Case Study: The Mystery of The $8 Million Janitor

Great opportunity to use this inspiring case of the part-time janitor with an $8 million investment portfolio to teach critical investing and budgeting lessons including the power of compound interest, investing in stocks for long-term growth, living frugally and sharing your wealth.

http://player.theplatform.com/p/gZWlPC/cnbc_global?playertype=synd&byGuid=3000353167&size=530_298

From CNBC:

Ronald Read, a Vermont gas station attendant and janitor, invested in recognizable names when he amassed an $8 million fortune, according to his attorney. A large part of that fortune was later bequeathed to an area library and hospital after his death, stunning a community that had no idea about his wealth.

Is this another case of a news story touting an unlikely millionaire that turns out not to be true (see this earlier case study on a millionaire who wasn’t)?  I think this one rings true.  Why?  Very simply, the power of compound interest.  One fact you should be aware of is that Mr. Read was 92 when he passed away.

Other facts that I was able to gather about Mr. Read:

  • He lived frugally.  In other words, he was a saver.  Some funny anecdotes (from Rutland Herald):
    • He dressed in such a way that someone once bought him breakfast: “And he liked to tell Smith the story about how a man ahead of him at the cash register had paid for his breakfast because he looked in need of help.”
    • He drove a second-hand Toyota Yaris. “The cheapest car you can buy,” Rowell said.
  • He lived in Brattleboro, VT which means his cost of living was low.
  • He dressed simply, with a “typical ensemble of a well-worn coat, flannel shirt and baseball cap,” according to one account.
  • His employment history:
    • 1945-1979:  Gas station attendant/mechanic
    • 1979-1996:  P/T janitor at J.C. Penney
  • Upon his death, his estate donated $4.8 million to the local hospital and $1.2 million to the local library and his total estate was estimated at over $8.0 million
  • He bought stock and held them for the long-term (from Today.com):  “He did all his own investing,” she added. “He had only a small account with Wells Fargo. His safe deposit box was filled with original stock certificates.”
    • From the Rutland Herald, he was a conservative investor: “Read gave Smith stock tips, and she said his investment strategy was conservative and blue chip. Dot.coms and startups were not for him, said Smith, who now works at Landmark College in the development office.”
  • What stocks did he own?  According to CNBC:  “Those investments included AT&T,Bank of America, CVS, Deere, GE and General Motors.”

So, let’s do the math (and see the power of compound interest) to determine how realistic it is that this auto mechanic and part-time janitor could accumulate an $8 million portfolio.  Let’s use the following assumptions (if your students are adept at spreadsheets, you can have them follow along as you create an assumptions table 8MM_Janitor that will drive your analysis):

  • Mr. Read started to regularly invest in 1945 when he started working as a gas station attendant/mechanic.
    • Average wages in 1945, according to People’s History was about $200/month or $2,400 per year.
    • Let’s assume that he earned 1/2 of the average wages or about $100/month or $1,200 per year since he worked in a small town in Vermont.
  • Estimated savings rate:
    • He was by all accounts, a pretty cheap guy so let’s assume he was able to save $50/month or $600/year (a savings rate of 50% of annual wages in 1945) and that he increased his savings by the rate of 3% (inflation rate) until 1979.
    • Assume from 1979-1996 that he only saved 1/2 as much since he was only working part-time.
    • Assume that he stopped saving in 1996 (when he finally retired) which is unlikely since the dividends he was earning probably more than covered his cost of living and he was also receiving Social Security payments too.
  • He liked to invest in blue-chip stocks so let’s assume that his investments matched an S&P500 Fund.
    • Thanks to NYU which has a great data set of S&P500 returns since 1928.
    • I assumed that he earned a full-year’s return (S&P500 return for that year) on his starting balance for that year and 1/2 of the S&P500 return for his investment in the given year since he may have been investing throughout the year.
  • Assume that he bought and held stocks and that he maintained his stock exposure at 100% (one article notes that almost all of his wealth was in original stock certificates).  This is generally not advisable for retirees but since he lived frugally and could have had dividend income of a few hundred thousand from his portfolio alone, he could afford to me more risk-seeking.

I created a spreadsheet (8MM_Janitor), plugged in these variables and….voila, discovered that his portfolio using these assumptions would have been worth $10.3 million.  What is amazing, when I review the spreadsheet, is that he could accumulate a portfolio this large while only saving at most $1,591 in a year (in 1978 or $5,188 in 2014 dollars).  So, in this case, it doesn’t appear a stretch to believe that this frugal Vermonter, who chopped his own firewood until the age of 90, could accumulate an $8 million portfolio.  For those who noted his prowess at picking individual stocks, it probably would be a surprise that may have done as well buying a passive S&P500 index, which unfortunately would not have been available in 1945 (that didn’t happen until 1976).

So, what lessons can be learned from this humble, unassuming Vermonter?

  • He benefitted from a phenomenal 70 year run in the stock market.  During the period from 1945-2014, the stock market returned an average of 12.6% per year.  He benefitted from three major bull markets:  the post-war period, the go-go 1960s and the bull market that ran from 1982-2009. It is probably not reasonable to assume such prosperity over the next 70 years…
  • Given the power of compound interest, it pays to live a long life.  Just think, every dollar he saved in 1945, would have been worth about $4,052 by 2014 if he earned the average market return for those 70 years [the math is $1 X (1+.126)^70 = $4,052.  Yes, exponential functions like compounding interest are extraordinary wealth creators!
  • Stocks have been the best investment for long-term growth (when compared to bonds or savings accounts).
  • As Ben Franklin said “a penny saved is a penny earned.”  While most of us can not pretend to live as frugally as Mr. Read, his story does provide an excellent example that “it’s not how much you earn, but how much you save that matters.”
  • He chose a conservative, blue chip approach to investing without chasing investment fads.  My guess is that he wasn’t an avid CNBC watcher (oh, that’s right, he probably didn’t have cable TV anyway).

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Check out the NGPF Lesson on How Savings Grow.