"Chump. There was a tale in Money Magazine some years ago about a woman who invested $5000 with Merrill Lynch in 1944, when she died 51 years later her $5000 had compounded to more than $20,000,000 and her portfolio payed $750,000 in dividends in the year of her death"...ok Jon, but you did ask for this
51 years let's start there.
At what age does the average person start to get enough excess income over expenditure that they can make significant investments for the future (allowed to compound untouched) as a % of their gross income ? I'm going to plump for the age range 30 years to 35 years. Before then they are typically buying first homes and making babies.
At what age does the average person start to lose the excess income over expenditure at least in terms of having excess sufficient to continue to fund investments ?
I'm going to plump for 60 years to 65 years of age. Remember I am talking about Joe average. In the past the average Joe would be dead in his early to mid 70's.
In effect he might have a compounding rangespan of around 35 years years max on average so the first point we have now established is he does not have 51 years in which to compound gains so what does the sum $20m look like based upon a shorter rangespan.
$5k let's continue with this. First the sum. $5k in 1944 was a fortune to the average Joe so this woman was already rich in average terms...that sum would have bought probably 10 average priced homes so as I say she was not the norm.
Let's talk about prudent investment. She's investing $5k in an asset group that is above average in risk so a balanced approach to portfolio would say she probably had assets to invest at least double that sum spread between equities ,bonds and cash..so again she's got at least $10k washing around not needed for day to day living and that means at that time she was already quite wealthy.Now putting in a lump sum is not how most people can invest. Most people have to drip feed from income so again they don't actually have max compounding effect on a lump sum for their lifespan of compounding. This decreases the average Joe's potential compounding gain against the gain made in the example where a lump sum investment was made. I won't go into the emotional hazards in depth that even in a long bull run there exists sufficent volatility that the average Joe shoots himself in the foot by exiting the compounding mountain whereas this woman did not.
$5k with Merill Lynch.
Let's think about this. Does it mean she bought $5k of Merrill Lynch stock ? If she did then she either, had much more capital than we have identified so far because putting such a high % in one stock would be risky in the extreme, or does it mean Merill Lynch establish a portfolio of stocks for her using the $5k , in which case once again we need to establish the context of the investment so we can think about the probabilites of being able to replicate that investment.
Now this takes us into the really good part of this analysis, the context which is the timing implicit in the year the investment started 1944 !
I don't have it on this machine,but if someone throws up a longterm chart of the Dow back from 1900 ish onwards ...do you know what would be the start of the longest bullrun in history in terms of real net growth in equities ? By real I mean inflation adjusted. ...LOL
1941/2.
A chart will show you that after the great wash out of the American economy in the 1930's....sell off followed by a couple of bull markets the stocks retreated back to the washout of the 1929-32 period by 1941/2 inflation adjusted...that washout and the demand created by WWII took those stocks on a journey from which they wouldn't look back until around the mid 60's by which time the compounding effect would have been enormous on untouched investments.This was the creative destruction process optimised.
How many such periods could be identified in a similar way to enable replication of the investment. Just ONE, post 1981/2 following the great inflationary washout of the 1970's.
So in considering the quoted investment in probability terms we have a universe of data containing a sample of just two .BUT it's get's better ,let's look again at the dates...we've dealt with 1944 ,but now 51 years on we are in 1995 and the brave new world. This is not quite the peak of 1999/2000 , but over a investment timeframe of 51 years it is near enough the equivalent to picking a top. So ,we've effectively picked both a top and a bottom for establishing our extroadinary investment example. One of only two in inflation adjusted terms that existed in the modern era of finance.
To put this now into context this example bears as much relation in probability terms to the average Joe's investment probabilites as if we were to peruse a handful of new born babies from which we would select the next Mohammed Ali. In other words it's crap. You want to know one of the reasons why Warren Buffet can make money...having watched him now quite a few times it's obvious the guy is gifted in that he can identify statistical crap and he knows what stats are actually relevant.
The above example looks to me like just the type of cherrypicking crap that you might see from the finance industry...Merill Lynch et al , when they are trying to sell buy and hold to the crowd...the type of stuff..."this could be your $20m"...in statistical terms you might as well go buy a lotto ticket ...your chances are probably not dissimilar.
