One of the great things about going old school and reading Charles Dickens novels is that Dickens is one of Western Civilization’s all-time greats when it comes to articulating the intersection of morality and economics. In fact, I read most of his work with this point of view in mind: How do I maximize my personal economic success while having a net positive effect on the other members of the civilization that I encounter?
Dickens is relentless when it comes to constructing various scenarios that can help us determine when we should prioritize economic success over the other areas of our life.
For instance, many of you have probably encountered this quote from Wilkins Micawber in David Copperfield: “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.” That is one of the most succinct insights into the human condition you can ever encounter because it taps into the energy that we all want to feel forward progress in our lives.
If, after adjusting for all of your expenses in October, you have an extra $30 in the bank, you know at least that living another month put you in a better position than you were before the month began. If you have $80 less on Halloween than you had on October 1st (by the way, I’m talking about the relationship between income and expenses here, not the inevitable fluctuations in the stock market that will naturally accompany your investments), then you have to deal with the obnoxious feeling of knowing that you’re working your butt off to be in a worse position. That feeling sucks—it’s the rough equivalent of going to the gym five days per week only to realize you have gained non-muscle weight at the end of the month—but the good news is that, with a few tweaks, most of us can become cash flow positive if we become deliberate with our spending decisions.
Of course, Dickens is there to point us in the other direction if we become too ham-handed in our economic life, as we learned from Ebenezer Scrooge in the classic A Christmas Carol. It took reflection upon the loss of the woman he loved, coupled with the vision of a future tombstone reading “Ebenezer Scrooge (Miser): Died As He Lived, Unloved And Alone” to break his pattern of overworking employees and paying them negligible wages. He was the modern equivalent of a man who views his minimum-wage employees with the attitude of: “You should have thought about that before having two kids! You should be glad you have a job! $6 Per Hour After Tax Is Nothing To Sneeze At!” It is hard to become a benevolent figure that earns the love of others when you treat those around you like economic pieces of meat—replaceable cattle that you aim to treat as poorly as possible while maintaining the labor necessary to keep the cogs in your business running.
But what inspired me to write about Dickens is that I recently came across a powerful illustration in his novel Bleak House that I wanted to share with you. The central subplot of the novel is a lawsuit titled Jarndyce v. Jarndyce, which is a court case that has been going on for so long that the participants in the lawsuit don’t even know who it involves and what exactly they want anywhere. It’s about this huge fortune that is being litigated to determine the beneficiaries, and Dickens finishes the lawsuit with the biting ending that the Jarndyce v. Jarndyce terminates once the legal fees sap the entirety of the estate—and with no lawyers left to get paid in the English Court of Chancery, the suit ends upon the full depletion of the fortune.
While Dickens used hyperbole to make his point—there is a very real take-home lesson from the story. Be very careful about inviting any ongoing fees into your life. It is amazing how many funds charge between 1.5% and 3.0% for management.
Look, you don’t have to participate in that drain—there’s only about a dozen or so managers that I have encountered in my life that are arguably worth the cost of management. When you add up all the mutual funds in the United States, these are the largest holdings:
Apple Inc. (comprises around 3% of total mutual funds holdings, nationwide).
Exxon Mobil (usually comprises just under 3% of mutual fund holdings across the country).
General Electric (used to be around the 4% mark, now it’s down to about 2%).
Chevron (solidly between 1.6% and 1.7% of all mutual fund holdings).
Johnson & Johnson and IBM (a little over 1.5% of all mutual fund holdings across the country).
Microsoft and Google (a little under 1.5%).
Procter & Gamble and Pfizer (usually over 1.3% of all mutual fund holdings).
Those companies right there would account for a little over 15% of your earthly wealth if you put all of your money into domestic stock funds across the country. If you are starting from scratch, you ought to be able to acquire the necessary investing skill within 8-12 months to determine whether you want to buy those companies at the present market prices.
But the Dickens lesson from Jarndyce v. Jarndyce is that you do not want to let other people siphon off your wealth. If you have a $100,000 portfolio, it is in your interest to avoid giving someone $1,500- $3,000 per year just to buy these very same companies that you could pick out yourself.
Wealth gets created when it can grow untouched. That means minimizing taxes, fees, and expenses that try to diminish your wealth. If you are considering purchasing stocks, bonds, REITS, or energy MLPs that yield greater than 4%, it probably makes sense to pay your one-time $8 fee and stuff that money into a tax-advantaged vehicle like a Roth IRA. If you are going to invest in a regular brokerage account, you might want to look at stocks like Disney, IBM, and Becton Dickinson because they pay out a dividend but also retain substantial amounts of earnings for future growth so that you don’t get whacked by taxes as your wealth grows (but you are also receiving annual increases in cash dividends so that you can truly benefit from your ownership without having to sell). Although, for middle-class investors, the current tax code in the United States can still be quite beneficial if you own high-income assets in a taxable account. The point that Dickens teaches us in Bleak House is that we should avoid paying mindless fees that threaten our wealth. It’s straight out of the Benjamin Franklin playbook—1% here, 2% there can eventually turn into an iceberg powerful enough to sink the Titanic that is your wealth base.