Nov

26

 I recently had the opportunity to review the portfolio of a near centenarian who had part of her portfolio held at a large "wire house" broker, and part literally held as stock certificates held in a bank vault. GARP stocks in a vault for 30 years… well, they make you very very wealthy over a 30+ year holding period with zero friction… a thing of beauty. No "proper" broker would have ever allowed a 12K investment to bloom into multi-millions, etc with more than a few positions, plus the amazing stalwart Exxon, etc. The idea that " you have to diversify, etc" made the "wire house" account just a fraction of "the vault".

Alex Castaldo adds:

This reminds me of the famous anecdote told by Robert Kirby in his article "The Coffee Can Portfolio" (JPM, 1984). Mr. Kirby had been advising a well off female client for several decades, supplying a steady stream of buy and sell recommendations.  One day he discovered that her husband, unbeknownst to him, had copied some of his early buy recommendations in his own separate account; he had then lost interest and stopped trading that account; the dormant account had grown more than the wife's more active account and included some remarkable gains in a few now famous stocks.

Victor Niederhoffer writes: 

Very fantastic and resonant for all ages. 

David Lillienfeld writes: 

But that was during a period of economic growth starting from when the US produced ¼ of global GDP. Would the same thing have happened if she had started in 2000?

Victor Niederhoffer adds: 

England did not do very well during this period. A few world wars. Lost its seat as financial capital. Went socialist. Their returns about as good as those of the US. David, you can take the boy away from the agrarian farm, but you can't take the ( ) farm away from the farm. You would enjoy Dimon who suffers from the English disease, and despite his results is always trying to forecast 2 or 3 % a year less for the next 100 years because of his malady.

Rocky Humbert writes: 

There is a bit of chicanery going on in this thread. The tax effects are not being considered. Let me illustrate: Let's assume that a portfolio of stocks compounds at 8% and there are NO dividends. And let's assume that a portfolio of bonds compound at 8% (and the coupons are reinvested each year.) So it's a horse race between the two long duration asset classes. After 30 years, the stock portfolio will have grown from $1 to $9.31.

HOWEVER, there are capital gains taxes owed as the old lady moves into a nursing home and needs the cash. Let's arbitrarily say that the combined local, state and federal capital gains tax rate is 40%. Then the $9.31 is actually $5.58 after paying the tax bill … and the compounded rate of return is 5.9%In contrast, the investor pays taxes every year on the bond portfolio and reinvests the remaining amount after taxes. After 30 years, the bond portfolio will have grown from 1$ to $3.89 or about 4.5%. So, even though the return on both asset classes were the same, the effect of compounding on the deferred taxes in the stock portfolio is what accounts for the lion's share of the difference. I used a high capital gains tax rate. The actual results may be better. And if the old lady dies, there are no capital gains taxes. Only estate taxes (if any).

Buffett understands this phenomenon extremely well. And there are several excellent academic studies that document even better results if one harvests the tax losses each year and never sells the winners…. BOTTOM LINE: The permabears on this list are ignoring the single most important factor to achieving outstanding returns: Unrealized tax liabilities are an interest free loan from the government on which one can compound over time.

Jim Sogi writes: 

There is another very important often unanswered question: how much is enough? I know all of you want to make as much money as possible, but how much is enough. My best friend is rich, and made his money in real estate. Yet he has gained weight and is having health problems. I tell him, take time off, spend some money, have fun, exercise, spend time with your family. He doesn't need to work, still he is busy with another big project. Why? The money will not be good for his kids. I've seen the destructive power of money often. It can ruin a child's incentive and motivation easily. Is money worth losing your health?

Ed Stewart responds: 

James,

You are making inferences that are unwarranted given the story that I told. She was an extraordinarily generous woman to friends and charity, who lived very well - very adventurous in spirit and a world traveler. She continued to oversee private companies well into old age - Companies that employed many and created value for customers in competitive industries.

In the weeks before her death she was contacted by a young man who is an attorney at a leading law firm in the region where she lives. He met her for dinner with his wife with gratitude in his heart. Years ago, this old woman had paid for both his private university and his law school. And her only connection to this young man was that his father was her gardener and household helper for many hears. And this was not an anomaly or a one off. She helped to open up the American dream in this way, for many, many people - never publicly or speaking credit, but content and satisfied to be a partial catalyst for the self betterment of others and the achievement of what she felt was the American dream.

So, while in a general sense I understand your sentiments, in this case they are ill applied. Happy thanksgiving folks.

a commenter writes: 

I had often wondered why someone with great wealth will continue not only to sometimes still work so hard but to risk all in ventures in the quest for even more rather than keep in safer investments that will be enough to give them a great luxurious life. I later realized that there are different objectives that are the focus of people's lives that seem innate or driven by personality types that are. One of the most common are find are the "game players." To prove to themselves that their lives matter they prefer competitive activities in which the goal is to come out on top. The money might matter to some extent for what it buys, particularly for buying power, but part of it is just a way of keeping competitive score. People are not necessarily confined to one trait; they can be more complex than that - but one may dominate. Those who favor high taxes on the rich sometimes point to good growth in the economy like in the 1950's when those marginal tax rates were outrageously high. Of course, loopholes allowed the wealthy to often pay less than those rates, but that can hardly be the entire answer. Rather, I suspect that some will be competitive irrespective of the haircuts because even with the disincentives they still want to be the ones who come out on top. Hence, the destructive effects need not be quite as great as one might expect. But if the disincentives are too great they may just start playing other competitive games, such as who will be on the political top under a communist society, and stop playing the economic game in which wealth is the measure of success.

Ed Stewart adds:

Rocky,

Your sentiments are a big part of what struck me after reviewing this track record.

Let me add to the story though, what perhaps I should have initially. This old woman was never a miser. In fact very wealthy all along do to her husband's success in business and investing acumen. She had no need for the stock portfolios for any reason, be it income, old folks, care, etc, be it current income or charity, etc. And she was very generous, lived comfortably, and by no means a miser. The amazing part of the investment angle of the story is the way the "vault" stocks over time surpassed her other holdings in value, investing in many of the "dull" names that today are famous for having created enormous returns over the long term.

A commenter advises: 

 How would buy and hold work for those not initially wealthy?

Though you can't afford them, buy stocks when you are young so they can compound.

Never look at them, or the market, as you will be tempted to sell.

Pay off your student loans from your after tax income.

Don't read about investment managers who beat the market because you might try your hand.

When you need money to start or buy a business, borrow but don't sell.

When the little lady wants a nice car, house, vacation, or life, just say no.

When you need money for your kids growing up, skimp but but don't sell.

Save for kid's college from your salary and make them take student loans for public schools.

Have boys so your daughter-in-law's parents pay for weddings.

Retire late to prolong compounding and delay taxes.

Now that you can finally spend, enjoy retirement with your many close friends and relatives.


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1 Comment so far

  1. Diogenes on November 27, 2013 5:29 pm

    Of course, there are also stories such as that of my late friend whose ‘vault’ was fully invested in Penna RR stock certificates that went to zero, and were later wryly used by his children for wallpaper.

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