Let me ask you a straightforward question — do stocks outperform treasury bills? We know that the simple answer to this question is “yes”, on average, the stock market will outperform Treasury Bills. The spread in the performance of Treasury Bills and stocks is called the Risk Premium. Essentially, the Risk Premium is the extra 5-6% return a year that you receive for holding stocks, which are inherently riskier assets than risk free Treasury Bills. But a paper by Henrick Bessembinder from Arizona State University has recently found that 58% of all stocks failed to outperform Treasury Bills over their lifetime in the paper’s data set.
Gold, silver, oil… These are just a few of the numerous commodities in the world that hold some value. How much value is subject to the whims of the market and can fluctuate from day to day. But, what constitutes the most valuable commodity in the world?
When thinking about passive income, one usually thinks about how much will the yield of a particular investment generate for me? For real estate, that will be your cap rate and for blue chip stocks, that will be your dividend yield, but both concepts start and end with the same fundamental calculation — income received / investment purchase price. That got me thinking — given that the median American family earns approximately $59,039 each year, how much would you have to have in an investment for its interest’s interest to equal the median American household? Well, it depends of course on what sort of investment we are looking at.
I came across, albeit belatedly, one of the more remarkable investing stories that I have ever heard from the Wall Street Journal. On June 2, 2014, Ronald Read passed away at the age of 92. A resident of Brattleboro, Vermont, Read was a WWII veteran, gas station attendant, and janitor for J.C. Penny. Upon his passing, his friends commented that he was a frugal, private man whose two main hobbies were cutting wood and reading the Wall Street Journal. What they didn’t expect was that Ronald Read had quietly amassed a fortune of $8,000,000, consisting of almost 100 hundred blue chip stocks.
One of my theories on investing is that boring industries do better. When you have to develop new products or upgrades every 3-5 years, that’s an invitation and an opportunity for your competitor to challenge your product. Indeed, the historical returns support this theory of simple and basic being better — I like to call it the “Repeatability Advantage”.
In this article, I detail the stages of building wealth that I developed when I first started working and subsequently refined as I met investors and private businessmen from all different walks of life. While each individual story is always different, for many their story is remarkably similar.