Whilst skimming through Christopher Mayer’s book – 100 Baggers: The Stocks That Return 100 to 1 And How To Find Them – I was pleasantly surprised to see that the case of Ronald Read got a pretty big mention. For those who haven’t heard of Read’s story he was another high profile example of a millionaire who generated his wealth by a devotion to investing in highly cash generative stocks, similar to the cases of Margaret Dickson and Paul Navone which I covered in one of my first ever posts back in April.
As far as I can tell the original story cropped up in a Wall Street article by Ann Prior – The Frugal Man Who Left An $8m Estate – it’s a pretty awesome story full of neat little tidbits that will appeal to long-term investors. As it turns out Mayer’s book was written at around the same time that mainstream media were publishing the details of Read’s buy-and-hold strategy, but seeing it actually crop up in a print book as a case study is still pretty neat. Even as recently as a few days ago CNBC were running it as a case study in their personal finance section – more than a year after the original story came out.
The great thing about Ronald Read’s story is the combination of the utter simplicity of his strategy backed up by very powerful concepts. Here’s a guy that spent his life as a janitor and gas station attendant in Vermont. It’s pretty much the polar opposite to most people’s idea of a route to create relatively large sums of wealth. Most of the time we like to concentrate on our own productive output. Why? Because unless you’re looking at large inheritances it tends to be the best way to generate wealth in the shortest amount of time. It could mean starting your own business, or investing in an education to provide you with a skill set that few other people have.
The second way of doing it is to invest in someone, or something, else’s output. For a variety of reasons this is where the majority of the population don’t really engage. For many this will be because of a lack of savings. You work hard in life and most money ends up going towards housing costs, utility bills, healthcare, childcare, food & drink and other essentials. Yes these costs also existed in Read’s day, but it seems that it’s increasingly the case that a lot of the time there just isn’t anything left over for many folks. There’s also the fact that finance isn’t really a mandatory component of education, and since most people don’t have the time to dedicate to it then a simple cash savings account often becomes the primary tool for saving.
This is the beauty of Ronald Read’s case; whether he was aware of it or not he was deliberately saving in exceedingly high quality and wealth accretive output. The article describes him as being a good stock picker but it’s a really simplistic treatment. Consider his portfolio which at the time of his death contained a total of 95 different stocks. The largest positions consisted of $510,900 worth of Wells Fargo stock; $364,008 worth of Procter & Gamble stock; $252,104 worth of Colgate-Palmolive stock; $199,034 worth of American Express stock; $189,722 worth of J.M. Smucker stock; and $183,881 worth of Johnson & Johnson stock. His portfolio also contained large positions in stalwarts such as Dow Chemicals and General Electric.
To you and me that just looks like regular blue chip dividend investing. It’s not like these didn’t already have illustrious histories even when Ronald was acquiring them in his heyday. Working backwards from his age and date of death we can deduce that Read was born in 1923. Let’s say he makes his first stock investment in 1941 at the age of 18 (this is entirely hypothetical on my part).
Now at that point, Procter & Gamble had already paid a dividend for fifty straight years. Colgate-Palmolive had been doing so for 46 years, surely qualifying it is a stodgy blue chip stock and not requiring much “stock picking” ability. In fact the only evidence of any kind of stock picking process appears to be that he was familiar with the businesses in question and that they had a habit of paying out dividends to shareholders.
The portfolio contained its share of losers – including total zeroes such as Lehman Brothers. That didn’t matter though, because within Read’s treasure chest that contained a grand total of 328 stock ownership certificates there were more than enough winners to make up for the big losers. Even in the cases like Lehman Brothers it is likely he collected a significant sum in dividends before they went bust. Not only does it make the headline losses look a lot better but it would have funded other positions that would carry on compounding and churning out cash.
- If his $8m stock portfolio had an average dividend yield of just 2% then it would have been throwing off an average of over $13,000 a month in dividend checks. Not bad for a man who worked as a janitor, maintenance man and gas service attendant.
It’s a slow churn that you don’t appreciate when you make that very first investment in year one. A spare $1,000 in Coca-Cola stock would only get you about $33 in dividends this year: not enough for even a single whole share if you wanted to reinvest it. That’s hardly something that’s going to appeal to younger investors who are maybe just starting to make enough income to be able to save regularly. It only starts to pay off big time years down the line, with the more you save and the earlier you start speeding up the process.
Okay, so by all accounts this is a pretty extreme example of frugality; a big element of which just comes down to individual life choices. Striking a balance between spending and saving is a matter of judgement and personal taste more than anything else. I imagine there are relatively few folks who would have the proclivity to carry on saving and reinvesting dividends right up until the end like Ronald Read did. Yet there are doctors and lawyers in Read’s peer group who will have died with but a fraction of his wealth having earned significantly more than he ever could. What he lacked in earnings power he made up for by allocating his savings to some of the highest quality businesses on the planet: a brilliant example of compounding in action.