The Janitor Who made $8 Million Dollars and How!

In his book, “The Psychology of Money” by Morgan Housel, he narrates a rather fascinating story of one Mr. Ronald Reed. Mr. Reed lived till the ripe age of 92 and passed away in 2014. 

No big deal, lots of people die every year and some of them do live long but what of it- You ask?

Well, when he died, his net worth was $ 8 million, he left $2 million to his step kids and $6 million to his local hospital and library.

So, a rich man died and did some charity, I still do not see the fascinating part.

Well, he was a janitor.

Hold up, you are telling me a janitor working on meagre or minimum wage was able to save $8 million. 

Yes.

 

When this news first came to light, people were surprised just the way you are. How come a janitor made so much money, his friends were surprised, his relatives were surprised and so began the search for his cause of wealth.

Did he inherit?

Did he commit a bank robbery?

Did he find a stash of gold under his house?

How can a janitor acquire so much wealth? Upon enquiring, people found out that he did the simplest of things. He invested systematically into blue-chip stocks, lived well below his means, and lived a long life. He invested, did not succumb to lifestyle inflation and time played a hand in making a fortune for him. SIMPLE.

I love this story. It is a classic rag to riches story, but to be honest, it is not that rare a story. A popular one but not that rare. Most people who do this: invest, keep lifestyle inflation in check, and are patient are rewarded. They do not have to be the best investor. An average one will do just fine.

Unfortunately, we do not know more about Ronald Reed but on the surface, he seemed like a simple man who followed the theories of investing quite diligently.

And he made a lot of money by following a simple strategy of buying and holding. And holding for a long time. He seems to have followed the advice of legendary investors such as Warren Buffet and Charlie Munger.

Advice such as “Do not disturb the process of compounding unnecessarily” or ‘The Big Money is not in the buying or the selling but in the waiting’

He also seemed to have lived the saying “Investing is simple but not easy” or “Making money is simple but not easy”.

But, it seemed easy, looked easy enough. You say, just buy bluechip companies and let time run its magic

Let me tell you a little bit more about Ronald Reed.

He bought a two-bedroom house at the age of 38 and lived there for the rest of his house.

Can you even imagine living in the same 2-bed room house when you have millions stashed in your bank account? At some point in life, you would say, I deserve better and buy a bigger house and with it, the Diderot effect (explained at the bottom of the post) comes into play and the corpus dwindles substantially.

His main hobby was chopping firewood. Not golfing, not traveling around the world but chopping firewood. I cannot think of a cheaper hobby. An ax, firewood, and a block. Good for your health but cheap. Would you not have at least experimented with other hobbies to see what sticks?

I do not know what car he drove but I am reasonably certain that it was not BMW or Audi. 

Reed would be hailed as a Demi-God for people preaching against lifestyle inflation.

But can you do it? 50 years of the same life even when you have made money. Or do you even want to do that? What good is your money if you do not get to enjoy it?

I think Reed would be one of those rarities whose example can be given to people who say high income is important to create wealth but also to people who do not enjoy life.

But I want to take his example and make another point. The point about the retail investor and their competitive edge. In the world of finance, dominated by the brightest, the most competitive, the people with access and resources, retail investors do hold certain competitive advantages. 

All you have to do is acquire money and build assets. Simple. Every month, every quarter, keep building assets and we end up on the right side of things.

Assets can be anything: it could be real estate, FD’s, Mutual funds, Gold, bitcoin. We can discuss a lot more about the optimum mix of assets, how can we maximize the gains but the starting point is always going to be building assets.

Even if you are paying your home loan EMI, you are reducing the loan and increasing your equity in the asset.

If you are buying gold, you are buying an asset that can beat inflation and act as a hedge.

If you are buying a mutual fund, you are buying a stake in the company. You are a part business owner.

Optimum allocation depends on your risk profile, your time horizon, your cash flows but buying an asset is a non-negotiable goal, and buying a car is not buying an asset. Let me put in another way, buying an asset with chances of appreciation. This is where the retail edge comes in. We can beat most fund managers by using the retail edge that we have.

Retail edge consist of the followings:

1. Investing Consistently
2. Keeping lifestyle inflation in check
3. Keeping our emotions in check
4. Ability to withstand periodic fluctuations in the portfolio 
5. Autonomy (not reporting monthly or quarterly number to acquire asset)
6. Goal-based investing
7. Compete with yourself, set asset allocation by yourself, keep your risk management practice in place, and do not look to become rich overnight.
8. Finally, TIME. Time can help massively if we are moving in the right direction.

As Ronald’s story proved, time was the greatest factor. I have discussed more here, here and here. 

At a time when Bill Hwang(How to lose $10 billion in 3 days?) has been making all the headlines, let us learn from Ronald and get set in the right direction.

This is post no 46.

Some other post that you may like:

1. Enough
2. Delayed Gratification 
3. How does Poker And Chess help in investing?

For people interested in trading, below is a good story:

https://www.portfolioyoga.com/wp/thoughts-on-trading/

Diderot Effect