From 5’000 to 22’000’000

In 1944, Anne Scheiber, who worked as a tax-auditor at the IRS for 23 years and never earned more than 350 USD/month, retired from the service at the age of 50.

After 23 years of work, her life savings stood at 5’000 USD.

Using this sum and her monthly pension of 260 USD over the next 50 years, she built a fortune that exceeded 22’000’000 USD upon her death at the age of 101 in 1995.

How did she manage to turn her small savings and pension into such a fortune?

Well, for a start, she lived a frugal life. But Anne Scheiber really became a wealthy woman, because after retirement, she studied the markets.

The lesson she learned from her work at the IRS (Internal Revenue Service; a US-government agency responsible for tax collection and tax law enforcement) was that the surest way to become rich is by accumulating stocks. Scheiber did her own research on stocks, read the annual reports of companies with the same inquisitive mind she audited tax returns during her tenure at the IRS.

She then picked stocks of companies she understood and based on the opportunity to increase earnings and pay higher dividends over time.

She accumulated stocks like Coca-Cola, PepsiCo, Bristol-Myers, Schering Plough (bought by Pfizer in 2009) and reinvested dividends for decades. She never sold, in order to avoid paying taxes and commissions and kept her ‘buy and hold’ strategy  even during the severe 70’s bear market or the 1987 market crash because of her high conviction into her stocks picks. She also didn’t mind about market adages as ‘Sell In May And Go Away’ (see yesterday’s post) and held to her portfolio of almost 100 individual stocks. In her later years, Anne Scheiber diversified and reinvested the stock-dividends into tax free municipal bonds to earn a fix interest.

At the time of her death, her 22 million USD valued stock/bond-portfolio was throwing off 750’000 USD annually in dividend and interest income.

Is such a stellar longtime performance with stocks and bonds still possible today? Well, of course it is, but it’s probably gonna be much harder to achieve a Scheiber-style explosion of wealth.

Why? Because the golden era has ended. This is the condensed message of a just finished McKinsey Global Institute report titled ‘Diminishing returns: Why investors may need to lower their expectations‘. The study shows, that the forces that have driven exceptional returns are weakening, and in some cases even reversing.

The key findings:

• Returns on US and Western European equities and bonds during the past 30 years averaged 7.9%; that’s considerably higher than the long-run trend. Several economic and business trends drove these exceptional returns. They include sharp declines in inflation and interest rates from the unusually high levels of the 1970s and early 1980s; strong global GDP growth, lifted by positive demographics, productivity gains, and rapid growth in China; and even stronger corporate profit growth, reflecting revenue growth from new markets, declining corporate taxes.

• Some of these conditions are now weakening or even reversing. GDP-growth is likely to be sluggish as labor-force expansion and productivity gains have stalled. While digitization and disruptive technologies could boost margins of some companies in the future, the big North American and Western European firms that took the largest share of the global profit pool in the past 30 years face new competitive pressures as emerging-market companies expand, technology giants disrupt business models, and platform-enabled smaller rivals compete for customers.

• Over the next 20 years, total returns including dividends and capital appreciation could be considerably lower than they were in the past three decades. Total real returns from US and West European stocks over the next 20 years could average 4 to 5 %, more than 250 basis points below the 1985–2014 average. Fixed-income real returns could be around 0 to 1 %, 400 basis points lower or more. Even in a higher-growth scenario based on resurgent productivity growth, returns may fall below the average of the past 30 years, by 140 to 240 basis points for equities and 300 to 400 basis points for fixed income.

• Most investors today have lived their entire working lives during this golden era, and a long period of lower returns would require painful adjustments. Individuals would need to save more for retirement, retire later, or reduce consumption during retirement. To make up for a 200 basis point difference in average returns, for instance, a 30-year-old would have to work seven years longer or almost double his or her saving rate.
  

If I may add my personal opinion: harsher conditions are ahead for investors, indeed. But this should in no way keep you away from the markets. Take the challenge, but you have to be patient, precise, consistent and realistic regarding strategy, selection and expectations. And by the way, when Anne Scheiber started to invest during World War II, conditions and outlook weren’t all that rosy too.

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‘Why investors may need to lower their sights’ – the full report is available for download via 

http://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights

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Profound research, profitable strategy, longterm view: Anne Scheiber started with 5’000 USD to build a 22 million USD portfolio.

The last 30 and the next 20 years: The period from 1985 to 2014 produced equity and bond returns far above long-term averages for both the United States and Western Europe. However, returns on financial markets will become harder to achieve over the next 20 years.