Warren Buffett's secret - THE COMPOUNDING FACTOR

EXPLANATION

This may be old hat to some readers but it is worth remembering how compounding is one of the keys to Warren Buffett’s investment success.

The compounding factor is easy to understand. Compound interest (or compounding of earnings) is simply the ability of interest (or investment return) earned on a sum of money to earn additional interest (or investment return), thereby increasing the return to the owner of the money or investor. It works like this and we will use interest as the exemplar:

You deposit a sum of money, say $1,000, in a bank or other financial institution that earns interest at the rate of 5 per cent, payable annually. At the end of the first year, you have earned $50 and have the right to get your $1,000 back.

Suppose however that you want to invest the money long-term, for say 10 years. You now have two options.

OPTION A: TAKE INTEREST PAYMENTS

You can have the interest paid to each year, in which case you will receive $50 each year to spend or use as you wish. At the end of the 10-year period, you will get your final interest payment and your $1,000 back.

OPTION B: RE-INVEST INTEREST

You can choose to re-invest your interest and earn interest each year on the accumulated interest payments as well as on the original investment. This means that you do not get annual payments but, at the end of the 10-year period, you will get a lump sum payment of $1625. This is compound interest.

Why this much larger amount? Because your interest earns interest each year like this (calculations rounded to nearest 50 cents). 

Year	Principal sum	Interest earned	New principal sum
1	1000	50	1050
2	1050	52.50	1102.50
3	1102.50	55.00	1157.50
4	1157.50	58	1215.50
5	1212.50	61	1273.50
6	1273.50	64	1337.50
7	1337.50	67	1404.50
8	1404.50	70	1474.50
9	1474.50	74	1548.50
10	1548.50	77	1625

The higher the interest, the bigger the capital gain. At 10 per cent, the sum would increase to $2594.00; at 15 per cent, to $4055.00.

Warren Buffet is said to look at the compounding factor when deciding on investments, requiring a stock investment to show a high probability of compound growth in earnings of at least 10 per cent before making an investment decision.

COMPOUNDING AND RETAINED EARNINGS

Warren Buffett has on several occasions referred to the use by a company of its retained earnings as a test of company management. He tells us that, if a company can earn more money on retained earnings than the shareholder can, the shareholder is better off (taxation aside) if the company retains profits and does not pay them out in dividends. If the shareholder can achieve a higher rate of return than the company, the shareholder would be better off if the company paid out all its profits in dividends (taxation situation again excluded) so that they could use the money themselves.

Put simply, if a company can retain earnings to grow shareholder wealth at better than the market rates available to shareholders, it should do so. If it can’t, it should pay the earnings to shareholders and let them do with them what they wish.

 HIGH RETURNS ON EQUITY

This is why Buffett is interested in companies that have rights rates of earnings on equity and likes them even more where the return rates are increasing. He reasons that, with a company like this, he is better off if the company pays no or little dividends and retains the money to earn even more for its owners.

In addition, where no dividend is received, there is no income tax payable by the shareholder. Instead, the investor gets the value of the increase in value in the shares which will, eventually, rise to reflect the enhanced earnings. The shareholder can then retain the shares, sell them at a time that best suits them, if they wish, and take advantage of the capital gains taxation regime.

It is why potential investors should calculate the company’s history of returns on equity and management of retained earnings.

BERKSHIRE HATHAWAY AND RETAINED EARNINGS

Berkshire Hathaway does not, following Buffett’s mantra, pay dividends to its shareholders and this is one reason why its compound return over the years of Buffett-Munger management has been so high.

The downside of course is that shareholders have not received dividends, meaning, that if they were dependent on money coming in at a given time, their only recourse, in relation to their shareholding, would be to sell the shares or borrow against them.

Having regard to the huge price of a single share over the past few years, this meant that investors may have had to either keep all their shareholding or dispose of it, not always the choice they wanted. Berkshire Hathaway partly catered for this dilemma by introducing B shares, which are in essence a fractional unit of the normal shares.

A POWERFUL FORCE

When asked to nominate the most powerful force on earth, Albert Einstein is reputed to have answered ‘compound interest’. Buffett might well agree.

http://www.buffettsecrets.com/compound-interest.htm

Warren Buffett - An Outstanding Allocator of Capital

Warren Buffett

Warren Buffett was born in 1930 in Omaha, Nebraska. 

He took his first degree at the University of Nebraska and then completed a Master's degree in economics at Columbia Business School in 1951. He was supervised and mentored at Columbia by stock-investing guru Benjamin Graham, author of Security Analysis. 

Buffett received the only mark of A+ Benjamin Graham ever awarded in his security analysis class. From this it's clear that Buffett had an extraordinary ability in stock analysis from the very beginning of his career. 

Making Money

Warren Buffett grew obsessed with numbers and money from an unusually early age. It wasn't an obsession founded upon the lifestyle or the wordly goods money could buy. It was a collecters' obsession. Some boys in the 1930s and 1940s collected stamps. Some collected bird's eggs. Warren Buffett collected money. 

He started at the age of five, selling gum and lemonade in the street and he later set up a business, renting pinball machines to local barbers. By his mid-teens, he had made enough money from these earlier efforts and paper rounds to buy land - which he rented to farmers. 

Making More Money

Investing In Stocks

Warren Buffett bought his first shares at the age of eleven - his father was a stockbroker - and stock trading gave the young Buffett a natural outlet for his twin obsessions with numbers and money. 

After completing his master's degree, Buffett worked as a salesman in his father's brokerage. Between 1954 and 1956 Buffett worked for his old mentor, Benjamin Graham, then returned to Omaha, ready to begin his own investing business. 

Making Even More Money

Investing Other People's Money In Stocks

Warren Buffett's progress towards almost unimaginable wealth accelerated in 1957 when he pursuaded friends and family to invest $105,000 in his limited partnership. Then he began the process he is famous for, the process of annually compounding the money he manages extraordinary rapidly.




http://www.warren-buffett.net/

How Anyone Can Make A Million

How Anyone Can Make A Million

Is it really true, asks Aaron, my personal assistant, that I could become rich?

Yes, I say, if you do one simple thing. Come off it, Richard, that can t be true. Enter Alison, Aaron s younger friend. Alison is a hairdresser with pink, punkish hair. If it was easy, we d all be millionaires. You know as well as me that there are a few people with all this, she waves at the swimming pool, lush gardens, and tennis court, and then there are all the rest of us, struggling with money.

Aaron, Alison, and I are basking in November sunshine, sip- ping ice-cold drinks at my house in Spain. I make the most of my captive audience.

You re right, I tell Alison, most people ” even with big jobs and incomes to match ” don t have much spare cash. I don t say it s easy to accumulate money. I just say it s possible for everyone.

So what s the secret? Aaron is 23, right? Assume he saves $200 a month Pigs will fly, said Alison. Maybe, I say, but imagine he saves and invests $200 a month, and it grows at 10 percent a year for 42 years, until he s65. How much would Aaron have then? $200 a month is $2,400 a year ” times 42 is $100,000 and change. But you have to add the growth on top.

So, I face Aaron, what s your guess? Maybe double that. $200,000? Alison? I m no good at sums, she says, but it couldn t be that much. Maybe $150,000?

The right answer, I reveal, is over $1.4 million. They re stunned.

But that assumes Aaron could save 10 percent ” I don t believe that

Fine, I ll come to that later, I interrupt, but Alison, what about you?

Harrumph, she says. Nobody earns less than me. You know how little hairdressers get? Worst-paid profession. Wouldn t be worth saving.

How old are you? How much do you earn? Eighteen. $16,000 a year. A tenth is $1,600. If I saved that, which I don t think I could, what would my nest egg become?

I produce calculator and paper. The computer is faster, but I want to demonstrate the sums. Aaron fetches more drinks. When he s back, I m ready.

Whaddyathink? If Alison saved $1,600 a year till 65, what would she have?

Aaron grabs the calculator. $1,600 times 47 years equals around $75,000. He multiplies that by five, his estimate for compound interest. $400,000, he guesses.

No way, Alison shrieks. Can t be more than $250,000. Have I got news for you, I tell her. Clich s seem to be expected. The right answer is $1.5 million.

Impossible, she snorts. I earn much less than Aaron, there s not much difference in our age, you say I d get more than him. Calculator must be glitched.

No, I say. It makes sense. The compounding is so powerful, just a few extra years make all the difference. It s more important to start saving early than to earn a lot.

It s all just numbers until you say how we save 10 percent of our pay, said Alison. Don t see how we can, we always spendmore than we earn.

I ll come to that later, I said. And I will. But first, should we care about money?

http://flylib.com/books/en/1.522.1.36/1/

Why do 20 percent own 84 percent?

Why do 20 percent own 84 percent?

Money is a force, like the wind, the waves, and the weather. Money dislikes being equally distributed. Money clonesmoney.

Why? How can we attract money?

Money obeys the 80/20 principle because of compound interest ” Einstein s most powerful force in the universe.

Start with a small dollop of money, save and invest it, then compound interest will do the rest.

In 1946 Anne Scheiber, who knew little about money, put $5,000 into the stock market. She locked away the share certificates and stopped worrying. By 1995 her modest nest egg had transmogrified into $22,000,000 ” up 440,000 percent! All courtesy of compound interest.

If we never save money, we will always be poor, no matter how much money we earn.

Most people have very little money because they don t save. The typical 50-year-old American has earned a great deal but has savings of just $2,300.

People with the most money have typically saved and invested it for many years. Compound interest multiplies savings in a breathtaking way.

http://flylib.com/books/en/1.522.1.36/1/

The Othmers' Story

The Othmers' Story

James K. Glassman | July 14, 1998

The Washington Post, Tuesday, July 14, 1998; Page A15

Donald Othmer, a professor of chemical engineering in Brooklyn, died three years ago. His wife Mildred, a former teacher and a buyer for her mother's dress store, died in April. Both were in their nineties. They lived quiet, unpretentious lives -- which is why it came as a shock to their friends to learn that their combined estates were worth $800 million and that they had given nearly everything to charity.

How did the Othmers get so rich? Like many other Americans, they simply put their money into sound stock market investments and left it there for a long time.

This they had in common with a woman named Anne Scheiber, who worked as a government drone, never making more than $4,000 a year. In 1944, she put a total of $5,000 into stocks such as Coca-Cola and Merck, and when she died in 1995, she left her estate to Yeshiva University. It was worth $22 million.

As for the Othmers: In the early 1960s, they turned $25,000 each over to Warren Buffett, an old family friend from their hometown of Omaha. "They just rode along," Buffett told the New York Times. The investment "never changed their lives."

In 1970, when the Othmers received stock in Buffett's new company, Berkshire Hathaway Inc. (which invests in other companies such as Gillette and American Express), it was trading at $42 a share. Last week, it was $77,000 a share. Mildred Othmer's 7,500 shares alone are worth $578 million. Donald's, which were sold on his death when the price was lower, were worth $210 million.

The Othmers were smart -- or lucky -- to pick Buffett to manage their money, but that's not the lesson of this story. After all, even if they had simply put their funds into the broad market, they still would have ended up with a fortune of between $50 million and $100 million.

No, the lesson is to live modestly, invest sensibly, don't touch the money and grow rich. This lesson is at the heart of the current debate over transforming Social Security.

Today, it is a government-run plan by which Americans retiring over the next few decades will get minuscule (or even negative) returns on a lifetime of payroll contributions. But reformers, including New York Democratic Sen. Daniel Patrick Moynihan, want instead to create a system of private accounts by which retirees can get the returns that the stock market has been generating for the past century.

Why shouldn't every worker be able to get the returns -- and build the nest eggs -- that Anne Scheiber and the Othmers built? They can -- but only if they have money to save. Currently, 10 percent of every worker's pay is going to taxes to fund Social Security retirement benefits. No wonder Americans are strapped.

William Beach of the Heritage Foundation has calculated that the average single black woman born in 1960 will receive lifetime benefits from Social Security totaling $173,000. But, Beach found, if the woman invests the same money that now goes to Social Security taxes in a mixed portfolio of stocks and bonds instead, she will accumulate $414,000.

Blacks, in particular, are victimized by the Social Security retirement system, since they don't live as long as whites -- and thus don't collect benefits for as long. Under a private retirement plan, they could pass assets on to their heirs.

There are other lessons in the Othmers' story:

(1) Frugality pays. Donald Othmer was a smart scientist who contributed to more than 40 patents at Eastman Kodak. But his wealth came from following the simple virtues. The Times wrote that as a boy "he developed a lifelong frugality as he earned money picking dandelions from neighbors' lawns [and] delivering newspapers." He and his wife "lived comfortably but not ostentatiously and rarely talked about their money."

Thomas Stanley and William Danko, authors of the surprise bestseller "The Millionaire Next Door," came to similar conclusions about the rich people they studied for their book. They wrote that "frugal" is the best adjective to describe millionaires. More own Fords than any other car, and only 25 percent of the men studied paid more than $600 for a suit in their lives.

(2) Saving pays. This is a notion that should be drummed into the head of every young person. Put away money early, and don't touch it. If you can leave it undisturbed in a decent investment for a long time, it will grow to immense proportions through the miracle of compounding.

Savings can also be eroded by capital gains taxes, but both Scheiber and the Othmers managed to avoid them by not selling their stocks, then passing them on to their heirs. Still, the cut in capital gains from 20 percent to 15 percent that Congress just passed is a move in the right direction that will boost savings.

(3) Philanthropy will boom. The Othmers' estates will provide $190 million to Brooklyn Polytechnic University, where Donald taught, $160 million to Long Island College Hospital, $75 million to Planned Parenthood and so on.

Rich people, more and more, are giving back what they've earned in an effort to make society better. They would rather make these choices themselves than leave them to Uncle Sam, so they are preserving their estates against taxes.

Eliminating the estate tax entirely could touch off a philanthropic flood. But, even without that change, generous Americans like Scheiber and the Othmers are turning frugality into wealth into good deeds. They deserve attention and praise.

http://reason.com/archives/1998/07/14/the-othmers-story/singlepag
e

A True Success Story Of a Shrewd Investor

From time to time, new paper features stories of shrew investors of modest income who surprised their friends and relatives by leaving substantial fortunes accumulated in the stock market.  A close study, of these cases usually reveals that careful timing and patience, rather than any mysterious secret or fantastic luck, were the explanation of the success story.  Students of the stock market are indebted to the Chicago newspapers for coverage, early in February, 1955, of the story of Miss Ida Mighell of Aurora, Illinois.  Miss Migehell had died on January 1 1955, at the age of eighty-six and left an estate appraised at just under two million dollars.  Even close friends had assumed that her income had consisted of the salary, or pension, of a Chicago school teacher plus income from a twelve thousand dollar inheritance received forty-five year before.
 
She also owned real estate, government bonds, and some local or thinly traded stocks.  It is immediately apparent that not all of Miss Mighell's selections have been outstanding growth situations, such issues as Westinghouse Air Brake, Kennecott, and Pennsyvania Railroad have failed to keep pace with the Dow Joes averages and even the portfolio's third largest holding, American Telephone and Telegraph did not raise its dividend for  thirty-six years.  A few highly  profitable transactions more than offset an equal number of mediocre of poor deals in Miss  Mighell's account, as has been the case in the experience of most successful investors.
 
It is unfortunate that information regarding the cost prices and purchase dates of Miss Mighell's stocks is not  available,  but we can reasonably surmise that many items were originally purchased many years ago and swelled the fund with their dividends.  For example, the odd amounts of Consolidated Natural Gas, Mission Corporation, and Mission Development Company were in all probability, received as dividends on Standard Oil of New Jersey held in the 1930's.  The mere factor of compound interest has done much to increase this fund, the elderly  spinster with a modest standard of living probably reinvested all of her after-tax dividend income in recent years.
 
It is also quite apparent from Miss Mighell's choice of stocks that liberal income was not her principal criterion of selection.  Most of the larger holdings, such as  Standard Oil of New Jersey, Westinghouse Electric, Union Carbide, and Chicago Corporation, have been quite conservative in their payouts through the years and have been consistently reinvested a substantial percentage of their  profits.

Miss Mighell apparently did not aim to get rich in a hurry.  There is not a  single electronic or space age stock in the portfolio, and oil stocks are of large companies.  Although many American fortunes have been created by buying common stocks of "infanct industries" and holding them until they grow to maturity, it is notable that all of the larger holdings in the Mighell portfolio were stocks of companies which were already dominant factors in established industries in 1914, when this shrewd lady first began to invest.  No spectacular new listings of the post World War II era are included.

http://www.sap-basis-abap.com/shares/a-true-success-story.htm

While most people become poorer the older they get, Anne Scheiber became wealthier.

1. Anne Scheiber died in 1995 at the age of 101. For years she had lived by herself in a tiny run-down apartment in Manhattan. The paint on her walls was peeling and everything was covered with dust. Scheiber lived on Social Security and a small monthly pension which she began receiving when she retired from the IRS in 1943. At age 51, when she retired, she was making only $3,150 per year. Those who knew her say she was the model of thrift. She didn’t spend money on herself. When her furniture wore out, she kept on using it. She wouldn’t even subscribe to a newspaper, rather she went to the library once per week to read The Wall Street Journal. Norman Lamm, the president of Yeshiva University was literally blown away when he learned that this poor old woman left her entire estate to his university – $22 million! How did she do it? One day at a time. She had managed to save $5000 by the time she retired in 1943. She invested that in stocks. "By 1950, she had made enough profit to buy 1000 shares of Schering-Plough Corporation stock, then valued at $10,000. And she held onto that stock, letting its value build. Today those original shares have split enough times to produce 128,000 shares, worth $7.5 million" 

2. Anne Scheiber understood the value of investing for the long haul. Whether her stocks went up or down, she never sold it off. When she earned dividends, she kept investing and reinvesting them. While most people become poorer the older they get, she became wealthier. 


To Invest is not enough We must make Wise Investments.

Anne Scheiber could have invested her nest egg unwisely and died penniless. She became wealthy because she wisely invested her resources.






http://www.barberville.net/sermon246.htm

Buy-and-Hold: Golden Strategy That Takes an Iron Will

Buy-and-Hold: Golden Strategy That Takes an Iron Will

August 10, 1997|TOM PETRUNO

http://articles.latimes.com/1997/aug/10/business/fi-21077/2

Anne Scheiber's life was no happy tale. Embittered after the federal government failed to promote her from her IRS auditing job at the end of 1944, she retired and spent the next 51 years mostly alone, living on the Westside of Manhattan.

Her only hobby was investing. She apparently put every penny she had into stocks, rarely selling, her broker would later explain.

By the time she died in 1995, Scheiber had amassed a $22-million fortune in about 100 stocks--all of which she left to a stunned, but grateful, Yeshiva University.

If Scheiber's story is something of a cliche--"aged, frugal recluse buys and holds stocks, leaves millions to charity"--it's too bad we all can't be beneficiaries of such cliches.

But then, many investors have in fact benefited handsomely in the 1990s from the same basic investment philosophy: Just buy stocks and don't sell them. Period.

The proven long-term success of buy-and-hold is the basis for the retirement savings plan boom of the past decade, of course. Americans are encouraged to invest regularly in the market, avoid the temptation to sell when stocks suddenly sink, and trust that when retirement happens in 10, 20 or 30 years, a hefty nest egg will be there to fund it.

And why doubt that? Since Dec. 31, 1989, the Dow Jones industrial average has risen 192%, from 2,753.20 to 8,031.22 at Friday's close.

Even better: Measured from the start of the 1980s bull market on Aug. 13, 1982, the Dow has increased a spectacular tenfold.

What's more, if buy-and-hold still is good enough for Warren Buffett--perhaps the greatest living spokesmodel for that investment style--it still should be good enough for the rest of us, right?

Yet as stock prices have zoomed this year, adding to the huge gains of 1995 and 1996, many investors have understandably grown uneasy. The nagging worry is that stocks might have reached such historically high levels that buying and holding at these prices may never pay off.

On days like Friday--when the Dow sank 156.78 points, or 1.9%, as bond yields surged on concerns about the economy's growth rate--investors' darkest concerns about the market's future can surface.

*

Is there a danger in trusting buy-and-hold at this point?


Certainly not if you have 51 years, like Anne Scheiber did. Academic studies show that the longer your time horizon, the lower the possibility of losing money in stocks.

That's not terribly surprising: Over time, the economy's natural tendency is to grow, because humankind's tendency is to strive to achieve more. If you own stocks, you own a piece of the economy--so you participate in its growth.

But over shorter periods--and that includes periods as long as a decade--it is indeed possible to lose money in stocks. Consider: The Dow index was at 890 on Dec. 31, 1971. Ten years later, on Dec. 31, 1981, the Dow was at 875. Your return after a decade of buy-and-hold was a negative 1.7%.

True, the 1970s were a miserable time for financial assets overall, as inflation soared with rocketing oil prices, sending interest rates soaring as well. But we don't even have to look back that far to discover just how difficult it can be to stick with a buy-and-hold strategy.

From the late 1980s through 1991, major drug stocks such as Merck & Co. and Pfizer Inc. were among Wall Street's favorites. They were well-run businesses, and the long-term demand for their products seemed assured.

By December 1991, Merck was trading at $56 a share, or a lofty 31 times its earnings per share that year.

Then came the Clinton administration's push for national health care. Suddenly, the drug companies found their pricing policies under attack. The stellar long-term earnings growth that Wall Street anticipated seemed very much in doubt. And the stocks fell into a decline that lasted more than two years and which shaved 40% to 50% from their peak 1991 prices.

Merck, for example, bottomed at $28.13 in 1994, which meant a paper loss of 50% for someone who bought at the peak in 1991.

If that had been you, could you have held through that horrendous decline? You should have: Today, Merck is at $98.81 a share, or 76% above its 1991 year-end level. After restructuring its business, Merck's earnings began to surge again in 1995 and 1996.

And this year, the drug stocks have once again become market darlings. But therein lies the problem: Merck is again trading for a high price-to-earnings ratio--26 times estimated 1997 results.

*

That doesn't necessarily mean that Merck is primed to drop 50%, as it did in 1992-94. But it does mean that if you own that stock--any stock, for that matter--you must allow for the possibility of a deep decline from these current high levels, something much worse than the just-short-of-10% pullbacks the market has experienced twice in the last 14 months.

Anne Scheiber, angry recluse that she was said to be, somehow managed to show no emotion at all about the stock market's many ups and downs in her 51 years of investing. A cynic might say she had nothing on which to spend her money, anyway. But the point is, she managed to remain true to buy-and-hold, when many other investors were probably selling out at the market's lows.

Mark Hulbert, editor of the Hulbert Financial Digest newsletter in Alexandria, Va., and a student of market history, worries that too few investors will have Scheiber's iron stomach when the tide eventually turns for the market overall, as it did for the drug stocks in 1992.

"I am cynical about all of these people genuflecting at the altar of buy-and-hold," Hulbert says. "They're not buy-and-hold--that's just what is working now," so investors are happy to go with the flow, he says.

Most investors, Hulbert maintains, are too new to the market to imagine how psychologically painful a major and sustained loss in their portfolio would be.

What is key to judging how much of your assets should be in stocks is your tolerance for risk, your tolerance for loss and, of course, your time horizon. But as a simple rule of thumb, many Warren Buffett disciples like to use this line: If, for whatever reason, you can't take a temporary, 50% loss in your portfolio, then you don't belong in the stock market.

For the relative handful of pros who really invest like Buffett, what the market does on a short-term basis isn't important. Their faith in buying and holding stocks derives from their long-term faith in the underlying businesses.

George Mairs, the 69-year-old manager of the $324-million Mairs & Power growth stock fund in St. Paul, Minn., owns just 33 stocks in the fund. He is among the least active traders in the fund business--he almost never sells. And his results speak for themselves: Mairs & Power Growth has beaten the Standard & Poor's 500 index every year in this decade.

Does Mairs fear that buy-and-hold isn't a great idea at these market levels? Hardly. High-quality stocks aren't cheap, he says, but neither does he find them to be drastically overpriced. "It's the long-term earnings stream that we look at," he says. "If the earnings are going to be there, we don't worry too much.

"What we want to do is own businesses," Mairs says. "If we like a business for the long term, we don't worry about what the stock value is on a week-to-week basis."

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)


How Patient Can You Be?

"Buy and hold" sounds great on paper, but it can require enormous patience. Major drug stocks, for example, soared 94% between March, 1990 and December, 1991, as measured by the Standard & Poor's index of five major drug companies. But when the threat of federalized health care surfaced in 1992, drug stocks began a sustained decline that lasted more than two years--and slashed the S&P drug index by 42%. With the stocks again rocketing this year, 1992-1994 stands as a sobering reminder of how bad things can get. S&P drug stock index, quarterly closes and latest



Source: Bloomberg News

Anne Scheiber's story: An amateur investor with a large fortune

The Anne Scheiber story ... an attachment to DGIS as noted by Taggart Stock pickers who can beat the market over a long period are like .400 hitters. When one turns up, it's big news. Thus did Money magazine think it had a sensation in the story of Anne Scheiber, an amateur investor who died a year ago with a large fortune. The cover of it's January issue shouted "10 Secrets From The Investor Who Turned $5000 into $22 Million." Unfortunately, Money got it's numbers wrong. Scheiber was a successful investor. She was not, as claimed, the peer of Warren Buffett or the superior of John neff. According to the magazine, Scheiber retired from a low-level job at the IRS in 1943 and made stocks her full-time hobby. Earlier she had lost some of her hard-earned savings in the market, but this time she learned from her mistakes. Her astute eye for growth stocks enabled her to transform $5,000 of savings into a $20 million pot by the time she died last year at 101. She left the money to Yeshiva University, and, said Money, the pot has grown to $22 Million. Wow! Warren Buffett, move over. John Neff, hang your head in shame. Money said Scheiber's portfolio grew at a compound annual rate of 22%, only slightly trailing Warren Buffett's record.There's only one thing wrong with this tale. It isn't true. Go through the arithmetic. Turning $5,000 into $22 million over 52 years is not a growth of 22% ayear but one of 17.5%. "A regrettable mistake," says Money managing editor and article author Frank Lalli. That's just the beginning. The starting date and the starting value presented by Money are wrong. Key fact in the Money magazine account: "In 1944...she started fresh with a $5,000 account at Merrill Lynch Pierce Fenner & Beane." The $5,000 might have been the opening balance of her Merrill account, but it almost certainly wasn't the extent of her investment portfolio at the time. "I think there was a little confusion," says Benjamin Clark, who knew Scheiber for 25 years and is the executor of her estate. "She retired to New York in 1943 or 1944, but she was in the market long before that." Scheiber's 1936 tax return shows she was already receiving dividends of $900 (plus about $3,000 in capital gains), Clark says. That dividend number never shrank, as would have been the case had there been significant pre-1944 losses. Instead, the dividends kept growing, says Clark. The market's average dividend yield in 1936 was 4.3%. That suggests that Scheiber already had something like $21,000 in stocks in 1936-four times what Money said she had when her investing saga began. Scheiber had a spartan lifestyle. In those Depression days even a modest salary would stretch fairly far, and Clark says she saved 80% of her salary. That means she was contributing cash to the investment pot between 1936 and 1943. Even ignoring the input of fresh cash, the difference between starting in 1944 with $5,000 and starting in 1936 with $21,000 is tremendous. Not counting additional cash, Scheiber probably earned about 12.5%. That's better than the 11% annual performance of the Standard & Poor's 500 index, but not as good as the 14.7% return on small stocks., according to data compiled by Ibbotson Associates. If you allow for probable additional cash input, she about matched the S&P 500. Nice, but no magazine cover miracle. Scheiber did come up with at least one home run-an early investment in Schering Corp. (now Schering-Plough). She was also wise enough to avoid the drain of capital gain taxes and brokerage commissions by almost never trading. She was like Warren Buffett in this regard. Was she in his league as an investor? Far from it. Her wealth sprang from an unusual mix of austerity, longevity and compound interest. From it's Scheiber myth, Money magazine draws some grand conclusions about how the little investor can beat the averages: Buy growth stocks, invest in leading brands, go to shareholders' meetings. The facts support a much more limited lesson: Live on next to no money, survive in good health to past 100 and let your savings compound for 60 years. With that going for her, Scheiber would have gotten as rich had she invested in a diversified basket of stocks, today's index funds, and never attended a single shareholders meeting or read a financial statement. Here's what Money magazine had to say in the "letters" section of their magazine of March 1996. Note how the 22% compounded becomes 17.5% without admitting "any errors or omissions". "January's cover story, "How She Turned $5,000 into $22 Million (and How You Might Too...)," intrigued and inspired Money readers. While expressing compassion and concern for Anne Scheiber's lonely, loveless life, those of you who sent us mail admired her fierce commitment to the simple rules that shaped her investment success from 1944 until her death last year at 101. Among them: Invest in leading brands, favor companies with growing earnings, invest in small increments (a rule that not only added diversity to her portfolio but caused her to pick up extra shares when prices were low) and avoid going overboard when prices were high. Two others: Reinvest your dividends, and hold on to stocks you believe in (no matter what the market does). That time-tested investing style brought her an average annual return of 17.5%, well ahead of the S&P 500's 12.4% for that same period and the 13.9% posted by Vanguard superstar John Neff from 1964 to 1995."

http://www.financialwebring.org/gummy-stuff/Scheiber.htm

Anne Scheiber's investment legacy provides a powerful example of what we can achieve if we are methodical and patient with our money.

FOOL'S SCHOOL DAILY Q&A
It's Never Too Late to Invest

Ask A Foolish Question

By Selena Maranjian (TMF Selena)
May 7, 2002


Q. I'm middle-aged and don't earn much money. Can I really invest? And would my investments really ever amount to much?

A. It's never too late (or early!) to begin investing. For a little inspiration, look to the amazing story of Anne Scheiber. Most people haven't heard of her, but she's one of the world's greatest investors. In 1932, Ms. Scheiber was a 38-year-old IRS auditor. Intrigued by the stock market, she forked over most of her life savings to her brother, a young stockbroker on Wall Street, who lost it.

Determined to try again, but this time relying on herself, she saved $5,000 and plunked it back into stocks in 1944 (at the age of 50). By the time she died in 1995 (at the age of 101), her money had grown to $20 million. How'd she do it?

Well, for starters, she was a long-term, involved investor. She didn't buy a stock today and sell it tomorrow. She attended shareholder meetings and followed her companies closely. She bought big, consumer-brand companies like PepsiCo, Schering-Plough, Chrysler (now DaimlerChrysler), and Coca-Cola, and she reinvested her dividends. She placed her faith -- and her money -- in these growing companies and watched their earnings grow higher over decades. And, when she died, Anne donated it all to Yeshiva University in New York.

Anne wasn't totally Foolish, though, as she didn't stop to smell the roses enough. Those who knew her say she was a recluse in her small, rent-controlled apartment. Never married and painfully frugal, she wore the same coat year after year and skipped meals to save money. Fools generally enjoy not just investing and compounding long-term profits, but also family, friends, and the pursuit of happiness.

Anne Scheiber's investment legacy provides a powerful example of what we can achieve if we are methodical and patient with our money.


http://www.fool.com/foolu/askfoolu/2002/askfoolu020507.htm

Anne Scheiber's story: Most important points to take away - Being patient and consistent.

The almost unbelievable story of Anne Scheiber who turned $5,000 into $22 Million with a simple buy and hold strategy has been told quite some times now, unfortunately sometimes with wrong numbers. Here is what she did in her long life of 101 years:

• Anne Scheiber invested in leading brands, which she called franchise names. These were leading companies that created products she admired like Coca-Cola, Bristol-Myers and Allied Chemical.
• She favored firms with growing earnings and tended to ignore a stock's price to earnings ratio. Important for her was the company's ability to increase profits. She reasoned that stocks are overpriced sometimes and underpriced others but if the company's income rises year after year the buy price doesn't matter.
• Investments were taken by her in small pieces. She essentially put fresh money she earned as an IRS auditor to work and bought small lots of shares. Her extreme ability or better said fanaticism to cut down her real life expenses allowed her to invest the better part of her salary.
• She never sold a stock in which she believed. Neither in the bear market of the '70s nor during the crash of '87 she was worried. Instead she thought the general market had gotten overpriced, and she was convinced her stocks would come back.
• In order to cut taxes she reinvested her dividends in tax exempt bonds. When she died, she had 60% in stocks, 30% in bonds and 10% in cash.
• Her compensation for her poor life - saving every possible cent and investing it in stocks - was to attend her companies' New York City shareholder meetings. She demanded answers from the CEO, just as she did when she was an auditor. She also loved the freebies at these meetings, filled her bag with the food served and lived on it for days.

--

When Anne Scheiber died at 101 on Jan. 9, 1995, her 10 top stockholdings were worth nearly $6.2 million.

No. of      Dec. 11   1995
Company (symbol)              shares owned     price   gain
SCHERING-PLOUGH (sgp)            64,000       $59.25    62%
PEPSICO (pep)                    27,000        57.50    65
ALLIED SIGNAL (ald)              20,934        49.25    44
LOEWS (ltr)                      14,061        78.00    75
BRISTOL-MYERS SQUIBB (bmy)       10,080        84.50    45
COCA-COLA (ko)                    9,048        79.25    60
ALLEGHENY POWER SYSTEM (ayp)      8,000        28.25    30
ROCKWELL INTERNATIONAL (rok)      4,640        51.75    46
UNOCAL (ucl)                      3,690        28.75    10
EXXON (xon)                       1,664        84.00    39

Sources: Merrill Lynch, Benjamin Clark

--

The orignal money article quoted an average growth of 22% for the long period of 52 years. With such numbers Scheiber would have rivaled even Warren Buffett's record. There's only one thing wrong with this tale. It isn't true. Turning $5,000 into $22 million over 52 years is only a growth of 17.5% a year. Furthermore Anne Scheiber loved stocks her whole life long and there is evidence that she started much earlier than 1944 investing, albeit only partially successful.

--

It shows quite clearly that there were many mistakes in the original article:

1. $5k to $22m in 50 years (1944-1995) is 18.3% p.a. not 22% p.a.
2. Anne received $900 in dividends in 1936. At the average market yield of 4.3%, this meant she had capital of about $21k not $5k, and she started at least as early as 1936 and not 1944.
3. Anne was saving 80% of her $3,150 salary between 1936 and 1944. So there was probably additional cash input to the portfolio during these 8 years.

Ignoring the additional cash input, going from $21k to $22m over 59 years (1936 to 1995) gives... 12.5% p.a. Better and longer than Hetty Green, but considering the S&P 500 did 11% p.a. over the same period, with its small stocks getting 14.7% p.a., one has to wonder if her record is truly outstanding after all.

I think the more important points to take away are being patient (Anne was down 50% during the 70's but didn't sell) and consistent (Anne only bought companies she understood, mostly leading brands, and reinvested all her dividends).

Side note: Like Hetty, Anne was frugal to the point of being miserly. She wore the same clothes year in, year out, walked everywhere, and filled up bags of food to take home at shareholder meetings

http://www.stocksystemtrader.com/systems/anne-scheiber.html

The Story of Anne Scheiber

November 24th, 2008 

In his book The 21 Irrefutable Laws of Leadership, John Maxwell says that becoming a leader is a lot like investing successfully in the stock market. If you hope to make a fortune in a day, you won’t be successful. What matters most is what you do day by day over the long haul. This, he terms as The Law of Process.

Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!

How did a public service worker with minimal salary accumulate such a staggering wealth? Here’s Maxwell’s take on it:

“By the time she retired from the IRS in 1943, Anne Scheiber had managed to save $5,000. She invested that money in stocks. By 1950 she had made enough profit to buy 1,000 shares of Schering-Plough Corporation stock, then valued at $10,000. And she held on to that stock, letting its value build. Today those original shares have split enough times to produce 128,000 shares, worth $7.5 million.

The secret to Scheiber’s success was that she spent most of her life building her worth… When she earned dividends – which kept getting larger and larger – she reinvested them. She spent her whole lifetime building…. When it came to finances, Scheiber understood and applied the Law of Process.”

The above story of Anne Scheiber was actually used by leadership guru Maxwell to illustrate an important leadership principle. But it can be equally applied to investing. I’m not sure if Maxwell got the facts right, but we can certainly learn a couple of important principles here:

1. Time in the Market
It is now how you start that is important. It is what you do day to day, and how you finish that counts. Sure it’s nice to time the market correctly but if you’re looking to make some serious bucks, time in the market counts.

Patience and consistency is everything!

2. Focused InvestingMost of Scheiber’s wealth was in a handful of stocks, the largest one being Schering-Plough. Like Warren Buffett, Scheiber is a Focused Investor. A Focused Investor puts meaningful amounts of money in a few things. Scheiber liked companies which are leading brands in their market.

Anne Scheiber

Most of us will not have the experience of picking one company which will ride on a tsunami wave. If you had bought a piece of Microsoft or Berkshire Hathaway when they started business, you would have the same ecstasy… but how many companies are like that? What are your chances of picking such companies? Nevertheless it is not impossible… imagine if you had bought and held on to Public Bank since inception. Now isn’t it worth a little time and effort to research and identify the next Public Bank?

3. Compound Growth
Whether the stock went up or down, she never thought, I’m finished building; now it’s time to cash out. She was in for the long haul, the really long haul. We are told that Anne Scheiber reinvested all of her dividends. She didn’t say lets take out some money and buy the latest LV handbag.  In fact Anne Scheiber was frugal to the point of being miserable. She lived in a rent-controlled apartment, wore the same clothes year in year out, didn’t own a car and even went to shareholder meetings so she could take home bags of food.

Don’t get me wrong… I’m not saying you shouldn’t reward yourself once in a while. In fact I would say there is a thin line between extreme thrift and greed. If you are blessed with so much money, spend some of it, give it away or whatever. Not only will you bless others, you release yourself from the trappings of greed 

“Keep your lives free from the love of money”Hebrews 13:5 (NIV)

The important lesson here is to realize the power of regular investment and compound returns. When you invest in good things and you invest regularly, your wealth will eventually multiply.

Remember attending one of those Unit Trust presentation and the Agent puts up that Regular Investment & Compound Return chart? Then everyone’s jaw would drop because your RM100/month savings can turn into a six figure sum when you retire? Start early, invest and have the discipline to keep re-investing…

Anne Scheiber loved stocks for her whole life and it is likely that she started investing much earlier than 1943 (the time she retired). Although she met with limited success initially, she came out tops in the end.

4. Hard Work
Anne Scheiber worked on her investments. She studied the companies she invested in, attended shareholder meetings and asked many questions to satisfy her curiousity and passion. Hard work with laser-like focus usually pays off.

“Successful leaders are learners. And the learning process is ongoing, a result of self-discipline and perseverance. The goal each day must be to get a little better, to build on the previous day’s progress.”John C. Maxwell

Replace the word leaders with investors. Makes sense, wouldn’t you agree?

http://www.horizon.my/2008/11/the-story-of-anne-scheiber/