Wednesday, March 7, 2012

The Grouch's Millionaire Secrets

“Earnings are only a means to an end, and the means should not be mistaken for the end. Therefore, we must say that a stock derives its value from its dividend, not its earnings. In short, a stock is worth only what you can get out of it. Even so spoke the old farmer to his son: A cow for her milk/ A hen for her eggs/ And a stock, by heck/ For her dividends.”

~ John Burr Williams, “The Theory of Investment Value” (1938)

Many books have been written over the years on how to become a millionaire. Some are based on sound business and investment principals while others are based on the latest fad of the moment. But you don't need to waste your money on these types of books (invest it instead). In the simple world of the Grouch, they can all be boiled down into a handful of key items that can fit on a single sheet of paper.

1. A million bucks ain't what it used to be. The younger you are, the more money you will need to live independently. You should set your goals higher, probably somewhere in the 3 - 5M range, before telling your current boss goodbye for good.

2. Your house is not an investment. It is a place to live. The days of massive real estate gains are over. Long term house price tend to move in line with inflation. The current correction in real estate is a reversion to the long term trend line. Until we have a good dose of inflation and higher employment rates, don't expect to see prices rise significantly.

3. Gold is not an investment. At best, gold is an insurance policy against fear. Gold has no fundamentals, no earnings, no cash flow, no dividends or interest. Its price is determined by supply and demand, and most of all by fear. In troubled times, its price will move higher as stocks move lower. In good times, its price will tend to drift lower.

4. Invest early and often. Let the power of compounding work for you and be happy with the 7 - 12% average gains of the market over the long term. Compounding is a magical thing that can turn small sums of money into large sums of money.

5. Choose low cost investments. Cost are subject to the laws of negative compounding. A 2% expense ratio is a tough hurdle to overcome year after year. Even the most talented stockpickers must take extra risk to beat the market. An index with an expense ratio of .07% is much more likely outperform a fund with an expense ratio north of 2%. It does happened, but it is usually luck rather than skill that lands a person in these fortunate funds. Odds are not in an investors favor with high expenses. Why buy yachts for your broker or fund manager instead of yourself?

6. Stay away from today's hot hand and pick managers based on investment philosophy, or invest your own money. Statistically, value investing produces higher returns over the long-haul as compared to growth investing. Chasing performance only works occasionally, and usually results in permanent loss of capital. Pick managers that apply a consistent discipline to their investments and only buy assets that they believe are selling for cents on the dollar.

7. Be a contrarian. The best deals are to be found in what investors are currently shunning. Major stock market corrections like in 2008 and 2009 are a prime example of this. But it is hard to control the emotions and be rational when fear is so thick in the air you can almost cut it with a knife. So do your homework and make sure the current problems with a business or security aren’t of a permanent or fatal nature.

8. Be frugal. Live well below your means. Make bargain-finding a lifestyle. Be a coupon-clipper at the grocery store, and put at least 100K miles on your cars.

9. Use demographics in your favor. Observe the world around you with fresh eyes every day. See where the population trends are heading and invest in these areas prior to discovering trends with the masses from Money Magazine, Kiplingers or Smart Money. By then, it is too late.

10. Look at everything with a skeptical eye. Try to poke hole in every investment thesis, and understand the potential downside of every investment before committing capital. This is more important than understanding the potential upside of investments.

11. Keep a balanced approach. Use some income assets to help you deal with portfolio volatility, and to provide stability in the bad times. But realize you will never get rich off of these type of investments. At best you will stay 1 or 2 percentage points ahead of inflation.

12. Invest in yourself. Always seek to grow your base of knowledge every chance you get, whether through formal or informal education. Reading books, youTube and blogs are a great source of knowledge as well as misinformation so you have to apply a filter to everything you experience to separate the wheat from the chaff.

13. Have fun. Life's an adventure. If you don’t enjoy compounding wealth, then by all means be like most people and live paycheck to paycheck. Buy whatever your heart desires, but don’t come boo-hooing to Uncle Sam that the taxpayers should fund your dream retirement. This isn't Greece. But for those who want to try something different, compounding wealth can be a lot of fun. Not just for misers, but for regular folks who may ultimately want to give it all away to their favorite cause, or just take care of their families.

Ok. So there’s nothing secret about anything in this list. It’s all just common sense, and if applied consistently throughout your life will make you very wealthy, much more than your friends who will be laughing at how cheap you are. It all comes down to what you want to do with your life. If being financially independent is important, these items can provide some general guidance. Each person will have to individually map out their course to wealth, but the principles are universal and timeless.


  1. Well stated Grouch! It might be common sense, but common sense worth repeating!

  2. Great list. I would add "Check your emotions at the door. The stock market can be an expensive place to learn about yourself."

  3. Not too hard, is it? Balancing "having fun" and "being frugal" are not mutually cancelling.

    And, "Start early" is one principle I wish I would have heeded. But such is life.