The Millionaire Next Door
Posted in Daily £££ Chatter |
A recent news article reported that Grace Groner passed away in January at age 100, leaving £5 million.
Although Groner lived in a wealthy community, she hardly fitted the profile of a trust-fund socialite. An orphan at age twelve, she was cared for by neighbours and attended university, earning an English degree in 1931. She went to work as a secretary for nearby Abbott Laboratories where she worked for forty-three years. She never married, never owned a car, and lived for much of her life in a small flat before moving to a tiny one-bedroom house willed to her by a friend.
Her £5 million estate was the fortuitous result of a lifetime characterised by frugality, simplicity, and a large dose of good luck. She had purchased three shares of Abbott for £40 each in 1935, reinvested the dividends, and never sold them. Over the subsequent seventy-five-year period, her £120 initial investment grew over 38,000-fold to approximately £5 million.
This story brings a smile to almost everyone’s face and offers a number of investment lessons as well.
- Compound interest is a wondrous thing over long periods. To turn £120 into £5 million over 75 years requires an annualised return of 15.13%. .
- Maintaining an investment strategy requires discipline, detachment, or some combination of both. Ms. Groner had ample reason over seventy-five years to question the wisdom of holding Abbott shares, and by extension, equity investments of any kind. The shares lost roughly one-third of their value in the bear market of 1937. She continued to hold her shares despite plunging stock prices in 1962, 1970, 1974, 1982, 1987, 1990, 2002, and 2008.
- In the wake of the recent financial crisis, lecturing investors on the possibility of so-called “black swan” events has become a popular pastime for authors and financial journalists. There is certainly some truth to their observations; as Prof. Gene Fama pointed out in his Ph.D. thesis published in 1965, stock returns exhibit extreme outcomes much more frequently than that predicted by a normal probability distribution. Ms. Groner’s experience illustrates how some unanticipated “black swan” events can be remarkably good.
- Could you recognise a great growth story even if you owned it? It could be harder than you think. The most striking characteristic of Abbott’s share price behaviour over the past seventy-five years is how long periods of trendless or below-average performance are punctuated by brief episodes of sensational results. As an example, the 1950s were a rewarding decade for equity investors, and the stockmarket more than tripled in value. But Abbott shares rose only 22.7%. How many of us would have had the patience to continue reinvesting dividends into an “obvious” loser after such a long drought? The same argument applies to holding an asset class such as small cap stocks or commervcial property after a prolonged period of weak relative results.
- Should we seek to emulate Ms. Groner’s success by making a bet on a single company? Probably not, particularly if we are seeking to use our portfolio to fund retirement expenses. Although we may admire her habit of thrift, most of us would have a hard time riding the bus for decades and wearing second-hand clothes whilst maintaining a multi-million-pound portfolio. If her investments had done poorly, the loser would have been her beneficiary, not Ms. Groner’s lifestyle.
- A major factor in Ms. Groner’s success is a happy accident of geography. She was raised and went to work for a firm in Chicago that turned out to be one of the biggest winners in the entire US equity universe. For the fifty-year period ending in 2009, for example, only seven shares had higher rates of return. But if she had chosen to work instead for other industrial leaders of the time such as DuPont, National Steel, or Nash Kelvinator—the outcome would have been sharply different.
