Wurdy Writes

What about the Janitor who made $8 million by investing in stocks?

In 2014, a former janitor at JCPenney (a large supermarket chain in the US), made the headlines when he died.

News channels reported that he donated 6 million dollars to his town hospital alone. These were followed by list of inheritors including friends and family.

The guy was loaded; and nobody knew about it. (Except his lawyer, of course, since he made the will.)

How did he make that much money as a janitor? What sources of income did he use to amass that much money, people wondered.

The answer being, exactly what he said: A janitor's wages.

Ok, you might say, what the hell did he do with his wages?

Well, he saved whatever he could and bought shares of big, established companies. These companies are market leaders in their fields, which means there is a very slim chance that one of these would go bankrupt. These are what you'd call Blue-chip stocks in investing jargon.

Since these companies do not have room for growth, the managers don't invest in the growth of the company and just distribute the profits to the owners. AKA, dividends.

Read used these dividends to buy even more shares.

This strategy gave stable growth in share prices as well as more shares acquired with the dividends received.

Now, most articles on this guy mention just this one point and praise it all the way to the high heavens. They make it look like this is the be-all and end-all of Ronald Read's investing journey, the layman's guide to sure-shot investing. I beg to differ.

It isn't nearly as simple as it looks. There are three caveats to this approach, as far as I can tell: The Caveat of Knowledge, The Caveat of Discipline & The Caveat of Frugality. Allow me to elaborate.

The Caveat of Knowledge:

Ronald Read read The Wall Street Journal daily. He had knowledge that enabled him to gauge which companies gave ample dividends.

You need to know how stable the company is, and if the dividends given are better than its competitors.

This is the easiest one. Knowledge may be time-consuming to acquire, but if you allow yourself to take a few wrong turns and keep going, you'll get there eventually.

The Caveat of Discipline:

Ronald Read was a superhuman as far as discipline was concerned. And I am not taking about saving money. Saving money, according to me, has more to do with habits than discipline.

No, I am referring to holding these stocks for decades.

Do you know how hard it is to invest in a boring Blue-chip stock and hold on to it, knowing people out there are multiplying their money by ten times investing in the latest tech stocks? This used to happen in the late 1990's.

At that time mutual funds managed by extremely educated people switched to owning tech stocks only, and earned big bucks. They used to say that if you weren't doing the same, you ought to get your head checked.

Amidst all this chatter, Read kept a clear head, keeping in mind the advice of, arguably, the greatest investor of our times: Warren Buffet.

Buffet always said (still does), that you should invest only in the businesses you understand.

Read didn't understand how a startup which hadn't sold anything yet could go up 10 times in value overnight. So he stayed clear of them.

This doesn't mean that those fund managers knew what was going on. They didn't know shit. They smelled stupid money coming into the tech sector and flocked there.