Normally, I cover the “batting average” type of issues associated with wise stewardship of one’s money. Spending less than you earn, doing something with the surplus like diversifying into ownership interests in the most profitable companies the world has ever seen, and so on.
There is another component to it that is less often discussed–and this is the “home run” component, or the magnitude effect of your decisions.
You may have previously encountered the Warren Buffett quote that, when it is raining gold, it is better to reach for a bucket than a thimble. This advice was summed up well by Charlie Munger in Poor Charlie’s Almanack with the following quote on page 26:
“Success means being very patient, but aggressive when it’s time. And the more hard lessons you can learn vicariously rather than through your own hard-learned experiences, the better. Our investment style has been given a name–focus investing–which implies ten holdings, not one hundred or four hundred. Our game is to recognize a big idea when it comes along, when one doesn’t come along very often. Opportunity comes to the prepared mind. The idea that it is hard to find good investments, so concentrate in a few, seems to me to be an obviously good idea. But ninety-eight percent of the investment world doesn’t think this way. It’s been good for us–and you–that we’ve done this.”
With this in mind, I try to pay attention to how a few tweaks in one’s decision-making process and daily approach to life can lead to radically different outcomes.
So much advice out there is of the generic “do the best you can” or “do what’s right for you” that the potential for satisfaction and greatness gets lost in the execution because there are no discussions of the specifics.
Imagine someone, accustomed to saving $5,000 every three months, was looking through the debris of the financial crisis in 2008-2009 and was trying to figure out the best investments to position his family for the long-term future.
One option might involve setting his sights on a sturdy business like Campbell Soup, which fell to $27 per share while selling a product so recession-proof that it actually grew profits during every recession from the Great Depression onward.
Or, he might have studied Aflac stock, which fell from a split-adjusted price of $34 per share all the way down to $5 per share. It is entirely possible that Aflac at $5 per share was the single most mispriced stock that was evidently mispriced at the time, out of all the investments I have ever studied.
Aflac, despite its quacking duck mascot being ubiquitous on the American advertising landscape, actually earns most of its money selling life insurance, cancer insurance, and other medical insurance in Japan (in 2008, the Japanese market accounted for 85% of Aflac’s business, and accounts for 70% of it today).
Aflac’s dividend had grown every year for three decades. It had a compounding rate of 18% annualized prior to the stock price collapse during the Great Recession. When it was earning $1.96 per share in profits, it was trading at $5! We are talking less than 3x earnings. The premiums were rolling in, and Aflac’s balance sheet is notoriously conservative for the insurance industry (a portfolio that is consists of 99% bonds and 1% stocks). It was isolated from the crisis, but nevertheless saw its price pulverized along with every other financial stock.
If you loaded up on Campbell Soup with your $5,000, you might have something like $9,000 today. It’s compounding, but not life-changing. If you had the financial literacy to identify Aflac as the once in a lifetime opportunity that it was, and found a way to load up, taking not only the $5,000 available but working overtime and reaching into cash reserves to swing heavy and buy $15,000 worth of the stock, you would have seen the fruits of that decision climb in value to $140,000.
Successful investing is all about tweaking three variables. You have money (surplus available to turn into action), you have the investment selection (a product of financial literacy / knowledge), and you have time. The part that can be forgotten is that not all financial selections are equal.
I see many finance writers say, “I invest $2,000 per month equally into ten different stocks each month.” That process will yield favorable results, and therefore, it is easy to get stuck there. But it is unlikely that all ten ideas are of equal merit. And if one of them particularly stands out as a compelling opportunity, it might be worth examining what you can do to make more than $2,000 available to invest at that given time. The magnitude of your success can increase dramatically by finding the highest compounders and saving the most amount of money possible, and you shouldn’t let yourself become sleepy and forget that.
Originally posted 2018-09-21 01:20:35.