in perpetuity.
I keep saving and I keep checking the above against 'my' companies every week. Most times the PEG ratio is enough for me to know straight away to ignore it for now. Trading costs here were quite high upwards of €40 per trade. Low cost brokers now make investing cost effective.
The problem is that while such companies are excellent businesses in and of themselves, the likes of Coca Cola, Nike and Colgate Palmolive seem to always trade at premium prices reflecting the quality of the earnings. That's where stock market crashes (or corrections) come into play. You wait. Sitting on your ass patiently for corrections just like the past couple of weeks. (I got to buy more AT&T, Starbucks, Exxon and I finally got some Disney stock). When my one year old daughter retires, she will be getting dividends from The Walt Disney Company in the 2080's.
While the news talks of crashes and panics etc, in reality it's just over valued prices correcting themselves back to the reality of underlying earnings. You then pick up the quality but at a fair price. The market is so overvalued that Coke and Colgate are still too pricey. It will take a major correction (20-30%) for them to be added to the portfolio, despite them being reliable dividend payers, the price is still to pricey. For example, Starbucks got sold off big time when Lehmans collapsed. The stock price dropped to below a cup of their coffee (. Who will be going to Starbucks anymore? The world is falling in!. It split 2 for 1 in 2015 and is now over $54. I didn't invest until much, much later
I bought an iPod in 2004 and thought it was brilliant, thought everyone will get one of these, I thought about investing €3,000 in the stock at $38 that summer. I didn't. If I had the discipline of Arkad and the fortitude that would now be $246,000. Nobody's perfect. Apple might have tanked and I'd have lost 3k or I could have doubled my money thought myself a market wizard and sold up. But to have done so would have meant I actually lost over $200,000. You never sell. Ever.
Another aspect to how people get rich is what to do with the dividends. Like Arkad, you could spend them on 'stuff' but his mentor was right to tell him to reinvest them. Instead of buying stuff, reinvest it. While buying more Exxon Mobil stock with Exxon Mobil dividends is great in and of itself (it's called Dripping), what if Exxon stock is actually too pricey? The trick here is to not automatically reinvest but pool together the dividends from the other over priced stocks in your portfolio and invest them (along with your habitual paying yourself savings) in ones that are trading at fair value per your fundamental criteria.
Dripping the dividend though over many years and decades can still make you very wealthy. A $1,000 investment in Apple in January 1988 is now $132,000. That company went through some serious problems but that's another lesson to be learned. The discipline to never touch the principal. You could have sold that stock at any point and done something else with it but time is also important and you would have missed out on the appreciation in price. You never sell unless absolutely necessary.
“If the job has been correctly done when stock is purchased, the time to sell it is almost never.” - Phil Fisher.
The same $1,000 invested in quality, boring blue chip companies in January 1988 is listed below. You have invested 'blindly'. Like above where you think just because you like Pepsi means you will just buy the stock there and then without any consideraton for valuation. You just think that you use a Mac and you like Apple, you use Johnsons baby oil, you use Fairy liquid, Head and Shoulders, you get those at Walmart and you smoke like a trooper.
Procter & Gamble - $33,836
Johnson & Johnson - $53,432
Walmart - $43,150
Altria (formerly Philip Morris) - $163,000
That's successful investing. That's by dripping the dividend, and never selling through the rollercoaster of bull and bear markets. A reward for discipline.
Let's say you will save your 10% and at the end of the start of the year you'll buy $250 more of each stock above. You see yourself, like Arkad, as a co-owner of the business and you are lending them more of your money to do business for the year ahead. What would the difference be?
Apple - $764,000
Procter & Gamble - $84,647
Johnson & Johnson - $136,849
Walmart - $104,275
Altria (formerly Philip Morris) - $381,000
So having invested the initial $5,000 plus an addtional $7,500 in each (i.e. $250 every January) you now have a portfolio worth $1.47 million. Taking a 2% dividend yield on that then you're getting $29,415 a year in 'rental' income alone. Now imagine reinvesting that $29k in other fair value quality common stocks and watch it grow exponentially. Having a portfolio of 1.4 million from a cost basis of just over $37k over 30 years is rich by anyone's estimation.
You buy them at fair value, get them on your personal or family portfolio and you never sell, letting dividends, time and compounding do their magic. You buy more when they match your criteria and you get on with your life, getting rich over time.
That's how people get rich (with stock investing at least).
The other aspect is trading stocks, buying low selling high, yield curves, technical indicators, trend following metrics etc. That's too complex for me. That for me is over complicating something simple. I'll leave it to Warren Buffett to explain;
There seems to be some perverse human characteristic that likes to make easy things difficult. Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down
We're not a country of investors. My mother had €30,000 in a credit union account during the financial crisis in 2008-09. Not all of her savings. She had more. I remember telling her that now was the best time to invest it. She was frightened for very obvious reasons, prices were falling for everything. It was too risky. It was all over the news. It was safer under the mattress for people. She actually had an additional €7,000 in 50 euro notes under the couch. I used to give her €200 a month (I was single and stayed at home during weekends) and she was just piling it up under the couch.
I tried to convince her as best I could to set up a trading account and to invest. She didn't in the end. She let that money sit earning a 'dividend' of €200 a year before the DIRT tax. The €7,000 was earning nothing but dust and crumbs. Literally.
It was such a waste of money. That same €30,000 if invested during the big stock market 'Sale', diversified across the very safest companies listed above would be worth just over $200,000 today. A dividend yield of 3% would be making her just over €4,000 after tax this year. That's a 13% annual yield on her inital 30k from 9 years ago. She could use it to pay her rent, pay for her fuel costs whatever she wanted to do. All I know is that the €4,000 she would have made this year, would have been €4,400 next year because such companies raise their dividends every year. A 14.6% yield on her 30k next year etc etc etc. That money is still resting in the account earning a 'dividend'. If she set and forgot it for the next 20 years, at the end of year 20, she would have been getting €26,910. Almost as much as her investment amount 30 years prior.
So pay yourselves first. Let it build up. Invest it when the time comes with the best companies on the planet. Never sell. Get rich. In time.
Here's the list for this week. First thing Monday I fill this out.
Anything with a red circle and I monitor the price for the week and ignore the rest.
e.g. I don't own Apple stock but the only thing is the lowest price over the past year has been 132. It's 156 now. It's better to get it for 132 than for 180. If it drops lower then I'll invest and own a very small piece of the business and will never sell it.
Investing in blue chip stocks can be one of the most profitable things a person can do over their lifetime if they are careful to select a basket of shares in strong companies at reasonable valuations and a history of paying out the increasing profits in the form of cash dividends.
Source: https://www.thebalance.com/the-benefits-of-owning-blue-chip-stocks-3560630 -
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The way things are going for me recently I suspect I'll never be rich enough to treat my family the way they should.
Took a bad hit in 2017 which has just dominoed it's way since.
Since mid January I've clocked up roughly 40 hours of overtime just to get more cash in.
Sadly This won't keep happening as I'm not able for the 60 hour weeks and Saturday work for much longer so I've decided to go down the drastic option of selling one of our cars and downgrade to an older more basic car to free up some cash or worst case scenario we become a 1 car household and I take the bus.
It can be very depressing but we have to soldier on.
Baby 2 on the way soon so I want to get the finances back as quick as possible.
Have a potential new job prospect with jp which could net me 40% more net pay a month so that would be a good start.. if I get it.
If not then, oh Well, soldier on.
Just to re-visit this.
I ended up selling the car the same day I put it up for sale.
Didn't get the full asking price obviously but managed to get enough to bring us back from the brink and breathe.
I'm paid in 2 weeks and I'll get a portion of my over hours paid too so it looks (for now) that the planning and sacrificing has paid off
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