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Saving and Investing: What’s the Point?

One of the roadblocks for people who could be successful with the stock market is that they don’t see the point of saving and investing.

Maybe you can think of somebody you know who believes this way. Have them read this. To the person reading: Give me this chance to win you over. If I can’t, then you are justified in never having to think about saving and investing again.

investing system

I don’t necessarily have more life experience than the next guy. But I’ve made some simple observations in my short life span. Humans always desire. We always want food, always want sex, and always want to spend money. It’s what makes us human.

Think you are above these basic human desires? Think again. Remember that time when you were a child. Money was magical back then. I remember thinking that if I only had $100, I would be happy to buy as many boxes of baseball cards as my heart desired.

Interestingly, now I am an adult and CAN buy tons of boxes of baseball cards. The allure of baseball cards just isn’t there for me anymore, so much so that I can’t remember the last time I bought some.

When I was in college, I remember that I would be happy just to have a “real” job. With a full time job, and full time income, I’d finally have enough money to be happy. Interestingly again, I got that full time income but that fantasy world of unending happiness has been elusive.

I guess I can say that as my income has increased, so has my taste. No matter what consumer item has seduced me into longing-ness, I’ve gone through the same predictable cycle. Want → desire → strive for → achieve and own → get bored → find new want → repeat.

American consumerism at its finest.

That’s not the point of this post. If you know me you know I’m the last guy to sing Kumbaya and share feelings. The point is that we have desires. Food, sex, spending money. The difference is that most people spend all their money, and then blame the world when they don’t get rich.

The Secret Wealth Formula

Anybody can get rich. The secret formula is quite simple. Want to lose weight? Eat less than you burn. Want to get rich? Spend less than you make.

Ah, but here’s where all the excuses come piling up. They are infiltrating your mind and short circuiting your reason. But, but, BUT… Shut up and listen.

The reason why most people don’t become rich is because they don’t have the patience for it. Same reason most people get fat. They don’t live right, and don’t stick to it.

Don’t believe me? Did you know that over 80% of millionaires are first generation? That means they grew up dirt poor like you did. The difference is, they lived their lives intentionally to get rich.

Mrs. CC started with nothing more than a college scholarship. With her never making more than $60,000 a year in her life, she is now a millionaire. Her secret? Saving and investing. A great book called The Millionaire Next Door has countless examples of people who became millionaires by doing just that.

Your next roadblock is already on the horizon. I can see it. You might hear a motivational story, but you aren’t convinced it could happen to you. Try me. Let me show you HOW.

Persistence beats Doubt

You see, success comes down to having the right systems in place. In the cold, cruel world we live in, people get lucky and unlucky all the time. Maybe circumstance has put you at a disadvantage with this whole money thing. You can change your outcome. You just need the right system.

saving and investing

You’ve heard of Thomas Edison, right? You know the guy with the light bulb. It may seem like he was just a lucky guy with a genius stroke of inspiration. In reality, he was just a really hard worker. He created 1,093 patents for inventions in his lifetime. Just so happened that it was just one that revolutionized the world.

So, were his 1,092 other patents just failures? I’d say not, and someone smart might deduce that his innovations with the light bulb wouldn’t have happened without all of his other inventions.

Thomas Edison wasn’t a guy who hit a lottery ticket. He was a man who guaranteed his own success by his sheer persistence and sweat.

Likewise, a guy like Warren Buffett didn’t just buy one stock and then wait for his meal ticket to arrive. The guy built his wealth, slowly and surely, and across many stocks.

This is where your system comes into question. Do you have any stocks? Do you have any investments? How do you expect to ever find more wealth if you aren’t persevering to create it?

A system of saving and investing will get you rich. That’s not an opinion. Millions before us have done it this way, even back in the Roman times (check out The Richest Man in Babylon).

Not every investment will work out. That isn’t the point. But a system of saving and investing will create the wealth you desire. Nobody knows which investment will be your 1 in 1,093. But it could only take one. And it’s more possible than you realize.

The Successful Investing System

In fact, The Stable Investor wrote a fantastic piece on Old School Value about the richest man in history, John D. Rockefeller. His secret to wealth was… his love of dividends.

Check out what the man Rockefeller himself had to say about his beloved dividends. “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Rockefeller went on to build and then relinquish control of one of the greatest companies in history, Standard Oil, while holding on to his shares and collecting ⅔ profit with dividends to catapult his wealth to the most anyone has ever seen.

Or take the story of Heyford Pierce, a science fiction writer. He’s created an income of $146,194, sheerly from his investments (this was in 2011). His best investment was Altria back in 1987. He continued to buy it and now it pays him effective yields of 37%.

Let me break down the concept of effective yields for you, because it is your KEY if you want to be wealthy. In simplest terms, a company that makes a lot of profits will pay out a dividend. If profitability and growth continues, that company will tend to raise its dividend every year.

The raising of the dividend means that our money compounds over time. As you receive dividends, you should reinvest them into the company. As the years go on and the dividend continues to be raised, you will continue to collect more and more shares from your reinvestment. Plus the new shares means you get more dividends each year, and in time it grows exponentially.

What the concept of effective yields does is tell us how much yield we are getting compared to what we paid in the beginning (or cost). For example, in 1987 the dividend quarterly payout was only $0.06 per share. Fast forward to now, and it’s at $0.52 a share. Back in ‘87, you could buy Altria stock for about $2. Consider that Heyford Pierce accumulated 11,000 shares of Altria in his lifetime. That’s a dividend payment today of $5,720… made 4 times a year!

The effective yield of 37% means that Heyford now earns 37% on his money that he invested in the past, or his “yield on cost”. 37% is phenomenal, and it keeps increasing every year!

See what patience can do for you! But you must be saving and investing!

Dividend Reinvestment Success Stories

There’s a bunch of examples of stocks that turned ridiculous profits over the years. The key to all of them was a long term holding, and dividend reinvestment. In fact, check out some of these inspiring examples from the dividend pig [numbers are from 8/30/11 and assume automatic dividend reinvestment].

A $10k investment in Procter and Gamble ($PG) in 1970 would be $363,000, with annual dividend payments of $12,000. $10k in Coke ($KO) in 1990 would be $73,143 with annual dividend payments of $1,968.36.

$10k in Abbott Labs ($ABT) in 1990 would be $68,000 with annual dividend payments of $2,532. And like we said about Altria, a $10k investment in 1970 would be $786,000 with dividend payments of $44,080.

The big one, though, is Walmart. A $10k investment in ($WMT) in 1980 would be $3.4 million, with annual dividend payments of $108,729.

How incredible! Keep in mind this is just assuming a one-time investment. The investing system I recommend to you has you adding money every month. Your actual gains could be much higher!

dividend success stories

One last example to really bring this all home. In my Sather Research eLetter, I take a real life money portfolio of $150 / month and attempt to turn it into $1 million after 40 years.

Now the debate on whether I make this high of a return or not is beyond the point. The point is that it just takes a little bit of consistently invested money to make you a big sum of money in the long term.

Take the example of $150 / month. In a 40 year period with 11% annual returns, you’d have $1,162,489. What if you had returns that were slightly less than that? With the same time period and 9% annual returns, you’d still have $662,925.

Now consider the person who isn’t a stock picker. The stock market has averaged a 7% annual return over the past century. If that person just upped their deposit to $416.67 a month (which is $5,000 a year, a measly 10% of the median income of $50,000 a year), they’d make $1,068,058 on just 7% returns.

If it’s really this easy, then why doesn’t everybody do it? That’s why I’ve been jumping around and screaming all this time! THAT’S MY WHOLE POINT. Anybody can do it!

And $150 a month isn’t terribly expensive. Most of you probably pay more than that for your car, or even your phone. But in a world where keeping up with the Kardashians is more important than getting financial priorities in order, it’s no wonder people don’t even consider setting aside a little bit of money every month.

The Bottom Line

Look, saving and investing is about getting you rich. It’s not about sacrificing unnecessarily or being painfully cheap. Instead, it’s simply curbing your spending desire… creating financial muscles for you now so you can reap the benefits later.

But that’s where people get stuck. They do their financial muscling in the short term, but forget that their rewards come in the long term.

It’s like planting a tree. You have to dig, and plant, and water it… it’s a lot of hard work. You don’t get to enjoy the tree until 15-20 years later.

That’s what saving and investing is about too. The thing is nobody wants to take the time to build their trees. Everyone instead is consumed with their desires in the present.

So get yourself educated and trim the fat out of your wallet. Make a commitment that you are going to intentionally live to become rich someday. Invest in information.