The Dow that can be told is not the eternal Dow.
That means I have no idea what I’m doing, as far as investing is concerned anyway–probably as far as a lot of things are concerned. But this is about mistakes in investing.
When I was young I read a good book about mathematical things in life. (I’m going to use the powers of the Internet to try to figure out what that book was, but I don’t want to interrupt my train of thought–okay, my caboose of thought–to look it up right now, but I intend to get back to it and then you’ll see how it relates.)
I was probably in about seventh grade, and I still remember several points made by the author– elephants cannot jump at all whereas fleas can propel themselves many times their own height (the Jordan of fleas would measure his vertical jump not in inches but in multiples of his own body size)– a chess board is the key to investing, because its sixty-four squares were used in a famous ancient parable to teach that doubling really makes numbers get BIG– and if you don’t use graphs correctly you can really mess with people. I think that last one was probably from a different book.
Here’s the chessboard story as I remember it. The wise number-cruncher was being rewarded by his king (a ruler of immense wealth), so the king promised him anything he desired as a reward. Just name it. (I think the excellent service consisted of inventing the game of chess which the king was enjoying immensely). The humble number-cruncher said his reward was merely to be of service, but the king insisted that he pick something even if it was something humble and symbolic, so he requested a single grain of rice be placed on the first square of the board. The next day the king saw the reward and objected that this was too meager a reward. So then he requested that the second square receive two grains. The king quickly proclaimed that his reward would be to have each square covered with double the rice of the previous day’s square until the entire board was covered in rice grains.
Mathematically, of course, this was equivalent to 2 to the Power 64 with the last square buried under 2^63 grains and the other squares all added up to make a total of 2^64 grains of rice. It turns out, my seventh-grade brain learned, that this is a LOT of rice. More rice than the kingdom could supply. More rice than the entire earth could supply. More rice than has ever grown in the history of earth.You get the idea: be careful when stuff starts growing by doubling.
In this book the story of the chessboard served as the introduction to the concept of exponential growth. I learned that elephants cannot jump because the mass of any creature grows as the CUBE of its size whereas the strength and power of the creature grows as the SQUARE of its size, due to the cross-section of muscle being the determining factor in strength. So a creature 100 times bigger might be 10,000 times stronger (100 x 100 = 10,000) but the weight of that creature would then be 1,000,000 times heavier (100 x 100 x 100 = 1,000,000).
I still remember these examples fifty years later. And I think about them when I think about investing. Because the idea of investing is to grow your money, right? How long does it take to double your money if you invest it in various ways?
If you invest in the stock market the long-term growth has averaged out to over 10% per year if you average over long periods of time. In the shorter term all hell breaks loose, but long-term the average is over 10% growth. Now, I know that 10% growth produces a doubling in about seven years time. So when I retired I knew that I would have to wait a long time but eventually my retirement account would start doubling. Since I retired at age 56 I could anticipate maybe . . . (being optimistic here) . . . doubling five times! Okay that would take 35 years which would make me 56+35= 91 years old. Would I still be able to do mental math at age 91? Not sure, but then Clint Eastwood is still making movies and he’s turning 90 this year!
I planned to be the Clint Eastwood of retirement. Not in the sense of beating people up, or fathering children with multiple partners, but just in staying mentally and physically alert enough to know how much money I have from all the doubling. And care.
So, say someone like me started retirement with $100,00 and then let it double every seven years:
Age 56 $100,000
Age 63 $200,000
Age 70 $400,00
Age 77 $800,000
Age 84 $1,600,000
Age 91 $3,200,000
What would someone 91 years old do with three million dollars? I didn’t know, but I decided to try to let my money grow, as long as I didn’t need to tap into it early of course. And, yes, I did realize that inflation might eat away at the value of that Three Million such that it was then barely enough to buy a condo.
I actually hold my investment in the form of an annuity account with a life insurance company, and my only decisions amounted to selecting funds of differing names and then letting the “investment professionals” make the day-to-day decisions about how many shares of Coca-Cola or Netflix to purchase, sell or hold.
I’m going to pause and come back in the next post– how’s it actually going? Am I on track to be Clint Eastwood? Or am I actually more of a Mickey Rooney? Rooney was born ten years earlier than Eastwood (DOB Sept. 23, 1920), and he lived to 93, passing away April 6, 2014– but Mickey Rooney was famously always broke despite Hollywood earnings (and later Broadway earnings) going back to his early childhood and continuing into his eighties. As a teen in the late Thirties, Rooney was the biggest box office draw in the world, but he never invested effectively.
On the other hand, he was Ava Gardner’s first husband.
Below: Ava posing in character for a publicity shot for THE KILLERS (1946). She’s 23 here and already divorced from Rooney.