“Wealth consists not in having great possessions, but in having few wants.” – Epictetus.
There’s a lot I am uncertain about when it comes to investing. Will the Fed’s actions to stabilize the markets in March and April lead to serious inflation? Will international equities finally begin to outperform U.S. equities? Will Tesla’s stock ever stop going up? The last one aside, I don’t pretend to know the answers to most day-to-day investing risk/reward puzzles, but there is one thing I am absolutely certain of with respect to wealth building: The only sustainable formula to becoming wealthy is to 1) earn; 2) save; and 3) invest.
It’s a simple equation that is nearly impossible for most people to accomplish. I hear so many excuses about how hard it is to accumulate wealth in America, and then I read the incredible story of Ronald Read captured in Morgan Housel’s excellent new book, The Psychology of Money. The bio headline from Ronald Read’s Wikipedia page is perhaps the most extraordinary that I’ve ever read: “Ronald James Read (October 23, 1921 – June 2, 2014) was an American philanthropist, investor, janitor, and gas station attendant.”
Ronald Read lived a humble life of anonymity, working his entire life as a gas station attendant and janitor in Brattleboro, Vermont.* When he died at 92, Read’s net worth was approximately $8 million. He gave $2 million to his stepchildren, $1.2 million to his local public library (Brooks Memorial Library), and $4.8 million to the Brattleboro Memorial Hospital.
His secret was so simple and yet so difficult for most to replicate:
1. He lived frugally;
2. He saved approximately 80% of his income according to friends; and
3. He invested wisely, by never selling his investments and by reinvesting his dividends.
How did he do this? With respect to frugality, Ronald Read only owned one home that he bought decades before his death – it cost him $12,000 (roughly $125,000 in today’s dollars). He owned a used Toyota Yaris when he died and wore the same beat up ball cap and wool jacket nearly every day.
Read invested heavily in high dividend stocks such as Johnson & Johnson, Procter & Gamble, JP Morgan Chase, Dow Chemical etc. He never sold these holdings (and therefore avoided taxes), even when they underperformed during the late 1960s and 1970s, and he eschewed “hot” internet growth stocks of the 90s.
The final piece to his recipe for success was time. If Ronald Read had died in his late 70s or early 80s, I doubt his story would have garnered as much attention as it did. The power of compounding makes small contributions look massive especially at the end of one’s life.
I don’t know which of the three is most important to becoming wealthy: earn, save or invest. I am certain, however, that the “earn” portion is the least important. This is counterintuitive, as most people assume great wealth must come from great income. Ronald Read proves that your income doesn’t dictate your wealth, and he is not alone. On the other hand, we hear all the time about wealthy athletes and celebrities who go bankrupt despite earning millions. Income simply doesn’t equate to wealth.
Ronald Read proves that wealth is achievable over a long lifespan if you live simply, save prodigiously, and invest intelligently. Rinse and repeat over your entire life. If you have a high income, that’s an added bonus. The story of this impressive, disciplined janitor also proves that anyone can be successful in America.
*Ronald Read served briefly in the Army during World War II, but that isn’t the only thing he and I have in common. My Goodell ancestors lived in Brattleboro, Vermont when they immigrated to this country seeking the same American Dream that all who come to our shores share.
