I love the power of compound interest.
I also love reading stories of ordinary folks, who invested for the long-run in blue chip, dividend paying companies.
As we all know, building wealth is a matter of:
1. How much you invest
2. Your rate of return
3. How long you invest for
If you invest a small amount at the start, and generate a good enough return over time, you may end up with a very large nest egg at the end of your investment journey. For example, if you invest $10,000 today in a tax-advantaged account such as a Roth IRA or Roth 401 (k), at a 10% annualized return, and hold for 50 years, you'd end up with a little more than $1.17 Million.
If you pull any or all additional levers listed above (1, 2, or 3), you may end up with an even higher amounts. This means adding more money at the start, or over time, increasing the rate of return (which is hard to do), or increasing the holding period.
For example, if you manage to increase the holding period to 100 years, you end up with much more than $135 Million. Few have the vision to do this today, and set their family up financially for generations to come, because most do not really care about those other than themselves. Many also lack the financial literacy that folks such as the Rockefellers have. But I digress.
Today, I will share the story of Robert McDevitt, who left a little over $250 Million to charity when he died in 2008.
He died at the age of 90 in 2008. He ran a nice-enough but unremarkable funeral home near the center of town. He lived a frugal life, living off his business income, and keeping invested on his stock. Sadly, his spouse died a little before him, and they had no children.
The bulk of this estate was in IBM stock, which he had inherited from his mother.
Robert McDevitt was an early investor in IBM stock which he inherited from his mother and held for his life. (Source)
At the time of his passing, he was the single largest shareholder of IBM stock, valued at over $250 million.
McDevitt's mother, Mary Graif McDevitt, was secretary to A. Ward Ford, one of the original board members of the Computing Tabulating Recording Company in the early 1900s.
A. Ward Ford was responsible for hiring Tom Watson, Sr. as president, who eventually changed the company's name to IBM and ran it until the 1950s.
Mary McDevitt apparently borrowed $125 to buy the company stock and reinvested back into the company, passing the shares on to her son.
It's truly fascinating how a small initial investment, compounded over 90 years at a high rate of return, with dividends reinvested, turned into such an amazingly large estate.
It sounds simple, but it's definitely not easy. IBM has gone through several shake-ups over the years, which threatened its business. Yet, the company is still going, and had overcome these obstacles.
IBM is a dividend aristocrat that has been able to pay dividends since 1913, and increased them annually for 29 years.
It's even more amazing that this money went to charitable causes, benefiting others. I love all of this.
The money was put in trust, and these benefactors will receive investment income from the pot of money.
It's fascinating to look at the source of this estate, namely IBM, which has generated a ton of wealth for those patient enough to hold on to the stock.
IBM has been one of the best performers on the stock exchange over the past century and then some.
If you invested $1 in $IBM in August 1911, it would have grown to $40,000 by 2014 on a price basis.
If you reinvested your dividends, that $1 investment would have grown to $1,434,300 by 2014.
The source of that calculation is this Global Financial Data article. They (GFD) really know their stuff when it comes to historical data on various financial markets.
There is some element of survivorship bias of course. But it does seem that a lot of fortunes we hear about are generated from some cash from a business or regular employment, which have been invested in a single security or two, then held on for decades, while enjoying the fruits of patient long-term compounding. This is how wealth tends to be built.
All those traders that try to time entries and exits, trying to outsmart everyone else, end up wasting those true long-term opportunities. And end up paying tons in taxes, fees, commissions, and missed opportunity.
The other factor to discuss is that while the majority of the portfolio seems to have been largely in IBM stock, that doesn't mean there weren't other investments either. It's simply a testament to the power of a few principles such as the Coffee Can Portfolio. This is where you assemble a portfolio of a few solid blue chip companies, and then you let the winners run for as long as possible. As a result, the portfolio ends up really concentrating itself over time into the best performing investments. The failures end up as mere footnotes.
The conclusion for me is basically that long-term investing works for those patient enough to take advantage of it. In my case, it means continuing to invest in a diversified portfolio of quality companies, reinvesting those dividends, keeping taxes/commissions/fees low, and investing for the long-run. This also means being as inactive as possible, and letting winners run for as long as possible, without re-balancing/trying to time entries or exits, or second-guessing and micro-managing my investments.
Relevant Articles:
- Time in the market is your greatest ally in investing
