Never judge a book by its cover. This universal rule can be applied to most of life. From books to people, what you see isn’t always what you get. The rule is particularly accurate when it comes to personal wealth. In fact, true wealth often manifests itself in the opposite way that most would expect.
Let me explain, you see someone driving a new Ferrari and wearing the latest expensive designer fashions, it is automatically assumed that this person is wealthy. The opposite could be said for someone sweeping the floors in an office building or pumping gas at your local gas station, it is automatically assumed that this person is poor and struggling.
Well, the truth can often be quite surprising.
More often than not that shiny new $200,000 Ferrari is leased by someone who spends all their money on “looking wealthy” and the reality is they struggle every month to pay the minimum payments on all their loans. In some cases, these flashy millionaire looking folks are one step away from bankruptcy due to overspending.
On the other hand, the person who sweeps the floors or does other menial tasks while wearing overalls and drives an old beat up Chevy just may be a multi-millionaire who has no interest in showing off. These “stealth millionaires” take pride in flying under the radar and accumulating massive wealth.
One example of a “stealth millionaire” is Ronald Read. This multi-millionaire from the unassuming state of Vermont lived a quiet life without showing any signs of his super investing results. He passed away at the ripe old age of 92 with an $8 million dollar estate from savvy stock market investing. Having a kind and caring for others soul, he left the majority of his estate to the library and hospital.
How Did He Make So Much Money?
Maybe you think that Mr. Read must have discovered a stock market secret to make so much money. Maybe he found insider information in the trash can where he worked? Well, the truth is, nothing could be further from the truth.
He made his money the old fashion way. He invested in solid, blue chip companies and held long term.
Read was unusual because he kept the actual stock certificates of the companies that he owned. Whether this was from a distrust of brokers or simply the way he preferred it, I am not certain. With that said, the way he kept the certificates really has nothing to do with the wealth accumulation over the years. It was simply a personal choice.
The companies that he owned include AT&T, Bank of America, CVS, Deere, General Motors and GE.
While these stocks appreciated wildly from when Read started investing in the 1970’s, the real secret to his success was dividend reinvestment and buying value.
What is Value?
Value in the stock market means finding stocks whose share price is undervalued compared to the value of the company. Value investing is Warren Buffett’s primary wealth building tactic. Many investors avoid value investing since it is very slow and boring. There is zero excitement in value investing. However, in investing, slow and steady often wins the race.
Obviously, Ronald Read saw incredible future value in the companies he poured his earnings into over the years.
What is Dividend Reinvestment?
Dividends are an often overlooked part of stock market wealth. Believe it or not, over 40% of all stock market gains in the last 80 years are credited to dividends. Think about this for a second.
This fact means that the Dow Jones Industrial Average and S&P 500 would be trading for over 40% less today if it wasn’t for the power of dividends. That’s truly incredible and a testament to the power of dividends.
The real investing magic starts when the power of dividends is combined with a tactic called dividend reinvestment. As its name suggests, dividend reinvestment means using the proceeds of the dividends to purchase more shares of the stock.
Don’t worry, you don’t have to do this manually. All you do is request that your stock market brokerage automatically reinvest your dividends.
Dividend reinvestment takes advantage of compound interest. Compound interest is the earning of interest on top of interest. Compounding is such a powerful force that Albert Einstein is said to have called it the most powerful force on earth.
The combination of buying value stocks that pay dividends and then consistently reinvesting those dividends is the secret to Ronald Read’s success.
Remember, despite the daily ups and downs of the stock market, stocks have an inherent upward drift. The upward drift can be seen clearly in this long term chart of the Dow Jones Industrial Average.
Taking advantage of the upward drift can only be done with a long term perspective on the stock market.
Steps To Replicate Ronald Read’s Success
The exact formula to replicate Ronald Read’s success is to invest $300.00 per month at an 8% interest rate for 65 years, as Chris Hogan told CNBC. Certainly, not every year will produce 8%, some will be less and others will be much more. The key is to average 8% over the long term. Obviously, by ramping up the average return, you can reach yoru goal much faster. Regardless of the timeframe, there are steps that you can follow to build your own long term stock market fortune.
Step 1. Start Immediately
The only way to build stock market wealth is to start investing. Regardless of your age, starting right now is the correct thing to do to ramp up your stock market wealth. Obviously, the earlier you start investing, the more capital you can accumulate by buying value stocks and reinvesting the dividends.
Step 2. Follow a consistent plan
Being consistent overtime allows your portfolio to take advantage of another powerful wealth building tool. This tool is called dollar cost averaging. Dollar cost averaging is investing a consistent amount of money on a regular basis. By doing this, it allows you to buy stocks as they vacillate in price. This means that you will likely buy at lower prices than those who only purchase stocks at a single time frame. By doing this, the law of averages generally works in your favor, allowing the purchase of more shares at a lower price. This in turn builds your portfolio faster than saving your cash then buying stocks just one time.
Step 3. Choose Dividend Aristocrats for your core portfolio
Your wealth building portfolio should be diversified. It should consist of 50% value stocks that have a history of consistently increasing dividends. The other 50% should be allocated to the Dividend Aristocrats. Dividend Aristocrats are stocks that may not be value stocks when you place your initial order. However, they have a history of increasing dividends for 25 years and are members of the S&P 500.
Presently there are 54 companies identified as Dividend Aristocrats by Standard & Poors. The top five of these include, AT&T (NYSE:T), Colgate-Palmolive (NYSE:CL), Franklin Resources (NYSE:BEN), Genuine Parts (NYSE:GPC) and HPC (NYSE:HPC).
Step 4. Be patient & consistent
Patience and consistency are the cornerstones of wealth building. This is proven time and time again by examples like Ronald Read. It’s not get rich quick by any means!
The Key Takeaways:
The people you least expect may be the wealthiest people that you meet. Wealth is slowly built in the stock market by buying value companies that pay consistent dividends. Reinvest the dividends to take advantage of compound interest. In addition, be consistent with your investing to exploit dollar cost averaging.