Theodore R. Johnson never made more than $14,000 a year, but he invested wisely so wisely that he made $70 million according to the The New York Times.
Mr Johnson, grow up in a middle-class family, worked his way up at U.P.S. to vice president for industrial relations by the time he retired in 1952. His annual salary was $14,000 ($126,000 in today’s dollars) then. Mr Johnson had $700,000 in savings when he retired in 1952 and when he passed away in 1991, that $700,000 ($6 million in today’s dollars) had grown to $70 million ($124 million in today’s dollars).
So how did one man retire with $124 million while he only earned $124,000 dollars in the last year before retirement?
“When I asked Warren Buffett — what are the secrets to your wealth, he said it’s three things. He said, No. 1, it’s being born in America. No. 2 is good genes, so I live long enough, and No. 3, it’s compound interest. Compound interest — people have no idea the power that it really has.”
– Tony Robbins
Let’s sit down and have a conversion about No.3 Compound Interest.
Einstein is reported to have said, ‘compound interest is the eighth wonder of the world.’ but he never did say that, but it is a powerful force.
Compound interest is simply this.
Imagine you had a bank account that paid 10% interest and you had $1,000 dollars deposited into the account on 1st of January 2017. And you didn’t touch it throughout the year. On 31st December 2017 the total balance will be $1,100 ($1000 deposited + $100 in interest payments).
What I have described is what people refer to as simple interest. Compound interest begins to take effect from the second year or often referred to as second time period. Now say you didn’t touch the account for another year plus you didn’t add to it. On the 31st of December 2018 the total balance will be $1,210 (interest earned (($1,100*0.10)+110))).
And if you continued to leave the bank account to compound earning 10% interest, in five years time the total will be $1,610 in 10 years $2,593.
Still not convinced, watch this video by Tony Robbins.
The same principle applies to investing. Now substitute in the above bank account example with the words equity instead of bank account and return on equity instead of interest rate and you now understand what the key variable is within a businesses economics better than 90% of investors.
Taking it a step further, growth in earnings per share is a byproduct of a high return on equity. Click here to learn more about Return on Equity.
Growth in earnings per share is a byproduct of a high return on equity!
Return on equity is one metric Warren Buffett informs his readers on a regular basis in his Berkshire Hathaway Annual Reports.
Below Buffett explains below how to $40 dollars into $5 million.
Getting back to Mr Johnson’s $70 million dollar haul.
Mr Johnson lived his life simply by spending less than what he earned and investing the difference.
I believe Charlie Munger once said ‘take a simple idea and take it seriously.’ And I encourage to do the same.
The New York Times further explained that Mr Johnson had bought as much of the company’s (UPS) stock as he could and had about $700,000 ($6 million in today’s dollars) when he retired. The article doesn’t explain if he actively invested in his retirement years but we know that Mr Johnson clearly took advantage compound interest. View the original article here.
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