The secrets of getting rich (as told by Warren Buffett, Peter Lynch and Charlie Munger)

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.

My Experiment!

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
Symbol
Current Value
Annualized Return
Total Return
$254,504.00
2000chd$95,304.0018.30%853.04%
2001un$32,422.009.94%224.22%
2002cl$26,396.008.88%163.96%
2003jnj$21,148.007.46%111.48
2004gis$27,210.0011.22%172.1%
2005kmb$20,212.008.73%102.12%
2006pg$16,067.006.62%60.67%
2007clx$15,745.007.34%57.45%

The takeaway

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.

Little Secret…
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!

(Photo in the front page used under Creative Commons License)

33 thoughts on “The secrets of getting rich (as told by Warren Buffett, Peter Lynch and Charlie Munger)

  1. Interesting experiment. Easy to do but apparently not that easy to carry out.

  2. Solid advice from some of the great. People make things too complicated sometimes. The secrets to success are normally obvious. These tips could be boiled down to, be aware of the world around you, stay the course, and add value.

  3. “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.” I could not agree more. There advice is so simple, yet so true and powerful. The best thing about it is that it works. :)

  4. Love your advice! Nice and easy and actually made some sense to me. Investing is usually way over my head but I love how this is simple. Thank you!

  5. I agree on the tips of investing in companies that selling boring products. These boring products are mostly necessary in every household. Every body needs these stuffs in every day living and keeping our body hygiene or healthy.

  6. Impressive! I am thinking about moving from index to stock picks and over the long term, your strategy makes perfect sense.

  7. Interesting experiment! I enjoy analysis like this. Often times, if we use a product regularly it means it’s genuinely good! Which, according to this line of thinking, should mean good things for it’s long term value as an asset for the company owning and/or marketing it.

    • I would also look at the past and the future. For example, I use Facebook, but don’t see myself using it in the future and the past is blank. I wouldn’t invest in Facebook.

      But Colgate toothpaste, I’ve always used that in the past and see myself using the same past in future as well. Colgate, I believe is a solid investment.

  8. I did this with a few Banks that Warren Buffett owns. When they were down a lot in 2011, I bought JPM, BAC, and WFC. I am up 100% on BAC, and 30% on the other 2.

    • I would be wary of banks after their shenanigans. Most have been propped up by Buffett or the government. Not my idea of solid companies. Sorry David!

  9. Cool experiment! I agree it’s much harder that it seems. Downturns are unpredictable and it’s easy to get caught up and make emotional trading decisions that end up hurting us.

  10. Wow, interesting “study” you did. Do actually own any of these or is it just for the purpose of your experiment?

  11. Terrific experiment MC! Easier said than done. We have the benefit of hindsight. Thinking back to 2000, there’s no way I would have been able to invest in boring companies when dot com high fliers were rocketing up 100%. Greed is bad, haha.

  12. The Wall Street Journal did an article recently on this very point: in an average year, low volatility stocks outperform high volatility stocks by 19% (1990 – 2012). Boring is CLEARLY beautiful….

  13. Another great article MC! Years ago, I read a book written by a Wharton professor. He claimed that his daughter picked 10 companies randomly from a list he compiled, and she outperformed all but top 1% money managers.

    His criteria to create a list was very similar to yours.

    1. Company with a household product.
    2. Company with, at least, history of 20+ years of dividend increases.
    3. Avg age of the company in the list: 110 years.

    You can see a pattern here..

  14. I have been using the “buy what you know” strategy for over 30 years — it really works. I know a lot about Tide, Gillette, Band Aids, gas, various types of foods. Companies that make those types of products bring in tons of cash and most give it back in the form of dividends and buybacks.

  15. You will be successful with this strategy, but it’s also because of the companies you picked. You chose items that most people use every day also. Basics. Even in a recession those items will be bought.

    Let’s say I like purses made by Coach. I know the quality first hand over 10+ years. If I invest in that company I could lose money because it’s a style thing, not a basic necessity. More people are buying purses that cost either less or more than Coach lately. It’s not a status item to own Coach anymore. Have you seen the DK emblem hanging from more purses lately? Anything that is considered something people buy with “disposable income” is vulnerable to changing trends. I know women who know particular brands in fashion very well. That doesn’t make it a good investment over time. Just sayin’.

    And just sayin’ you chose wisely!!!

  16. You will be successful with this strategy, but it’s also because of the companies you picked. You chose items that most people use every day also. Basics. Even in a recession those items will be bought.

    Let’s say I like purses made by Coach. I know the quality first hand over 10+ years. If I invest in that company I could lose money because it’s a style thing, not a basic necessity. More people are buying purses that cost either less or more than Coach lately. It’s not a status item to own Coach anymore. Have you seen the DK emblem hanging from more purses lately? Anything that is considered something people buy with “disposable income” is vulnerable to changing trends. I know women who know particular brands in fashion very well. That doesn’t make it a good investment over time. Just sayin’.

    And just sayin’ you chose wisely by going with boring basics!

  17. Wanted to add that I love Munger’s advice! And I love this article. Thanks, MC!

  18. I invested in video game companies cause that’s what I played every day. Midway bankrupt, THQ bankrupt, Edios Bankrupt, Graffiti bankrupt…geeze, I think I need to stick to toothpaste companies lol

  19. Solid advice from 3 successful billionaires. Great experiment by the way. I’m about to go do my own personal analysis.

  20. Simple, straightforward and practical. Also easier said than done!I think as Buffet boils it down, wealth is more about habits, discipline and temperament than it is about money. You might have the money to invest, but will you have the discipline to do it long term?

  21. While I think the advice is very sound and useful, I do not think the experiment means very much. The experiment was held largely in a bull market. Investment in any single stock in the experiment in the years 2008-2009 would have likely lost more than the DJI.

    So my opinion is that while the advice from the three is very useful, the missing point here is to diversify. Typically utilities and healthcare are a very stable area since both will be used forever (with minor impacts from government policy).

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title="" rel=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>