Tonight, I’d like to introduce to you a figment of my imagination for the purposes of this article only, Luckless Larry. Larry is a no-talented investor who spent the 1980s investing $5,000 on January 1st of each year.
On January 1st, 1980, he bought $5,000 worth of Lehman Brothers stock.
On January 1st, 1981, he bought $5,000 worth of Washington Mutual stock.
On January 1st, 1982, he bought $5,000 worth of Worldcom stock.
On January 1st, 1983, he bought $5,000 worth of Johnson & Johnson stock.
On January 1st, 1984, he bought $5,000 worth of General Motors stock.
On January 1st, 1985, he bought $5,000 worth of Enron stock.
On January 1st, 1986, he bought $5,000 worth of Conseco stock.
On January 1st, 1987, he bought $5,000 worth of Chrysler stock.
On January 1st, 1988, he bought $5,000 worth of Thornberg Mortgage stock.
On January 1st, 1989, he bought $5,000 worth of Pacific Gas & Electric stock.
Over the course of those ten years, his annual investments totaled $50,000 in money earned from his labor. Nine of those investments, totaling $45,000 in value, went completely bankrupt. That is an astonishingly high failure rate of 90%. Seemingly, Luckless Larry would be someone destined for the poorhouse.
After all, the only decent investment he made in his life amounted to a measly $5,000 set aside into Johnson & Johnson in 1983. How the hell could that compensate for an investment lifetime of mediocrity?
Well, it turns out that people across the world really like using Tylenol, Benadryl, Baby Lotion, Listerine, Aveeno, Neosporin, and so on. Three decades of profit growth, and reinvested dividends, can really do a portfolio wonders. That measly $5,000 investment in Johnson & Johnson grew into $304,000 today.
Think about that. Nine out of the ten investments went completely bankrupt, and he still saw his total wealth increase from $50,000 in out-of-pocket money into over $300,000 in total net wealth. A tidy, six-fold increase.
With investing, you don’t have to be perfect to get richer. You truly can fail your way to success by holding onto just a couple high-quality assets over the course of your lifetime. Personally, if nine out of ten things I touched went bankrupt, I would feel no right or justification to be wealthy. Yet, our friend Luckless Larry would be collecting $8,760 in annual Johnson & Johnson dividends from his singular investments. He’d be collecting 175% in dividends on his initial investment. When you aggregate it across a $50,000 portfolio that featured extreme failure, he’d still be collecting 17.52% in annual dividends on a portfolio that featured a 90% complete failure rate.
The fear of buying a Bank of America, Wachovia, or General Electric right before the eve of a financial crisis should be a terribly worrying concern if you practice widespread diversification. If you have a dozen investments of $10,000 each and given them each 25+ years to grow, it only takes one or two successes to make the investment endeavor worthwhile and provide you nice pension-like income during your retirement years.
The passage of time is your enemy in almost every respect except for investing. Take advantage of it. Hitch your wagon to it. Strategize your life around ways to get assets that churn out cash compounding in your favor. Even if you make extreme financial missteps along the way, the passage of time in regards to just one or two stock investments ought to make the process worthwhile.
And plus, imagine what happens if you are actually good at this investing stuff. Imagine if you included a $5,000 Coca-Cola investment compounding into $396,000 or a $5,000 Procter & Gamble investment compounding into $262,000 included in there as well. If your failure rate dipped to 70%, and you only made three $5,000 investments into Johnson & Johnson, Coca-Cola, and Procter & Gamble, you’d be sitting on nearly a million-dollar fortune today ($960,000).
Diversified consumer brands rarely get you into trouble. Utilities only occasionally get you into trouble. Large conglomerates without financial harms rarely cause mischief. Large-healthcare companies rarely go bankrupt. It’s retail, tech, and financial sectors where you can usually run into trouble. Imagine the lifelong results you can achieve if you keep those guiding principles firmly in mind. The person with the 90% failure rate saw his nominal wealth increase six-fold. Imagine what the person with the 10% failure rate could do over thirty years.