When it comes to investing, I have great admiration for three legendary investors. Peter Lynch, Charlie Munger and of course, Warren Buffett.
Peter Lynch was the fund manager for the Magellan Fund at Fidelity from 1977 to 1990. During that period his fund average a whopping 29.2% annualized! His most famous quote was ‘Invest in what you know’. He believed individual investors are in a better position to spot great investments than a fund manager, because they can spot a good company by the products they use, before a fund manager can.
Charlie Munger is a brilliant man. Warren Buffett and Charlie Munger have taken Berkshire Hathaway to dizzying heights. Even without Berkshire Hathaway, Charlie would’ve been a billionaire by his own talent at spotting great investments. When asked how an average man can get rich, this is what he had to say: “Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer”.
Finally good old Warren Buffett! He believes in Wrigley’s chewing gum more than Apple’s iPhone. And he has a point. 20 years from now you may not be using an iPhone, but chances are high you will still use Wriggley’s gum! When people are going gaga over Tesla’s new car, Warren thinks Railroads have a lot of potential! His mantra is very simple: Boring is beautiful.
I decided to do a little experiment. What if I really used the advice given by these greats and apply it to one of the most trying times in our nation’s history – year 2000 to current? i.e.,
- Invest in what I know (Peter Lynch)
- Reinvest dividends and keep my investments in a tax advantaged account (Charlie Munger)
- Keep it boring (Warren Buffett)
1. What products do I use on a day-to-day basis?
I decided to come up a list starting with the bathroom cabinet. Here’s a list I came up with.
- Colgate toothpaste
- Reach toothbursh (never realized they were made by Johnson&Johnson!)
- QTips (made by Unilever)
- Cheerios (General Mills)
- Dawn (P&G)
- Kleenex (Kimberly-Clark)
- Glad bags (Clorox)
- Kaboom! (Church & Dwight)
-I’ve excluded products made by companies that are not public
-Products made by companies not listed in one of the main exchanges (e.g. Nestle)
-Repetitions (My after shave is also made by Colgate!)
-Products I buy occasionally (Chips or sodas for example)
2. Investing $10,000 every year in one of these companies starting with the year 2000
What if I picked one company every year starting with the year 2000 and plunked $10,000 in its stock and repeated this for the next 7 years picking a different company every year?
3. Investing in a tax deferred account and reinvesting all dividends
Assume the money is put in an IRA (individual + spousal IRA?). All dividends are re-invested.
How much do you think I’ll have today?
According to my calculations, over a quarter of a million dollars!
Invested $10K at the beginning of year
The advice given by Buffett, Munger and Lynch actually works! But even though this might sound easy, in reality, it isn’t. I don’t know how many of you followed the markets in year 2000, but that was the height of the tech boom. It was very, very hard not to invest in a hot tech startup that quickly doubled your money than to invest in boring companies that made toilet papers and bathroom cleaners.
But once the markets crashed, investors wanted nothing to do with the markets. Again, very, very difficult to invest $10,000 while you are still licking your wounds.
Depending upon your financial situation, saving $10,000 every year, may not be that easy.
Not just that, even if you did get back into the markets, don’t forget investors rushed from one bubble after another only to see it pop before they could pull out. First there was the dotcom bubble, then the real estate bubble then the financial crisis, followed by gold crashing and it is only a matter of time before the bond bubble pops.
But for those who can keep their emotions in check, the rewards are wonderful!
This little experiment shows the combined powers of compounding and dividend reinvestment.
It might seem as though I selectively picked companies for this back test, but replace this list with companies from products that you use on a day to day basis, and I guarantee you the results will still be as spectacular.
Do you drink sodas on a day-to-day basis or do you smoke everyday or are you addicted to that particular brand of coffee? Replace my list with the companies that make these products, and see the results and you might start wondering if getting rich is really that simple!