Have you ever had to define the word “truth” to a toddler?
I had to recently.
The other day, my two-year-old son looked up at me from his breakfast and asked, “What truth is?”
That’s a heavy way to start the day.
I searched for an answer and – for whatever reason – stumbled upon Aristotle’s metaphysics.
It’s funny how the mind works. It’s been over a decade since I’ve read it. But sitting at the breakfast table, I somehow unearthed the phrase, “To say of what is that it is, and of what is not that it is not, is true.”
My son is probably not ready for Aristotelian metaphysics. So I simply said, “Truth is what is.”
That felt acceptable.
He seemed happy enough and went back to eating his waffles.
I’ve always told my kids that there is right and wrong (so we might as well do things the right way). That there’s always a winner and a loser (so while we’ll do both gracefully, we might as well strive to be a winner).
That we should always be kind to others and that lying, cheating, and stealing are bad.
Lying, in particular, has been a focus.
My kid has a good heart, but he’s clever. When I ask him about some of his antics, I see the wheels in his head turning. I know he’s calculating if lying would be an easier out than facing his angry father.
I’ve said to both my children that they’ll get in much more trouble for lying to me than they ever will for admitting to wrongdoing.
And so – well aware of the hypocrisy – I’ll admit something: I lie to my kids all the time… and I’m sure you do too.
To be clear, it’s nothing dangerous or deceitful. But who among us hasn’t told our kids that Santa won’t bring them presents if they’re naughty? It’s not true, of course, but it serves a purpose: teaching children to behave.
To borrow from another Greek, it’s what Plato might have called a “noble lie.” Or, if you prefer a more modern source, it’s what Yuval Noah Harari would call a “myth” – an untruth that binds society together.
And in investing, you might be shocked at what myths you believe.
Eighth Wonder of the World
I’m sure you’ve heard that “Compound interest is the eighth wonder of the world.” It’s usually attributed to Einstein.
The problem is, as far as I can tell, he never actually said it. At the very least, it was never published. It’s a myth.
But it also serves a purpose…
Anyone who has a high-interest-rate mortgage, or worse, has found themselves paying off even higher-interest-rate credit-card debt understands the incredible power of compound interest well.
It’s an uphill battle. And people who don’t understand that tend to dig themselves into holes they never get out of.
But the opposite is also true with investments. Compounding investments is the best way to build wealth over time. Here’s a simple example.
The S&P 500 Index has averaged annual returns of roughly 10% over the long term. That might not seem exciting.
As a result, too many investors take on too much risk in an effort to boost those returns. But anybody familiar with compound interest would happily take those 10% annual gains (saving themselves a lot of stress, heartache, and, ultimately, losses in the market). It comes down to something called the Rule of 72.
Divide 72 by your expected annual return percentage, and you’ll calculate the number of years it will take to double your money in the market. If you divide 72 by the S&P 500’s 10% average annual return rate, you get 7.2.
At that rate, your money will double every 7.2 years. That means it will quadruple in 14.4 years. And expand by 8 times in 28.8 years… so on and so forth.
These numbers get really big as time moves on. That’s what compound interest is all about.
What’s more, our dividend growth investing approach supercharges the compound interest snowball effect.
By reinvesting growing dividends, not only do you benefit from share price appreciation over time, but also a steadily growing share count which multiplies over time as annual dividends increase. That’s why we always evaluate a company’s ability to maintain and raise its dividend. And it’s why – more often than not – we’re happy to hold great companies for years.
Here’s how Brad put it in on Monday:
We recommended [Lowe’s (LOW)] in March 2020, which turned out to be great timing. It’s returned 295% as I write to you. After such a run, we might think that LOW is “expensive.” But that’s not necessarily the case.
The nominal share price might be up, but Lowe’s has earned that return with great financial performance.
[…]
As a general rule, we’re usually happy to let great businesses be great businesses. As investors, we like to sit back, collect dividends we believe are reliable and likely to rise, and let compounding do its work.
So, even if Einstein didn’t say it, compound interest is probably the most powerful force in the universe when it comes to creating wealth… especially over the long term.
Fidelity’s Dead Investors
According to rumors, Fidelity commissioned a study a couple of decades ago, examining the top-performing accounts on its platform. I’ve listened to very smart and well-respected analysts bring up this study.
Who wouldn’t want to know the secret sauce amongst Fidelity’s top performers?
So, who were these top performers? Who are the people we should all strive to emulate?
Either dead… or account holders who forgot their passwords.
In other words, people who didn’t trade.
They bought stocks and held them because… well, they didn’t have a choice.
If you search the web for “Fidelity’s dead investors,” you’ll read countless stories about this study. And yet, as far as I can tell… it doesn’t exist.
I’ve seen it mentioned countless times in financial articles, but they always conspicuously leave out a link to the study itself.
It appears to be another myth, perhaps an urban legend. But that doesn’t mean that the message is any less true.
Morningstar probably said it best in a 2020 report discussing this “study.” Their analyst reached out to contacts at Fidelity who said they had no knowledge of this potentially groundbreaking study ever occurring. Specifically, Morningstar said, “Fidelity’s ‘study’ rings true, whether it exists or not.”
The compounding process I highlighted above can’t play out if you aren’t patient. The dividend growth snowball takes years to gain strength, but once it does, it’s a force to be reckoned with.
That’s what we believe at Wide Moat Research. Buying and holding blue chip stocks that pay reliable – and reliably rising – dividends is the simplest, easiest, and most effective way to make money over the long term.
Again, here’s Brad:
It really is that simple, but that doesn’t mean it’s easy. Building a world-class, income-generating portfolio takes patience and process.
Einstein never said that famous quote. Fidelity never conducted a study on dead investors.
They’re myths.
All the same, the wisdom is sound. And that is certainly worth believing in.
Regards,
Nick Ward
Analyst, Wide Moat Research