UPDATE 11.27.24: The story behind Ronald Read and all of Your Survival Guy’s “Save til It Hurts Hall of Fame” inductees is hard work, patience, and compound interest. One is a mathematical principle and the other two you have to provide on your own. But compound interest didn’t just always exist. Mathematicians discovered the idea at least as far back as Babylon (2000-1700 BC), when historians have evidence they were working out the “Rule of 72.” C.G. Lewin explained the history of compound interest in Cambridge University Press’s Annals of Actuarial Science, writing:
Although there are very numerous historical references to charging interest on loans, only a few specific mentions of the compounding of interest have survived from before the 16th century. To some extent, this may have been because many loans were made only for periods of less than a year and hence compounding at annual intervals did not arise, but loans for longer periods did sometimes occur, and in those cases the interest may have been compounded every year, or occasionally even as frequently as quarterly. However, there were legal and religious restrictions on the charging of interest, which is probably why it was often the case that the terms of a loan did not mention interest, but instead the lender issued a bond specifying that on a stated future date a particular sum of money, greater than the amount lent, would be repaid to the lender in settlement of the debt. It is usually unclear nowadays how these repayment sums would have been negotiated, and whether a form of interest calculation underlay them. One type of contract lasting for a longer period was the purchase of an annuity for a number of years or for life, and the arithmetic developed by European medieval mathematicians for those cases did provide the purchaser with compound interest. Mathematicians would hardly have done so unless such calculations had practical uses. Moreover, at least one set of compound interest tables from medieval Florence has come down to us. From the 16th century onwards, legal and religious restrictions on charging interest started to be relaxed, and printed books emerged which demonstrated how interest calculations could be carried out, not only for simple interest but also for compound interest. It gradually became openly recognised that compound interest was acceptable when a transaction spanned several years.
Read the entire history here:
the-emergence-of-compound-interestOriginally posted August 10, 2020.
The story of Ronald Read is one that every potential investor should know. Steady compounding and saving til it hurts are tried and true ways to amass a fortune. Read did it better than most. Most Americans are simply not saving enough. In May, Elizabeth Renter reported in Nerd Wallet that most Americans couldn’t cover a $1,000 emergency out of pocket. She wrote:
About 9 in 10 Americans (89%) save on a regular basis, according to a new NerdWallet survey conducted online by The Harris Poll. And although financially responsible purposes such as emergency funds and retirement top the lists of savings goals, there is work to be done: 155.6 million Americans — 60% of them — don’t have a retirement-specific account, according to the survey of 2,035 adults from March 30-April 3, 2023.
Sixty percent is much too high. Bidenomics has made it difficult to save as real incomes have come down. Read what I wrote to you below back in August of 2020, and take a lesson from Ronald Read, and save til it hurts.
You may be familiar with Ronald Read’s story. It’s a story worth telling over and over and over again to anyone you know. My father in law Dick Young, wrote in May 2015:
Hard to even comprehend, but this great story, courtesy the WSJ‘s Anna Prior, recounts how Ronald Read accumulated an estate valued at almost $8 million. Mr. Read, who passed away at the age of 92, made a modest living pumping gas for many years at a Gulf gas station in Brattleboro, Vermont.
A Five-Inch Stack of Stock Certificates
How did Ronald Read manage to become a multi-millionaire? Mr. Read invested in dividend-paying blue-chip stocks. As Ms. Prior writes, Mr. Read took delivery of the actual stock certificates and “left behind a five-inch-thick stack of stock certificates in a safe-deposit box.” At his passing, Mr. Read owned over 90 stocks and had held his positions often for decades. The companies he owned paid longtime dividends. And when his dividend checks came in the mail, Ronald Read reinvested in additional shares. Apparently Mr. Read was the master of the theory of compound interest. Not surprising, his list of stock holdings included such dividend payers as Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG), J.M. Smucker (NYSE: SJM), and CVS Health (NYSE: CVS), all names I write about for you regularly. No high flyers for Ronald Read, and certainly no technology names.
Protect, Preserve, Patience, Perspective
Obviously Ronald Read had been a staunch practitioner of my PPPP theme, featuring the basics—Protect, Preserve, Patience, Perspective. Focus on those traits for success.
Now in August of 2020, in The Wall Street Journal, Jason Zweig writes the following on the book, The Psychology of Money by Morgan Housel.
It isn’t often that I receive a new book I feel I have to read, but I couldn’t wait to dig into “The Psychology of Money.”
To be published next month, this 242-page, easy-to-read book by Morgan Housel isn’t about investing. It’s about how to think about investing, and it’s one of the best and most original finance books in years.
Mr. Housel, 36 years old, is a blogger and venture capitalist who writes beautifully and wisely about a central truth: Money isn’t primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.
Mr. Housel begins with a shocking anecdote he witnessed himself: A technology multimillionaire handed a hotel valet thousands of dollars in cash to go buy fistfuls of gold coins at a nearby jewelry store. The executive then flung the coins, worth about $1,000 apiece, into the Pacific Ocean one at a time, skipping them across the water like flat rocks, “just for fun.”
To that man, money was a plaything. (He later went broke, Mr. Housel writes.) To Ronald Read, however, money was possibility. Mr. Read spent decades pumping gas and working as a janitor in Brattleboro, Vt. After he died in 2014 at the age of 92, his estate was able to give more than $6 million to local charities—because he had scrimped and put every spare penny into stocks that he held for decades.
How, asks Mr. Housel, did a janitor “with no college degree, no training, no background, no formal experience and no connections massively outperform” many professional investors?
Investing isn’t an IQ test; it’s a test of character. Unlike the man who chucked coins into the sea, Mr. Read could defer gratification and had no need to spend big so other people wouldn’t think he was small. From such old-fashioned virtues great fortunes can be built.
Analyzing two of the biggest stock-market winners of the past few decades, Mr. Housel says Netflix Inc. returned more than 35,000% between 2002 and 2018. Monster Beverage Corp. gained more than 300,000% from 1995 through 2018.
Yet, along the way, many investors quit; each stock spent at least 94% of the time trading below its previous all-time highs.
You can set your mind on the right course every month by reading my Survive & Thrive newsletter. Sign up here to get serious about investing.
P.S. The key to keeping your money alive and well—to survive and thrive—is to consider how much it can grow. Imagine showing a grandchild how to grow a plant in a Styrofoam cup like they learn in school. It doesn’t take too long to see that seed turn into something remarkable. How does it happen? The key ingredient is a little TLC. That’s how Ronald Read made his fortune.
