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The specific day this veteran investor makes his IRA contribution

My name's Tim Clarkson, and I'm a stockbroker with Van Clemens. And I've been doing this for over 40 years. I'm going to talk about my good friend Craig Ostrem, who's also a broker at Van Clemens, and I'm also going to talk about an analogy of comparing investing in a piggy bank to investing in the stock market. So, Craig Ostrem is a broker at Van Clemens. He's also a former client and friend. My favorite story about Craig concerns his IRA contributions. Many people wait till about April 15, to make their IRA contributions, the last possible day. Craig, on the other hand, always made his contribution on the first trading day in January, the first possible day, you could put money in. I think it was in 1992 that Craig showed up in his parka. It was actually 25 below zero on the day he made his IRA contribution. He bought 1,500 shares of Daig at about $1.75 after he made his $2,000 contribution. The stock shot up 100 times in the next three to four years. In combination with his other stocks, he's become solidly wealthy. Even winter shouldn't thwart your attempts to make wise choices. 

Craig thought that my presentation about comparing investing to putting pennies in a piggy bank was valuable. And so, I'm inspired to do this comparison again. To get where you're trying to go, you have to at least be going in the right direction. You won't make it to Mexico from Minneapolis by heading north. The correct direction for investing is always to ask the right question. 



According to math, getting wealthy can be easy for investors if you know the 'Rule of 72'

Where am I going to get the highest return? Will it be a bank at 2%? Or will a stock do better? To understand that choice, let's look at the analogy of a simple piggy bank. So, if you put your money in the bank, and you start with a 2% return, the 100 pennies at the beginning of the year, by the end of the year, you're going to have 102 pennies. Simple enough. And also admittedly, there's almost no risk with that. Now think of the stock market like a piggy bank. If you pick a winning stock at its book value, the company's actual net worth, and its return on book, the return on its net worth is 15%, you'll have at the end of the year $1.15, 13 pennies more than you would have had if you put the money in the bank. By the way, 15% doubles in about five years. To know how fast money divides is the rule of 72. So, you divide 72 into whatever the return is. So, if you divide 72 into 15, it's just under 5%. On average, your goal in investing should be to make 15%. The stock markets earn 10% overall going back 100 years. So, the two key variables are always the return on equity, and the price you pay for that return on equity, the price of book. If you pay half of book value and the company makes only 7%, you're still going to make 15% about because you got it at half the price. If on the other hand, you paid four times book value and the company makes 15%, you're only going to make 4%, 15 divided by the four times book value that you're paying. So, the point is the price you pay makes all the difference. 

If you want a fat 15% plus investment return, do this...

Now the job of a stockbroker or financial advisor is to get you into high returning businesses at low prices. Of course, a 15% return on a stock is not guaranteed. Businesses can and sometimes do make less than that. But if you own the stock at 100 pennies or less your main risk is that the company would actually start losing money. Then you could actually lose your 100 pennies. That's why you need to own predictable businesses with high returns at 100 pennies or less. Knowing what makes a business predictable is the very key, and we'll discuss this next podcast. In the meantime, I have a major insurance company that consistently makes 7% on equity, and it's only trading for 50% of its book value or its net worth. I think that implies a 14% return. In the meantime, it also pays a 4% dividend. Call me.

Listen to Investing Beyond The Noise - Episode 1

Listen to Investing Beyond The Noise - Episode 2

Listen to Investing Beyond The Noise - Episode 3 

Listen to Investing Beyond The Noise - Episode 4 

Disclaimer

The discussions contained in and referred to in this podcast are provided for educational, information, and entertainment purposes only. The information, statements, comments, views, and opinions expressed or provided are not necessarily those of Van Clemens and may not be current. Van Clemens does not make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views, or opinions contained in this podcast. Any liability, therefore, is expressly disclaimed. Van Clemens does not undertake any obligation whatever to provide any form of update, amendment change, or correction to any of the information, statements, comments, views, or opinions set forth in this podcast. You should not make any decision, financial, investment, trading, or otherwise based on any of the information presented in this podcast without undertaking independent due diligence and consultation with a professional broker, or financial advisory. You understand that you are using any and all information available on or through this podcast at your own risk.

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