Fortunes Are Built By Being Exceptional In One Of Three Ways

Halleluiah! Break out the tambourines and shake them. Break out the fireworks and make sure you don’t shake them. On the day dedicated to celebrating American exceptionalism, I wanted to point out one of the greatest truths that is necessary for building long-term wealth: You must be exceptional in one of three ways.

Way #1: You possess the ability to identify and purchase an exceptional company that is growing rapidly. It took $8,500 in 1992 to create over $1 million worth of Starbucks stock today. Once it became apparent that Wal-Mart was rolling out stores all across the Midwest in 1982, it would take $8,500 in Wal-Mart to create a $2.1 fortune in the retailer here in 2014. It took $50,000 eight years ago for Chipotle Mexican Grill stock to buy you a half-million dollar home today.

These investments are hard to come by, but the good news is this: you only need to be right once to make it. From there, you get to play the diversification game and enjoy life. Once you create a seven-figure estate, you should never have to start from scratch.

That’s why I’ve written about Visa so extensively on this site. It’s growing very aggressively international, growing 8-10% here, has no debt, and is using actual cash flow from its current profits to repurchase the stock and retire some of its owners, so that your piece of the corporate ownership pie is worth even more. You just have all these great factors coming together in one company with Visa. One of these days, I’m going to get around to starting a tab on this site that tracks Visa’s changes in underlying profit performance—I’m not concerned about annual volatility in the stock price, this site isn’t for you if you’re looking for stocks that appreciate a little, you sell, and move on—to provide a diary of sorts for what it’s like to see a great company grow and make owners rich right before your very eyes.

Way #2: You possess the ability to save at an above-average rate. If you are setting aside something like $15,000 every year for new investments, the minutiae of the investments you personally select matter a lot unless you are actually a terrible investor.

That’s probably the greatest secret of all in investing that doesn’t get discussed enough. A lot of people on online forums devote their energy to finding a way to getting an extra percentage or two out of an online $100,000 portfolio. Sure, that’s important—who doesn’t want to maximize and optimize what they got?

But perhaps the predominant focus should be finding a way to add another $3,000, $5,000, or $7,500 to the investment account. At the very least, you should get the two factors blending together in harmony. There’s a reason why I write about the “Holy Trinity of Wealth Creation” in which you get growing dividends mixing together with your fresh cash contributions (the Holy Ghost in this analogy, by the way, is the reinvested dividends).

Having 300 shares of Coca-Cola pump out $336 in dividends last year is nice. Finding $4,000 to buy another 100 shares to spit out some more income is nice, too. But it’s absolutely great when you get to see your addition of 100 shares mix and mingle with the Coca-Cola Board’s decision to raise the annual payout from $0.28 to $0.305. Then, suddenly, you have 400 shares paying you $488 in annual income, and if you choose to reinvest, you’ve suddenly got this little engine creating 11-12 new shares of Coca-Cola all by itself each year. A decade or so of dividend increases, reinvestment, and fresh cash contributions starts to change your life, as you start getting these cash checks show up effortlessly and can free up your mental capacities to do things even more productive than you have ever done before (it’s a Maslow’s hierarchy of needs kind of permutation—when you’re a naturally ambitious person with your basic financials taken care of, you can think and act broader and bolder).

Way #3: You Can Save For A Super Long Period Of Time.  If you do not yet have the skill set to select quickly growing businesses, or the financial circumstances to maintain a high savings rate, then there is a third way you can be exceptional: time. You have to bring a consistency to investing throughout your life that goes above and beyond what is typical of most Americans.

I’ll use Procter & Gamble as an example, because it was such a blue-chip powerhouse in the 1950s that the Supreme Court had to force it to divest Clorox for anti-trust reasons. It had been paying dividends for six or seven decades straight at that point. It was selling Tide and other readily recognizable household products. What would have happened if you started investing $50 per month in Procter & Gamble from 1964 to 1974, increased it to $100 per month from 1974 to 1984, increased that to $150 per month from 1994 to 2004, and then increased your monthly contribution to $200 per month from 2004 to 2014. Yeah, $7.8 million before factoring taxes. Somewhere in the range of $5.22 million if you had to give a third of it to the United States (I’m sure thinking about taxes makes your Independence Day sweeter).

In this case, what is so exceptional about you is that you kept accruing an interest in a company every month since Bruce Springsteen was locking himself in his room with a guitar so that he could make his new band “The Castiles” the best ever.

Something more realistic might be this: a “500 by 20 Plan” where you set aside $500 every month into blue-chip stocks for twenty years. Someone that did this with Procter & Gamble over the past two decades would have $475,000 today, assuming optimal tax strategy (of course, you wouldn’t actually have 100% of your portfolio in P&G. Every two or three years, you might want to change the stock chosen for your monthly contributions).

In the field of personal finance writing, everyone is afraid to set a minimum amount to invest because they don’t want to discourage anyone (note: this isn’t a bad thing at all, every little bit truly does matter. Even just $50 per month into Exxon for twenty years gets you $58,000, and that’s real money). But from what I can tell, momentum starts to get built when you hit $500 per month in savings. When I run calculations, it’s always right around the $500 monthly contribution figure for fifteen or twenty years where you start to see resulting amounts that make you say, “Okay, this is life-changing stuff.” You create your own light at the end of the tunnel when you conclude that you need to save $16 every day to see significant net result changes in your life.

Conclusion: The life-changing stuff happens when you develop investment skill, a high savings rate, and/or the ability to invest for long periods of time. Ideally, you’d combine some of those elements together to get what Charlie Munger calls “lollapalooza effect” results. Life gets a lot more interesting when you dispense with tracing everything to “average American” terms, and start asking and answering the question: “Which of these three things can I do to be exceptional?”

Originally posted 2014-07-04 08:00:47.

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