REAL LIFE & HYPOTHETICAL EXAMPLES

Real Life Example #1:

“10 SECRETS FROM THE INVESTOR WHO TURNED $5,000 INTO $22 MILLION.” Money Magazine, January, 1996 (cover story).

In 1944, at age 50, Ann Scheiber invested $5,000. Upon her death in 1995, Scheiber’s estate was worth $22 million dollars, which represented an average growth of 22.1% on her investment. In comparison, billionaires Peter Lynch and Warren Buffett had average growths of 29.2% and 22.7%, respectively, and the S&P 500 posted returns of 12.4%.

Ms. Scheiber’s top 10 stockholdings were worth close to $6.2 million. The stocks were as follows: Schering-Plough 64,000 shares, PepsiCo 27,000 shares, Allied Signal 20,934 shares, Lowes 14,061 shares, Bristol-Myers Squibb 10,080 shares, Coca-Cola 9, 0480 shares, Allegheny Power System 8,000 shares, Rockwell International 4,640 shares, Unocal 3,690 shares, and Exxon 1,664 shares. Sources: Merrill Lynch, Benjamin Clark

Scheiber followed eight investment strategies to become a multi-millionaire. The strategies were as follows: invest in Blue chip stock; invest in companies with growing earnings, capitalize in the popularity of companies (like Peter Lynch), use dollar cost averaging, reinvest dividends, never sell, stay informed about invested companies, and defer tax by investing tax-exempted bonds. At the time of her death at 101 years of age, Scheiber had 60% in stock, 30% in bonds, and 10% in cash. Ms. Scheiber left her entire estate of $22 million dollars to Yeshiva University in New York City.

Note: Go to links below for other versions of the Scheiber investment story.

http://www.visoracle.com/market/systems/anne-scheiber.html

http://www.fool.com/foolu/askfoolu/2002/askfoolu020507.htm

Real Life Example #2:

"Humble Life ends with rich surprise." The Boston Globe. October 25, 1996. p(p): A9 (Agnes Plumb's estate gifts of $90 million to three hospitals and one medical school)

Source: “UCLA med school receives donation.” Friday, October 25, 1996. http://www.dailybruin.ucla.edu/archives/id/7549/

Until her death in October 1995, Agnes Plumb had lived a quiet life in a modest neighborhood in the San Fernando Valley for 60 years. None of her neighbors had any idea that Plumb had amassed a fortune worth $107 million dollars during her lifetime. The bulk of Plumb’s wealth came from her father’s Kellogg Company stock, which he bought when the cereal manufacturing company was formed. Over the years, the stock split and doubled numerous times. At the time of her death, Plumb held 1.3 million shares, having an estimated cash value of $96 million dollars.

When her estate was finalized in 1996, the general public learned that Plumb had left $22.5 million dollars each to the Crippled Children's Society, the Orthopaedic Hospital in Los Angeles, the St. Jude Children's Research Hospital in Memphis, TN, and the School of Medicine at UCLA. It is doubtful that Ms. Scheiber or Ms. Plumb knew about the miraculous power of compounding, at least in the earlier phase of their investing.

Real Life Example #3:

According to the U. S. News & World Report article “How to Make Money the Buffett Way” (August 6, 2007), $1000 invested with Warren Buffett in 1956 would be worth over $27 million in August 2007.

Hypothetical Example #1:

Native American Indians sell Manhattan Island

According to popular history, Dutch settlers bought the island of Manhattan from a tribe of Native American Indians in 1624* for goods worth $24.00 (60 guilders). Hypothetically, the $24.00 would have been worth $820 billion dollars in 2005 if the tribe had invested the money at 6.5% interest, compounded annually.

Source: http://donferry.wordpress.com/2007/01/27/bucks-to-bucks/ Bucks to Bucks, Posted by D. M. F. on January 27, 2007.

*Some Websites reference 1626 as the year of the sale.

Note: Author was introduced to POC at a retirement seminar where the above story was used to illustrate the concept.

Hypothetical Example #2:

“A person who invested $100 in the Dow industrials in 1900 would have more than $61 million [in 1996]. That is testimony not only to the average's good performance, but to the tremendous power of compounding over long periods.”

Source: John R. Dorfman, The Wall Street Journal, September 30, 1996, page C-1

One might argue that few people will live to be in their mid-nineties. The whole point of the example is that a $100.00 investment would have grown to more than $61 million dollars in that time. Who could argue with that?