In case you have not heard the story of Grace Groner here it is. She is the 100 year old woman who died in January 2010 at the age of 100, leaving her $7 million estate to her alma mater, Lake Forest College. What makes Ms. Groner’s story interesting is how she made the $7 million. She made it from an initial investment of $180 into Abbott Labs stock in 1935 buying 3 shares of stock at $60 per share and reinvesting the dividends generating 15% returns per year. Since it is tax time here in the US, I thought it was a good idea to take some of the lessons from Ms. Groner and apply them to the modern US investor.
1 – Investors should optimize their savings. It might be hard to come up with that extra bit on a monthly basis to set aside for retirement. But the amount does not have to be much. Ms. Groner started with $180. An investor can even start with $50. There are mutual funds that allow investors to have money withdrawn from their checking account (and many stocks with dividend reinvestment plans) to make the process painless. The lesson from Ms. Groner here is that any initial investment can compound over time if it is allowed to work. One may look at that investment and think it is not a lot of money. Well, if it is left alone, it does not have to be a lot of money.
2 – Investors should utilize tax deferred vehicles like IRAs and 401ks. There are multiple reasons for this. First investors are going to need to rely on their own savings to fund retirement. Second, the government gives a tax break for these vehicles allowing investors to save with pretax money. Lastly when a tax deferred vehicle like an IRA is used the money cannot be touched without taking a penalty. This would encourage the investor to leave the investment alone.
3 – Investors should allow time to work in your favor. Assets can expand rapidly if allowed to compound over a long period of time. Ms Groner left $180 alone and did not touch it even as it spiraled into the millions. She held the shares and accumulated more through a depression, multiple wars, multiple recessions, inflation scares and many booms as well. I looked at Abbott’s stock and there were a few 40% draw downs. 75 years is a long time and we should all be so lucky to live so long but even if we placed $10,000 into an IRA and generated long term returns of 10% (which is historically what the equity indices have generated) then that would spiral into $175,000 over 30 years and to $1,000,000 by the 48th year.
4 – Investors should look at investments that generate dividends. It is true that stocks that dividend paying stocks tend to be more mature firms. Still if reinvested, dividends can really spiral an investment’s returns. Dividends may also force a company to be true with its accounting revenues and earnings. A company (like Enron) that did not generate cold hard cash would not be able to pay a dividend. This is just another layer of safety for the investor. This may have helped Ms. Groner and her investment as she had 100% of her life savings in one stock. Risky? Yes, but as long as it paid a solid dividend, it was at least generating enough of cash to stay in business.
5 – Know where your money is going. Ms Groner had all of her assets in one stock. This is no doubt a risky scenario. But it does point out an important part of Ms. Groner’s investment style. She invested in what she knew. In this case she worked over 40 years at Abbott Labs and had at least some idea of how the company was doing. As a secretary I would bet that she would be able to see how well financially the company was doing. Maybe she read the reports as well. Regardless investors should really get to know the story when investing in an individual stock. Read the annual report, the 10K and 10Qs are especially useful as they contain all sorts of scenarios both positive and negative that the company can take.
To recap, investors can learn a lot from Ms. Groner. If possible, save some money and utilize the IRAs. April 15th and Uncle Sam wait in the background but he gives individuals a way to save. Investors should take full advantage of it and maybe generate returns like legendary investor Grace Groner.
Authored by Tom Henderson, Strategist JBH Capital.
There are no disclosures to make.
Disclosure: There are no disclosures to make.