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https://craigverdi.substack.com/
Be an owner, not a loaner
Let’s imagine an investment you made in 1980. You invested $160,000. Today it is worth $720,835. Was is a good investment for you? If you want to create wealth it was a bad investment. The amount of $720,835 is the growth based on the increase in US postage stamps over that period. The average increase in postage is about 3.6% a year. https://content.commonwealth.com/calculators/java/CompoundSavings.html
The same $160,000 would be worth $19,573,819 had you invested in the S&P 500 index. with that investment you would have owned 500 US companies over 40 plus years and grown with them. Yes, the math is accurate. https://www.macrotrends.net/2324/sp-500-historical-chart-data
having ownership is the key to wealth
You probably didn’t have $160,000 in 1980. But did you have $10,000? That would be worth $1,280,000 invested in the S&P index.
So what good does that do you if you are 60 years old you may ask. Some people and a lot of advisors will tell you that when you hit 65 years old you need to chill down on how much “risk” you take. Not true. As a 50 year old you may have over 30 years of investment ahead of you, and if you don’t keep up with inflation you will be broke without equity investments.
Equity vs Debt
There are really only 2 places to put your money for accumulation. One is the ownership of equity. About 99% of all equity in the world consists of ownership in companies or real estate. By placing your money in assets that create ownership you are an equity investor. To place money in “debt” you are a debt investor. Some call it “fixed income investing.” What is “debt?” Debt means a company or government goes in to some debt to borrow money from you so they can grow. This is in the form of bonds. They offer to pay you an interest rate, currently around 5%, in return for your money, which they use for capital. The other place to be a debt investor is mainly in banks, savings accounts and CD’s.
About 99% of all equity in the world consists of ownership in companies or real estate
Loaning your money out to companies or banks is not investing. It is saving. You can’t get ahead of inflation. Bonds are mostly taxable. By the time you pay the tax on your 5% your return may be 3.8-4.2%. Inflation doesn’t pay taxes!
Leaving your money at interest would be akin to investing in the growth in the price of stamps. Basically it keeps you even with inflation over time. That doesn’t help. Imagine a world with no inflation. You make $10,000 per month in this world. You save $3,000 of that to retire on. After 30 years you have $1,080,000. Now you withdraw 7,000 per month to retire on. You can only live for 12.8 years on that. Back on this planet, that is the same as having your savings at 4% and inflation at 4%. You can’t get there unless you are super rich, like an athlete, actor or business owner, or perpetual college student. You need the compounding that only ownership can bring.
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The Rule of 72
Everyone thinks they know this but can’t quite get it right. It is simple and is an amazing tool to estimate future values. It is this simple:
Take your rate of return. Let’s say 8%. Now divide 8 into or 72 ÷8. The result is 9. That “9” tells you it will take 9 years to double your money at 8%.
100k at age 45 becomes 200k nine years later at 54. 400k at 63, etc. It works for any rate of return you divide into 72. Now, you are thinking about buying a $500k house and want to estimate when it will be worth $1 million. Hmm, houses increase about 4-6% in these parts. 72÷4 = 18. 18 years to double. 72÷6 = 12. 12 years to double.
Why Equity will always beat collecting interest
Most of us understand we probably have to own things to get wealthy. So own things. The companies and banks that borrow your money use it to grow. If Apple wants money they issue a bond for 3.8%. People buy it. They put in $100,000 and over 5-10-or 20 years they get back the $100,000 guaranteed. Each year they collect $3800 and they pay taxes. You have the choice to loan money to Apple by buying bonds or owning Apple stock. Your return is the same as the Executives and everyone else. Over the last 10 years the stock is up 963% or about 25.1% a year.
The reason equity always wins is that with capitalism, capital must grow more than debt. If a company is borrowing at a rate higher than they grow, over time they will not exist. You must invest in quality equity assets. They always go up. Decades not days is your time frame.
See you soon,
Craig
I am hoping to add 10 private clients total. The sale of my company, Verdi Wealth Management, was complete in 2021. I started a new company based on a maximum of 25 like minded clients. If you would like to discuss how to become a client, or know someone who might, please call me at 208-559-6250 or email me at [email protected].