A Vermont janitor had $8 million dollars when he died in 2015. His frugality and stock market investments, along with his longevity, paid off big time – but not his hard work as a janitor.
Actually, hard work does pay off – but not for the person doing the hard work. The worker’s hard work pays off for the shareholder. That is our system. Understanding our system and following the tough and demanding rules of compound interest can make you very rich.
Historically in America if you put $10,000 in the stock market when your baby was born, by age 80 he or she would be a multimillionaire just from that initial investment.
Don’t tell your child about it, just put $10,000 in a broad market index fund with a low expense fee in a Roth account, check the box that says reinvest dividends, put the stock fund in a trust account for your child. When you die, your child, who is then (hopefully) near or in retirement, might discover that they are well on their way to becoming very wealthy. At the close of the stock market yesterday (Sept. 30), over the past year the Dow Jones Industrial Average has grown over 26 percent while the NASDAQ has risen over 36 percent. For many years the stock market generally has increased on average over 10 percent a year with lots of ups and downs. But in recent years gross domestic product (GDP) has typically been growing at an annual rate of only about 3 percent or less!
Many non-financial firms have discovered that investing in the stock market provides a much higher return than investing in their own businesses. Why invest in creating new products and services when you can on average get a much better return in the stock market? If you do the math of compound interest, you discover (using natural logarithms => ln) that the number of years needed to double your money is equal to ln(2)/ln(1.10) when your annual percentage yield (APY) is 10 percent. (Note: This is a precise calculation which is much better than “The Rule of 72” which is only approximately correct around an APY of 8 percent.)
Isn’t this wonderful. Your child may become a multimillionaire regardless of how much they worked or didn’t work, and regardless of how creative or unimaginative they may have been. You don’t even need to know the names of the companies you have invested in, much less have helped them in any way other than investing a little bit of money a long time ago. We like to say that America is the land of opportunity. And it is, if you have wealthy, well-educated parents. But less fortunate children with poor or middle class parents face a much tougher road to success. What if you finished your education with a high school diploma (i.e., no college debt), you relied on public transportation (i.e., no car), bought no house (i.e., no mortgage), and skipped marriage and raising children? You may over time be able to invest enough money into the stock market early enough to benefit from compound interest and become wealthy.
Is this what we want people to do? Frugality is great up to a point. But do we want everyone to engage in extreme frugality instead of getting a good education, raising a family while living paycheck-to-paycheck and building up mountains of debt?
Is our country better off by over-rewarding extreme frugality while under- rewarding hard work and creativity? Should we encourage passive investors or hard-working employees? How can we still encourage frugality (up to a point) but do a better job of providing work incentives and encouraging entrepreneurial creativity?
The fundamental problem is that so much money is being diverted from Main Street to Wall Street that the people on Main Street can’t buy back the value of the goods and services that they are creating at full employment.
Two thirds of Americans do not have a college degree. Over 40 percent are living paycheck-to-paycheck and are up to their eyeballs in debt. High levels of savings would provide an automatic stabilizer for the economy as a whole while high levels of debt create a very unstable system.
The objective is to raise the growth rate of our economy to better align with the return to passive investors in the stock market. Bringing down the artificially inflated average annual increase in the stock market could help stop the reverse money flow that has drained the real economy of funds needed to enhance productivity and economic growth. Less money flowed into new and better products suppressing productivity and economic growth. High levels of private debt had to be supplemented with high levels of public debt to keep the economy from sliding back into recession.
I have personally benefited greatly from the current system. But at some point I have to speak up against my own self interest in favor of the truth about what is in the best interest of our nation.
We need to stop over-rewarding passive investors like me and redirect more of the money flow to reward hard working employees and creative entrepreneurs. One way to move in that direction would be to restore the Security and Exchange Commission’s rule that existed before 1982 and designate stock share buybacks as insider trading and illegal.
Another step would be to follow Germany’s example and require employee representation on corporate boards. All too often corporate boards consist of the CEOs golf buddies, who only know what is going on within the company from reports that the CEO gives them about what a great job he or she is doing. Requiring some employee representation on corporate boards for all companies above a specified size could provide representation from product development, production, marketing, sales and product distribution. We should also provide companies with incentives such as tax benefits for starting employee stock ownership plans.
Burns and McDonnell in Kansas City started as a small construction company but grew to become a worldwide engineering company. All the company stock is owned by its employees. When retiring employees have to cash in their company stock. The secret to its success is employee ownership. As owners, workers are not only motivated to do their best for the company but also want their fellow employees (their teammates) to work hard to achieve great success for the company.
Hopefully, with these and other such reforms, instead of a stock market growing annually on average of over 10 percent while the real economy grows at less than 3 percent, we could create a better balance, stop the reverse money flow and bring them to both grow together at roughly 6 percent or more.
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Note: This commentator is not a registered financial advisor. None of his commentary should be considered to be financial advice. You could lose a great deal of money in the stock market. Contact a professional financial advisor if you want appropriate and efficacious financial advice.
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