I recently came across an old article from 2014 about the case of Margaret Dickson, who passed away at the age of 72 leaving behind a secret investment portfolio worth over £1m ($1.42m). Now on its own that doesn’t sound particularly spectacular, but what made this case special was that Margaret was a woman of modest means. Her working life was spent as a police officer and a teacher, and her only other asset according to the article was the £75,000 ($110,000) apartment in which she lived.
For American readers, you also have to understand that individual stock investments were, and maybe still are, much less common in the U.K. than in the United States (Margaret was from Glasgow, Scotland), and that the propensity to save in the U.K. is also much less. Indeed her family were shocked to discover that her total estate was worth almost 15 times more than they believed.
One article went on to describe it as a “secret life playing the stock market”, but this is a gross mischaracterization of the reality of the situation. Firstly, about 25% of the final sum was in the form of a government backed savings scheme which was pretty much risk free. Secondly, the individual stocks mentioned included some of the safest and highest quality companies at the time – 6% of the portfolio was in British American Tobacco stock for example.
By all accounts Margaret was not playing the stock market, but merely allocating her savings to some of the best companies listed on the U.K. exchanges – companies that spew out cash each year and reward those shareholders who treat their investments like a business and not a casino chip. Part of the problem with this characterization is that it ignores the opportunity cost of not doing what Margaret did (which is to save in an entirely rational and logical way, seeking to maximize her returns with the lowest risk possible). By its nature, compounding has a massive effect on the end performance with just slight changes in the base when you are looking at long time frames.
Margaret could have put the money into a regular cash savings account, but it would have been to the detriment of her heirs, who in this case were largely charities. What it highlights is that allocating a sensible portion of savings to great quality stocks can have a profound effect over a long time frame. This is why a focus should be placed on companies that generate large profits relative to invested capital and operate in industries that afford minimal disruption and maximum stability.
These examples of “secret” millionaires are even more eye-opening once you look at the United States. The country is filled with buy-and-hold millionaires. These are people who lived regular and modest lives, yet always saved when possible and reinvested the dividends of the stocks they held. In many cases the fortunes they built are truly staggering when compared to the annual incomes they generated by offering their own labour. We’re talking about median or even sub-median wage earners who amass more wealth than many of those in the highest income brackets.
There’s a great one that cropped up back in 2008 about a retired factory worker called Paul Navone. Paul worked for just over 60 years and apparently never passed the 8th grade in school. According to the article he never earned more than $11 an hour. He never married, and he didn’t travel. However what Paul did do, just like Margaret, was save, a lot. He invested in stocks, bonds and real estate. The rent from the latter paid his living expenses, and so his wages mostly went into stocks and bonds. There’s a lovely quote attributed to his broker that neatly summarizes it:
Paul never inherited money. Paul started from zero. He just worked hard. He stayed the course even through the bad markets. Paul rarely ever took money out. He was the perfect client.
Maybe it’s a level of frugality that just doesn’t appeal to most of us, but look at the results. There isn’t any mention of the final wealth he had amassed (Paul passed away last year), but it was enough that he could donate $2m to two New Jersey schools during his retirement. Not too shabby for a guy that never graduated high school! This is just one example, but there are loads of them out there and they all make fascinating reading.
The key similarities in all the cases are that these individuals kept grinding away with their savings; they picked the best companies that consistently generate returns well above their cost of capital (usually in very stable industries); and they had diversified portfolios across a number of stocks and other asset classes. The effect of the occasional bankruptcy ends up as a small blip on returns with even modest diversification, and this assumes that an investor holds until that point of permanent 100% capital loss on a given stock. Even owning just one or two long-term winners can have a massive impact on the final portfolio value.
Consider the example of a $1,000 investment in Hershey, which I wrote about a few days ago. Forty years ago Hershey was already America’s most well known candy company. On a split-adjusted basis the shares were trading at the equivalent of $0.95 in today’s prices. In 1976, $1,000 in today’s money was equivalent to about $235 once you adjust for inflation. In other words an investor with $235 in cash in 1976 would have been able to pick up about 250 split-adjusted shares in the company. Today the stock price of Hershey is about $90, and our investor would be sitting on a value of $22,500 from an initial $235 outlay. That’t doesn’t include dividends either – purely capital appreciation.
Those are absolutely phenomenal returns, showing that having one or two big winners can have significant impact on a diversified portfolio. Nothing is certain in life, especially not the future. However, making sure savings are invested regularly into a diversified portfolio across several asset classes gives you the best chance to get compounding on your side. The earlier you start the better. After all, you could end up being one of the undercover millionaires living among us!