A guy that was in my fraternity, and took a job on Wall Street, found himself in the position of being able to invest $5,000 per month immediately after graduation. That’s a lot of money, but he is in New York, one of the few places in the world where that amount of money doesn’t actually do as much as it sounds. He calls me up to talk investing a few times per year, not because he wants my insight on anything, but because he knows I will nod my head and agree with him on what he is doing with his money: He is buying shares of credit card companies hand over fist. Visa, Mastercard, Discover, American Express, he picks one each month and then adds it to his brokerage account.
If I recall correctly, Visa is his largest position of the four, and Mastercard is his second largest, though he has been buying American Express lately (even before the Costco announcement that made American Express even cheaper compared to the expected loss) and perhaps that could be emerge as his second-largest investment. I don’t know.
What I do know is this: His life is becoming a real-life example of the fact that great things get accomplished by having just one idea that will get you rich, and then combining it with actual actions (a high savings rate, going to a brokerage website to click buy on V, MA, AXP, and DFS) that will turn the knowledge of something great into something that will actually benefit his life. Too many people forget this step—it’s like Mark Twain said, the person who knows how to read but chooses not to do so is no better than the person who can’t read. I am very excited for him that he is taking his insight—that credit-card companies earn very large profits compared to capital deployed, and because they earn a percentage of the transaction they are automatically hedged to inflation—and choosing to change his life.
Since Visa’s IPO in 2008, the shares have compounded at a rate of 25% annually. American Express has been compounding at a 12.5% rate over the past forty years. Discover has been compounding at 11% since its 2007 offering, which is especially impressive considering that it was exceptionally poorly managed going into the financial crisis (though, at present, it seems to have learned its lesson and is much better capitalized). Since 2006, Mastercard has compounded at an even more eye-popping 36% annually.
I do not know his exact figures, but I do know that a result like this isn’t out of the realm of possibilities: By age 30, he could be sitting on $876,000 in credit card stocks if he averages a blended 14% compounding rate and holds investment amount steady over the next few years. There are certain factors that he is taking advantage of that make this particularly doable—he chose a profession that pays him well, he does not have a spouse or kids or anything significant acting as a claimant on his earnings, and he lives below his means enough so that he can take advantage of a great opportunity in front of him. It is a lot easier for a single guy in his 20s to run a highly focused portfolio than someone married with kids in his 60s because a significantly adverse event that hits the industry would also hit his life’s accumulated savings quite hard. That said, given his well above average gains, it is significant risk that comes with significant rewards.
Even though the specifics of what he is doing is not something that can carry over to a lot of people, there are general principles from his life that I find useful to keep in mind. The first is the obvious one: Get your savings rate up high. A crappy investor saving $1,000 per month is going to end up in a better place than a magnificent investor saving $300 per month. That said, the second lesson is that it is best to do both: save a high amount and earn good returns while doing so. Charlie Munger’s famous quip is that you only have to get rich once. Someone with $5,000,000 in liquid net worth would have no need to run a focused portfolio because avoiding losses is going to matter a lot more than maximizing gains. But that is not where my friend is at—he is trying to build wealth in a city with a very high cost of living, and is making strategic decisions that he believes will lead him to a compounding rate above what he would get if he invested in the S&P 500. It’s a provocative strategy that is definitely not right for everyone, but it is fun to be a bystander at watch it play out because he is combining a specific insight with his work ethic to hopefully reach an outcome that will guarantee him food, shelter, and clothes for life while he works in an industry that becomes more and more unforgiving as you get up there in age or have to deal with an extended recession.
Originally posted 2015-03-02 16:49:33.
