Some keys to wealth creation

SOME KEYS TO WEALTH CREATION

Some of you may have Morgan Housel’s incredible book – “The Psychology of Money”. In this book he shares 19 short stories exploring the strange ways that different people think about money. In the book he states that his favourite Wikipedia entry begins: “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.” There are a number of conflicting themes just in that single line – a janitor that is an investor, that is a philanthropist. In this Financial View we look at just how incredible this story of Ronald James Read is and what we can learn from his story.

The best place in the story of Ronald James Read is the end of the story. When Ronald passed in 2014, at the age of 92, he left a staggering $1.2m to the Brooks Memorial Library and $4.8m to the Brattleboro Memorial Hospital. Despite very humble origins, at his death Ronald had managed to make $6m of charitable donations (R114m at current exchange rates). This would indicate that Ronald was incredibly wealthy and a rich man by anyone’s measure. The amazing part of the story is that he never worked in any high-income job. He built all his wealth by saving a large percentage of a meagre salary.

Ronald Read was born a century ago in 1921 and he grew up in an impoverished farming household in Vermont. His Wikipedia entry states that he had to walk (or hitchhike) 4 miles daily to his high school and he was the first in his family to graduate from high school. He had the misfortune to be born at the very point in time that after graduation he had to join the armed forces and go fight in the Second World War, earning a discharge in 1945. Thus, at age 24 he entered the labour market, which is a lot later than most blue-collar workers start their careers.

He worked for a quarter of a century as a gas station attendant and a mechanic at Haviland’s Service Station in Vermont. And after retiring for a year, he took up a part time job as a janitor at a JC Penney department store. He worked as a janitor for a further 17 years before retiring at the ripe age of 76 in 1997. A petrol pump jockey, a janitor, these are not the positions that one would associate with wealth creation but what Ronald’s story tells us is that is not what you earn that can generate wealth but rather what you do with it. Ronald was an incredible saver and he invested all of his savings into the stock market.

The story of Ronald Read tells us that the first key to generating wealth is to save, and to save a high percentage of your income, no matter what you earn. The second key is to ensure that you invest in the appropriate asset classes. Ronald invested his savings into the stock market which would provide the highest return over long periods, and there is the third key. Ronald invested for a very, very long period. He only retired at the age of 76 and thus really benefitted from the power of compound interest.

This brings us to a similar story, but in this case an individual that almost everyone has heard of – Warren Buffett. Warren Buffett is generally known as the world’s best investor. Almost 90% of his wealth was generated after he qualified for Social Security benefits at the age of 65. This wealth was generated because the money he had already invested was “working for him” as the dividends and share prices continued to grow, this accelerated the value of the investments he had made. Would we have heard of Warren Buffett if he had retired at age 65?

Part of the success of Ronald Read was due to his frugality. We don’t think it is healthy to be that frugal, but it does demonstrate just how rich one can get just by putting things away. He saved what he could, he invested it appropriately and left it to grow untouched for a large number of years. Almost the textbook investment recipe for the optimal outcome.