Thursday, March 5, 2020

Everybody Ought to Be Rich

In August 1929, John J. Raskob published an article in the Ladies Home Journal titled "Everybody Ought To Be Rich". The article discussed the novel idea of long-term dividend investing.

"Suppose a man marries at the age of twenty-three and begins a regular saving of fifteen dollars a month – and almost anyone who is employed can do that if he tries. If he invests in good common stocks and allows the dividends and rights to accumulate, he will at the end of twenty years have at least eighty thousand dollars and an income from investments of around four hundred dollars a month. He will be rich. And because anyone can do that I am firm in my belief that anyone not only can be rich but ought to be rich. – John J. Raskob"

You can read the article here: "Everybody Ought To Be Rich"

Raskob was very bullish in the stock market in the 1920s and gave an interview to Samuel Crowther for Ladies Home Journal in which he suggested every American could become wealthy by investing $15 per month in common stocks. At the time the average American's weekly salary was between $17 to $22.

The author described a very sensible sounding strategy, where an individual can put $15/month in the 30 companies from Dow Jones Industrials average. The investors would then reinvest all dividends, and expect to hold on to that portfolio for 20 years. The ultimate goal was to live off the dividend income stream from this portfolio, and retire.

Unfortunately, this article is usually seen as a warning sign, rather than for its sensible advice.
There are two major reasons for that. The first is its unfortunate timing, having been published to the masses just a few weeks prior to the Crash of 1929 and the start of the Great Depression, which ultimately put 25% of Americans out of work and crashed the economies worldwide.

The US stock market fell by 90% between its high of 381 point in September 1929 to its low of 40 points in July 1932. It did not recover until 1954, if you look at stock prices of Dow Jones Industrials Average. If you look at total returns, the US stock market recovered by 1936, only to plunge again and recover fully by 1944.

The second reason why this article is not taken well is the fact that the author expected those $15 monthly deposits to be invested for 20 years and turn into the princely sum of $80,000. Those $80,000 would in effect then generate $400 in monthly dividend income. Unfortunately, this assumes annualized total returns of 26%, which is simply not sustainable for a 20-year period.

Because of reasons one and two above, this article is seen as an example of the irrational exuberance and speculative excess from the late 1920s, which ultimately popped the bubble from the Roaring 20s. The popular saying goes that when stock market investing becomes mainstream and is adopted by the masses, it is a sign that investors should not be in stock. Of course, this saying is highly elitist and silly.

There is nothing special about long-term investing. Investing can be learned from everyone who is willing to commit to a few things within their control:

1) Save money regularly
2) Invest the money regularly
3) Keep investing costs low
4) Keep investment turnover low

This means that if you put money to work every month, by buying a diversified portfolio of blue chip dividend paying stocks that you hold for years, and do not expect to sell them, you should do ok over the long run. There will be ups and downs in the economy, the stock market and the world, but if you manage to persist and keep putting money to work in your portfolio, while reinvesting those
dividends, you have the odds of success stacked in your favor. Oh, and keep costs low. This means investing through a tax-deferred account, and investing on your own by bypassing expensive mutual funds and annuity salespeople.

I find the article to be sensible, minus the ridiculous returns expectations,

The most interesting fact is that if someone had invested $15/month in the companies of Dow Jones Industrials Average for 20 years, they would have done pretty well. That investment plan would have turned into a portfolio valued between $8,500 to $9,000 by the beginning of 1949. The numbers were calculated in The Intelligent Investor and by Jeremy Siegel. There is a calculation done by the blog Novel Investor as well.

In late 1948 the dividend yield on Dow Jones Industrials Average was a little over 6%. Which means that the portfolio would have generated $540 in annual dividend income, or $45/month by early 1949.
The site Novel Investor had calculated the amounts and charted it. If you look at the performance of this portfolio, the dip between 1929 and 1932 is not visible. That’s because the portfolio was in the accumulation phase at the time, which meant that new capital eclipsed the amount of temporary quotational losses generated along the way.

Raskob's All Stock Perfomance
Source: Novel Investor

Investors did not owe taxes on dividend income during the first 54 years of the 20th century. The act of 1913 made dividend income exempt from taxation. This was the case until 1954. There was a brief period between 1936 - 1939 when dividends were taxable as ordinary income, but other than that dividends were not taxable for over 50 years. Perhaps that's why John D Rockefeller is known for this quote: "Do you know the only thing that gives me pleasure? It's to see my dividends coming in"

When you are in the accumulation phase, the best thing that can happen to you is to buy when stock prices are going down. This bear market also allows you to reinvest dividends at lower prices, thus purchasing more shares. In effect, when prices are lower, you are buying future dividend income at a discount.

Now, I am not aware if any investor stuck to this investment program between 1929 and 1949. It would have been incredibly difficult to remain calm and to continue investing through the Great Depression, and the calamities of the World War II. After all, even if you had the mindset to ignore fluctuations and just put money to work, there was a 25% chance that you become unemployed at some point by the early 1930s. Since there were no social safety nets at the time, chances are that our investor would have had to sell their securities at fire-sale prices merely to survive the calamity. In addition, that person may have been drafted in the army during World War II and become of the casualties of the bloody war. So, a lot of things could have happened to derail the process of accumulating that portfolio.

Yet, it is still a good model to follow for long-term wealth accumulation. This is the model I followed as a 22 year old who started building out their dividend portfolio right when the Great Recession was about to start. This is the investment model I share with readers of my Dividend Growth Portfolio Newsletter.

The nice part of this investment model is that it could have led to some stratospheric account balances if our investor kept putting away $15/month for 20 more years until 1969 ( when they would have been 63). The investment value would have been close to $135,000, and the portfolio would have generated $4,725 in annual dividend income off of a dividend yield of 3.50% ( the yield on US blue chip securities in 1969)

Those who never bought stock, citing the Great Crash as the vindication of their caution,eventually  found  themselves  far  behind  investors  who  had  patiently accumulated equity

I know that the stock market has been turbulent in the past month. However, if you are a long-term investor in the accumulation phase, you should be praying for lower prices when you invest your money. This assumes focusing on quality blue chips, and keeping a diversified portfolio that doesn't cost an arm and a leg. Rinse and repeat, and keep investing through thick or thin.

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- Dow 370,000
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The Gift That Keeps On Giving
How to turn $40 into $18 million

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