Finance has a way of seeming incredibly boring. Until it isn’t. Exploring the Time Value of Money
By Greg Evans
The content for this article was inspired and influenced by the great book Psychology of Money by Morgan Housel, published by Harriman House, in 2020. It’s the best book on finance and money that I’ve ever read. Housel “explores the human behaviors and mindsets that influence financial decisions, and argues that financial success is more about behavior and psychology than intelligence and knowledge.”
People interpret money and wealth differently, based on factors such as, where they grew up, how they were raised, who they associate with, and their long-term financial goals, not spending all your money trying to keep up with the Joneses. Most claim not to care about the Joneses, but sub-consciously, most people seem to be working hard to keep up.
The most poignant part of his book for me, is when he discusses the fact that you don’t have to be particularly smart or lucky to be a successful investor. You just have to be patient and make smart decisions. My interpretation was a specific emphases on patience. People are immediate-gratification seekers, bad with money, and terribly impatient. It was Aristotle that said, “Patience is bitter, but its fruit is sweet.”
Heraclitus said, “The rewards of patience are not from a sudden achievement, but the result of protracted and patient effort, built day by day.”
The market is forever in a state of fluctuation, however, despite periods of downturn including plummeting recessions and depressions, the market has always corrected itself and gone up. Historically, according to Investopedia, the stock market has given a return of 10.26%. The real magic, however, happens once compounding kicks in.It is safe to say the majority of the population has no idea or interest in what compounding is. This is when you get interest on your interest and principal over an extended period of time. It typically takes 40-50 years before you truly see the extraordinary power of compounding at work. Who has the patience to wait that long? To give you some perspective on the power of compounding, consider these examples:
Taking advantage of the power compounding:
Initial investment: $2,000
Monthly contribution: $300
Length of time in years: 50
Estimated interest rate: 10.26%
Total in 50 years: $4,864,161.53 (give or take a shekel or two)
Saving without taking advantage of compounding:
Initial investment: $2,000
Monthly contribution: $300
Length of time in years: 50
Estimated interest rate: 0%
Total in 50 years: $182,000
Do you see the vast difference there? You also have to remember that to get the money total that high in 50 years of saving as an average person might, you have to invest in low-risk stocks or index funds and reinvest the interest. If you aren’t reinvesting the interest it won’t be able to compound.
If you didn’t embrace the power of compounding, how long would it take to reach approximately $4.86 million? You would have to save for about 1,350 years. If you had $4.86 million today having saved for 1,350 years you would have started in the year 674. Places like Bithynia, Mysia, and Thrace would have been popular tourist spots. You may have water-skied on the Euxine Sea or sailed across the Propontis (Sea of Marmara) to trade with other merchants.
There were thriving towns like Lopadion, Sosthenion, Artakion, and Tzurulion. Leaders like Yazid ibnMu’awiya were alive and dreaming of global domination,growing their wealth through war and violence, the Siege of Constantinople (674-678) would have been front page news of the Papyrus Post. Four long years of pointless violence and brutality. Not much has changed today (Russia’s invasion of Ukraine).
Fast-forward to the future, 1,350 years from today (the year 3374 A.D.), the Siege of Constantinople may be long forgotten and people who speak of Jupiter’s colony’s invasion of Neptune’s, saying, “It is the same today as it was 1,350 years ago in the year 2024 when the massive red nation of Russia invaded that small mineral-rich Ukraine.” We think of them as being backwater, uncivilized ruthless barbarian enclaves however little has changed aside from the technology and the names of cities and landmarks.
If you followed the formula and had an initial investment of $2,000, contributing $300 a month at an estimated annual interest rate return of 10.26% for 1,350 years, the amount would be astronomical, beyond our ability to wrap our minds around. If you invested using the same amounts but for a mere 100 years instead of 1,350, all things being equal, the total would be somewhere in the ballpark of $647,150,655.41. There is no cogent word that describes compounding better than “magic.” If you ever stood on a soapbox and tried to explain compounding to an audience in Salem, Massachusetts circa 1692-93, you can pretty much guarantee your fate. I use Salem as a dirty analogy a lot.
There is a funny interview with Eddie Murphy where he tells the story of how James Brown told him to bury his money in the backyard because then the government won’t be able to take it from you. That was a funny story, but it got me thinking about how much he would end up losing by not harnessing the power of compounding. Of course, someone like Eddie Murphy would be burying more than $300 a month in the ground so he would have way more than $182,000 after 50 years, but you aren’t Eddie Murphy.
Grace Groner was born in 1909, along with her twin sister on a farm in Lake County Illinois. Orphaned at the age of 12, the girls were taken in by a Lake Forrest couple, family friends of the Groner girls’ parents. Grace was lucky and the couple sent both her and her sister to boarding school for an education and then Lake Forest College. Upon graduation from college Grace took a job at Abbott Laboratories as a secretary where she would work for 40 years.
In that first year, Grace purchased three shares of Abbott stock for $60 apiece. She then held those stocks for 78 years. She didn’t buy more, just held them. At the time of her death, the three shares had grown to 100,000 shares worth $7.2 million. Grace is a perfect example of the ultimate power of the Time Value of Money, and how effective compounding can be over time. Compounding is a difficult concept to wrap your head around because it takes years to work.
Albert Einstein is credited with saying, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t, pays it.” When it comes to Grace Groner’s success with investing and tapping into the power of compounding, former publisher of SUCCESS magazine, Darren Hardy says it best, “The Compound Effect is the principle of reaping huge rewards from a series of small, smart choices.” Groner made small, smart choices. She purchased three shares of stock, and then she waited. Two decisions that eventually made her millions of dollars over 78 years.
Essentially Grace Groner went against nature and evolutionary instinct and was stoically patient. A moniker attached to people like Grace are “Dividend Millionaires.” There are wonderful stories about these people, who, for the most part, lived regular, if unconventional lives, but they were unique in the sense that they either bought or received stock and then held it for a lifetime.
I want to talk about a concept I learned from Morgan Housel, and how important time is when it comes to growing wealth, particularly in the stock market. What is so fascinating about this, is that you don’t have to be a professional athlete with an outrageous contract, a CEO, an actor or actress, or ultra-talented musician to make millions of dollars. A secretary, a janitor, an IRS auditor, among others, learned, and harnessed the power of time by investing in the stock market and understanding the value in saving money versus spending.
He said, and I’m paraphrasing here, you don’t have to be a genius or an employee on Wall Street at a big equities firm to be successful as an investor. You just have to be patient and let your money and time work for you.
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Anne Scheiber was born in Brooklyn, New York, in 1893. She was a recluse and extremely frugal with her money. Throughout her career as an auditor with the IRS, Anne never earned more than $4,000 per year. She never earned a promotion and that may have been because she a woman and Jewish and workplace discrimination during that time was fairly prevalent. In 1944, at the age of 51, Anne retired with an estimate savings of somewhere between $5,000 or $20,000.
Arguments persist on how much because investors are curious if she was earning an ROI of 22% or was more like 12%? Regardless, throughout her life, despite not earning a large salary, Anne was able to save and invest money because she lived frugally, so much so, that she resided in a rent-controlled apartment and reportedly saved 80% of her income. There is a story of how she could get a hot dog for lunch for 15 cents but sought out an even cheaper location.
Her portfolio consisted of stocks in leading brands in leading industries including, Schering-Plough (Now part of Merck), PepsiCo, Bristol-Myers, Chrysler, Paramount, Pfizer and more. They were dividend paying companies with regularly growing earnings. When she received dividends, she reinvested them into the market and waited. This patience allowed the power of compounding to take effect. It was reported that in 1950, she purchased 1,000 shares of Schering-Plough and then just left them alone.
Over the next forty-five years, thanks to stock splits and reinvested dividends her shares increased to be worth more than a staggering $7 million. There is some discrepancy as to how many stocks she owned, but you can be assured that it was a lot.
When Anne Scheiber died at the age of 101. Her portfolio consisted of stock in over 100 companies and was worth over $22 million and was generating annual dividend income of around $750,000. Anne is considered one of the most successful dividend investors of all time because she followed a few simple principles, including harnessing the power of the passage of time.
What is even more remarkable is that she really didn’t start actively investing until her retirement from the IRS, however, it wasn’t her first foray into the world of investing. When she was around 38 years old, she gave one of her brothers a bunch of money she’d saved up to invest because he was a Wall Street stockbroker.
She had indicated that he was pretty good at picking stocks, only the company ended up collapsing and she lost all her money. Some people may have been deterred but Anne picked herself back up, started saving again and upon her retirement began studying the market.
When asked how she became interested in investing she stated that while conducting her audits, she noticed that wealthy people tended to own a lot of common stock. She then tried to mirror their success.
Just to give you an idea of Anne’s largest positions, in 1995, the year of her death (Courtesy of Merrill Lynch and DividendGrowthInvestor.com):
Company (symbol) - # of shares
Schering-Plough (SGP) 128,000
PepsiCo (PEP) 27,000
Allied Signal (ALD) 20,934
Loews (LTR) 14,061
Bristol-Myers (BMY) 10,080
Coca-Cola (KO) 9,048
Allegheny Power (AYP) 8,000
Rockwell Inter (ROK) 4,640
Unocal (UCL) 3,690
Exxon (XON) 1,664
It is safe to argue that pretty much all, or none of the stocks listed above in 1995 were selling over $100 per share. You don’t have to own expensive stocks to do well in the market. Growing and preserving wealth comes from steady regular, dollar-cost-averaging into the market, focusing on dividend paying stocks in strong established companies and just allowing time to pass. That phrase, “allowing time to pass,” or some variation of it might seem redundant, however, the redundancy is good. It will drive it home in your head. You will fight to block it out, but come hell or high water, we will force it in.
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In 2014, a 92-year-old, former gas station attendant and mechanic, janitor, and investor named, Ronald Read passed away in Brattleboro, Vermont. Read was a World War II veteran having served in the United States Army in Italy as a military policeman before being honorably discharged in 1945. For 25 years he worked as a mechanic and gas station attendant before retiring. After a year in retirement, Read took a part-time job as a janitor at J.C. Penney. He would hold that job for 17 years until 1997. From all accounts Ronald James Read was just a regular blue-collar worker in a small town. What people didn’t realize about Read was that over his lifetime he build a fortune of nearly $8 million dollars by regularly investing in dividend-generating stocks.
Unlike numerous other dividend millionaires who lived wholly reclusive lives outside their places of employment, Ronald Read had been married. He met his wife, Barbara March, who was a customer one day at the Haviland Service Station where he worked. She was the mother of two teenage children from a previous relationship.
After the couple were married, Read cared for the children as if they were his own. He purchased a home for $12,000 and funded his stepchildren’s college education. After Barbara died in 1970 from cancer, Read didn’t remarry. He was just a regular guy with an interest in dividend-producing stocks, and the characteristics of the type of investor who can make such investments payoff.
He did his research, studying companies and the market by reading the Wall Street Journal. He only invested in companies that he understood and focused on blue chip securities spread across a diverse investment landscape from railroads to banks, consumer products, utility companies and more. He lived a frugal life spending very little to no money on luxuries. One day a neighbor recalls seeing him in a jacket held together with a paper clip. Every morning for breakfast he would drink a single cup of coffee and have an English muffin with peanut butter at a local cafe.
Read’s ten largest holdings at the time of his death are as follows:
Company
Wells Fargo
Proctor & Gamble
Colgate-Palmolive
American Express
J.M. Smucker
Johnson & Johnson
VF Corp.
McCormick
Raytheon
United Technologies
It is helpful for investors to understand that not all of Read’s investments were winners. He also had a stake in Leman Brothers Holdings, the financial firm who collapsed during the 2008 recession.
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Hayford Peirce was a science fiction author who, in 1995, at the age of 53, while in a Tahitian café, worked through his investments with the goal of earning the highest possible return on his dividends to support himself. He separated his investments into two groups. One group contained specific high-yield stocks that grew slowly. The second group contained blue-chip stocks that tended to grow faster. Peirce calculated that in 1995, he should earn about $14,000 in dividend income. He then surmised that he would increase his dividend payouts 10% per year over the next 30 years.
He came close. It turned out that by 2017 he was able to increase his dividend payouts by 8.54%. Though he didn’t reach the 10% goal, he was still able to become a dividend millionaire. His portfolio consisted primarily of common dividend growth stocks, master limited partnerships (MLPs), a single bond, and one annuity. Apparently, his income was derived half from the bond and annuity, and the other half from the common stocks and MLPs. It’s been said that his only regret was that he didn’t reinvest his dividends which would have significantly increased his net worth.
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A woman named Agnes Plumb became a secret dividend millionaire and only owned stock in one company, similar to Grace Groner. The difference is that it was her father that purchased a number of shares in Kellogg when it first went public which she inherited and just held onto for her entire life. Because of stock splits and dividends being reinvested that by her death, at age 88, her portfolio of Kellogg stock had accumulated about 1.3 million shares worth a whopping $98 million. Agnes like the majority of other secret dividend millionaires lived a frugal life, nearly void of luxury items and assets.
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Russ Gremel was another individual who lived a fugal and simple life. He lived in the same house for 95 years, drove the same old 25-year-old Dodge and ate simple meals like oatmeal and stew. This lifestyle may have been influenced by the fact that his family lost everything in the crash of 1929. He worked as a lawyer until retiring at the young age of 45, whereby he became a boy scoutmaster, a job he held for the rest of his life. Around the time Russ retired from practicing law, on the advice of his brother, he purchased $1,007 worth of Walgreens stock and held it for approximately 70 years until his death at age 99. Gremel never sold his shares which appreciated to over $2 million. Like many secret dividend millionaires, he donated his money to charity.
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One of the more bizarre stories is that of Curt Degerman. For around forty years, Curt spent his days riding his bicycle throughout the town where he resided, Skelleftea, Sweden collecting cans and bottles to recycle. Curt would then take the money he made and invest it in the stock market. To learn about which companies to invest in, he would spend time in the local library reading financial newspapers. Curt died relatively young in comparison to other secret dividend millionaires suffering a heart attack at the age of 60 in 2008, leaving behind a $1.4 million fortune. Similar to other dividend millionaires though, he lived an extremely frugal life.
Most people won’t hold onto their investments forever like these secret dividend millionaires. Human nature has a way of throwing curveballs like recessions and depressions, or some other costly life event and people will sell their investment interests. People also tend to panic buy during downturns in the market, they will sell to use the money for some other reason, they will sell to buy a popular stock that is trending high or to pay off large debts, etc. It really just comes down to your risk tolerance, personality, and lifestyle.
There are other investors out there that have made more on the stock market like Warren Buffett, John Templeton, Bill Ackman, and others, however, I am less interested in people who invested other people’s money and made billions (as spectacular as it is), and more interested in people who invested their own money from regular jobs and earned millions.
The world of investing is not what you think. The reason is because time is a more important variable than stacks of money. Of course, the more you invest in high-quality stocks, potentially the better you will do, with a little luck on your side, but there are no guarantees. Just think, you can be a fry cook at the McDonald’s down the street, and if you live a frugal life and have a little extra left over, instead of spending it on something you won’t even remember buying next month, by a few shares of cheap dividend stocks, and just hold it. I find that writing a book is a lot like investing. It is many small increases of words over a long period of time, only I find investing to be far easier than writing a book.
I am fascinated by the whole concept of purchasing stock and being a part owner of a company. If companies have good quarters, they pay me a few scheckles in the form of dividends. Money comes in almost daily only to be reinvested to buy a bigger stake in those companies that turn around and pay me more to buy an even bigger stake in them. There is magic inrepetition. Everything compounds, money, skills, knowledge, and health, it is about consistency and reason.
It is a magical cycle, going in circles, just like the earth goes in circles around the sun and spins in circles on its axis and the magnetic fields spin in circles from one pole to the other and the molten liquid within the core of the earth is spinning in circles and when we eventually go back in time it probably won’t be by flying straight up into the sky but spinning or traveling in some circular orbit, separating the dimensions with matter spinning wildly in their own circular orbit, some faster than others. Presumably.