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Simplicity frequently leads to the best outcome.
Find the simplest rules that work time and again, and keep working those rules time and again.
The simple things can work to your great advantage if let them
So let’s review two simple investment rules that have worked to my great advantage.
Simple Rule #1: Pay Less, Keep More, Save the Difference
Yes, that’s rule number one. I wasn’t kidding about simplicity.
Am I simply observing the obvious? Yes, but sometimes the obvious needs to be observed.
Saving should go without saying, but it apparently needs to be said. It certainly goes without heeding.
Many of us prefer to destroy the feature for the pleasure of today.
I offer proof.
Nearly a third of Americans (31%) report having a net worth of $0 or worse.
The no-net-worth group is populated mostly with members of the younger crowd, as you would expect.
Forty-one percent of Generation Z, born between 1995 and 2010, have a net worth of $0 or less.
Thirty-eight percent of Millennials, those born between 1981 and 1996, have a net worth of $0 or less.
Youth at least has an excuse: They are young and stupid.
Mom and Dad, on the other hand, what’s their excuse?
I find it shameful that 21% of Americans age 59 and older report that their liabilities exceed their assets.
Excessive credit use is the problem.
The U.S. household debt and credit report, published by the Federal Reserve Bank of New York, shows that overall consumer debt reached a record $17.1 trillion in the first quarter of 2023.
Mortgage debt is the largest and most justifiable (you are theoretically buying an appreciating asset) of the balance at $12 trillion.
Student loan debt is less justifiable at $1.6 trillion.
Credit card debt, at $1 trillion, is justifiable only if it’s a short-term, interest-free convenience enabler.
In other words, credit card debt is justifiable only if the balance is cleared each month.
The problem is that approximately 46% of credit card users fail to clear the debt each month.
Nearly half of the credit card users are willing to pay 24% in annualized interest to scarf down a McDonald’s happy meal.
Poverty and wealth share a common characteristic – momentum. Once wealth or poverty is established, both grow and accumulate like a snowball rolled down a hill.
The difference between wealth and poverty can be distilled to one simply fact: The wealthy collect income, and the poor pay it.
Stop being an income source for other people, let other people be an income source for you.
Simple Rule #2: Own Income-Producing Assets
Now that you have mastered the mature act of spending less than you earn, what do you do with the difference?
Invest! – always invest your savings.
I have continually invested for the past 35 years. I have owned (or own) individual stocks, bonds, and real estate. I have owned (or own) mutual funds, ETFs, closed-end funds, REITs, MLPs, royalty trusts, and BDCs.
A thread laces these investments into a fine tapestry.
Every investment I have owned (or own) pays income – dividends, interest, distributions, rents, or whatever. Everything had (or has) an income component.
Income is fundamental, a philosophical anchor.
Income imbues an investment with a tangible essence. Income is evidence of legitimacy.
Do you think it’s a coincidence that nine of Berkshire Hathaway’s (NYSE: BRK.b) top-10 publicly traded equity holdings – over 90% of the market value of Berkshire’s portfolio – pay dividends?
Do you think it’s a coincidence that these investments fill Berkshire’s cash coffers to the tune of $4.2 billion annually ?
Do you think it’s a coincidence that as the amount paid grows annually, the market value of the underlying investments grows annually?
Dividend-paying stocks are as good an income-generating asset as any, as one wealthy businessman acknowledged over a century ago.
“Do you know the only thing that gives me pleasure?” John D. Rockefeller rhetorically asked and then conveniently answered, “It’s to see my dividends coming in.”
Amen.
I said that my rules were simple, but are they easy?
They are for the mature, disciplined investor.
Good Fortunes
Steve Mauzy