When you compare the state of the American republic today to where it was sixty years ago, one of the things that is clear is that economic security is more difficult to attain due to structural changes in the American economy.
First, At-will employment has largely replaced the prevalence of union jobs that could readily be attained. In the long run, this makes corporate America more profitable because it grants companies the autonomy to only hire workers that are the most economically productive to the company. This is a good trend for business owners. However, it is a much less friendlier trend for workers because the nature of at-will employment means that you can get fired for almost anything, unless you are a member of a specific class that is protected by certain federal laws for social policy reasons.
That lack of control can be scary—although you can control the extent to which you are productive, your employer ultimately has the final say whether you get to stick around. For people that value financial security, that arrangement can be a strong cause of discomfort.
In addition to the shift from union jobs to at will employment, there has also been a shift away from the pension to the 401(k). Instead of getting a guaranteed $2,000 per month when you retire as a condition of your work at a company for 30 years, it’s up to you to spend those thirty years intelligently investing in a way that more or less generates that $2,000 in monthly income.
I mention those background facts for one thing—what happens if you want to simulate the guaranteed financial security of the “good old days” while living in a world in which it is entirely up to you to create that guaranteed income?
My answer would be this: Make it your first priority in your financial life to own big slugs of the most dominant businesses you can find, and let them grow for 20+ years and reinvest the dividends.
I would make the list concrete, explicit, and tangible. It might be something like this:
Own 200 shares of Coca-Cola by the end of 2013.
Own 150 shares of Colgate-Palmolive by the end of 2014.
Own 100 shares of Exxon-Mobil by the end of 2015.
Own 150 shares of Nestle by the end of 2016.
Own 150 shares of Procter & Gamble by the end of 2017.
Own 150 shares of Johnson & Johnson by the end of 2018.
Own 175 shares of Disney by the end of 2019.
You might use dollar amounts instead of share counts. You might adjust the companies and the year as necessary for valuation—if Disney is much cheaper than Nestle in 2016, there’s no reason not to use common sense and switch up the order of your list. And heck, you might have different companies. You might include Pepsi instead of Coke. You might include Pepsi in addition to Coke. You might choose Kraft instead of Disney. Maybe you’d include Hershey, General Mills, or Anheuser-Busch. The example is a template to be adjusted to your circumstances and style, not something to read literally.
The point is: a good financial life needs a good foundation. For the most part, I like value investing. But when it comes to the most dominant profit-churning companies in the world, I think “growth at a reasonable price” investing can kick the ass of value investing because of the underlying strength of the business models we are discussing. Three or four times in your life, value investing will have a short-term fling with the most dominant companies in existence, and if you load up on the Coca-Colas and Johnson & Johnsons during the 1973s and 2009s of your life, the world will be yours.
Ideally, these investments would be done within a traditional IRA, Roth IRA, or 401(k) as much as possible. In addition to the tax-deferred growth of the income, it would serve the function of shielding your assets as well. Although it depends on the specific facts and the laws of the locale in which you live, you are much more likely to leave a divorce hearing, a bankruptcy proceeding, or some kind of catastrophic event with your retirement assets intact compared to your regular taxable account investments. T he importance of retirement accounts is long recognized in American courts, and it would an additional layer of protection to your overall financial life to act as shield against creditors and would-be usurpers of your treasure (certain trust asset structures provide you protection as well, something I hope to write about in the coming months).
If you want to get serious about your future, you need to dedicate a certain chunk of your savings to the most profitable enterprises in the world. The ones that make you think, “When I die, that company will still be payout out dividends to shareholders.” And then set a specific goal for each company, and create a target date for when you want to own it. If you have six to twelve names on your list, you have some flexibility to modify your list to adjust for valuation. And try to do this within an IRA, so none of your dividends get siphoned off, and you have some protection in the event that disaster strikes.
By the time you die, those 100 shares of Exxon Mobil could be pumping out more oil profits than is generated by the owner of the local gas station in your community. Retirement accounts plus ownership stakes in the most powerful companies in the world, deliberately acquired over time, is the greatest way to guarantee you will end up rich if you allow those seeds the proper amount of time to grow.