The 3-Step Secret to Investing Success

I'd like to share with you the story of a woman I'll call Jean. She was an ordinary investor like you and me, but she went from being a pauper to being a millionaire.

Then we'll talk about how you can do the same.

One woman's story
Jean was born in 1905 on a subsistence farm. Her father died when she was 11, and the family found it couldn't manage the farm, so they moved to the nearest town, ending up among the poorest of its residents.

Yet, by the time she passed away at the age of 95, she had given her 15 heirs four tax-free gifts of $10,000 each and then passed on an estate worth more than $1 million. In other words, she gave away nearly $2 million.

How did she manage this feat? By working hard until the day she died? By pinching pennies so hard that Lincoln yelled in pain? Probably so, but she did more than that.

What Jean did was to invest in solid companies, steadily buying new shares and reinvesting the dividends all of her life.

You're probably expecting me to talk about dividends, but I won't. Rather, I want to point out how Jean's experience proves what Professor Jeremy Siegel of the Wharton School of Business showed in The Future for Investors: Investing in stocks over the long term is the best way to build a fortune.

One example of fortune-building
Jean amassed her fortune by steadily buying shares of solid, long-term companies like ExxonMobil and AT&T. They weren't flashy, even then, but between early 1970 and 2000, an investment in ExxonMobil, including reinvested dividends, grew nearly 114 times.

Not only did Jean invest in great companies, but she kept investing into her 70s, her 80s, and on into her 90s, holding her investments for decades. Buying and holding was an important part of her success and it allowed her to enjoy a comfortable retirement.

The 3 steps behind her success
Her "secrets" are simple:

1. Find companies with a record of good performance -- shown through solid earnings, free cash flow growth, and strong management -- and likely prospects going forward and then hold onto them for years.

2. Once you find one, buy shares consistently over time and reinvest the dividends. Rinse and repeat.

3. Do this for the rest of your life.

Using these steps today, an investment in one or more of the following companies -- and a plan to continue investing in them -- could start you on your road toward becoming a millionaire.

  • Disney (NYSE: DIS  ) , both for its strong brands and its strengthening movie studios after acquiring both Pixar and Marvel.
  • Johnson & Johnson (NYSE: JNJ  ) for its strong consumer brands and its careful acquisition of smaller companies that broaden and strengthen its reach.
  • Apple (Nasdaq: AAPL  ) for its continuing success in designing products that consumers like to buy and use.
  • McDonald's (NYSE: MCD  ) for its huge brand, strong free cash flow, and repeat business.
  • Teva Pharmaceutical (Nasdaq: TEVA  ) for its strong line of generic drugs which will only get stronger as more drugs lose patent protection.
  • Vale (Nasdaq: VALE  ) for its diversified mining production and its exposure to the growth of Brazil.

Putting one or three of those in your portfolio and following her steps to success is almost too easy.

Continuing the tradition
It's so easy, in fact, that not only did Jean do it, but her kids and grandkids have also done it, with similar, amazing results. In fact, one of her grandkids is a subscriber to Motley Fool Stock Advisor, which is where I first ran across her history.

Jean's three steps are familiar to Tom and David Gardner, co-founders of The Motley Fool, because that's how they outperform the market at Stock Advisor. For instance, they've chosen Netflix (Nasdaq: NFLX  ) as the only company they both think should be a core company in anybody's portfolio. Its DVD delivery system is still growing and it's poised to dominate the streaming-movie market. Over the seven years it has been a recommendation, a lot of members have made a lot of money, and Tom and David think there's more to come.

To read why they think so, and to read our latest thoughts on all the recommendations in our upcoming super-sized review issue, click here to sign up for a free, 30-day trial today. There's no obligation, and I'll even introduce you to Jean's grandson.

Jim Mueller owns shares of Netflix and Johnson & Johnson, but has no interest in any other company mentioned in this article. Walt Disney is an Inside Value selection. Apple, Netflix, and Disney are Stock Advisor picks. Johnson & Johnson is an Income Investor selection, and Motley Fool Options has recommended a buy calls position on the company's stock. The Fool's disclosure policy, while still young at just 17 years, plans to be around for decades, showing you the way.


Read/Post Comments (12) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2010, at 5:28 PM, PositiveMojo wrote:

    You could add a #4 - live a heck of a long time.

    While historically this has proven to be true during the 20th Century, the 21st Century brings some new factors into the equation. Like for example, many countries tied to a common currency that is causing pain for them all. The potential for one of those countries, Germany, to jump out of the agreement due to popular pressure which is likely a matter of time. Also there is the fact that the whole world is now operating on "fiat" money instead of the gold standard - or any standard for that matter.

    Things are VERY different now than when Jean was shoving money in her mattress.

  • Report this Comment On May 26, 2010, at 6:20 PM, stanton17 wrote:

    Consider all the unsettling periods of time that Jean lived and invested throughout:

    - World War I

    - The Great Depression

    - World War II

    - The Korean War

    - The Bay of Pigs Missile Crisis

    - The Cold War with Russia

    - The Vietnam War

    - 1970s Energy Crisis

    - 1973-1980 Stagflation/Recession

    - The Iranian Hostage Situation

    - 1987's Black Monday

    - The Asian Financial Crisis

    One has to admire her savings stamina and prowess. And if she were still here today, she just might say, "This time is not any different."

  • Report this Comment On May 26, 2010, at 6:43 PM, rmfool100 wrote:

    30 years ago one of these companies could've been Delta Air Lines. One would've lost one's backside.

  • Report this Comment On May 26, 2010, at 7:23 PM, vincetabacco wrote:

    This is probably the worst article I have ever read on the Motley Fool. It presents far too few relevant facts to back up his assertions that this scenario is informative and relevant to today's world. If the author was my investment counselor, I would discharge him. His advice of buy and hold forever, reinvesting all your dividends, then die and leave a relatively small sum to show for many decades of investing for your heirs to split is too ludicrous to be posted on such a venerable site as the Motley Fool where people look to invest to better the average investment firm. Yes, it's venerable that Jean went from poor to "vested", and yes, she "amassed" a great sum than she started out with by compounding, but where is the quality of life and comfortable retirement he talks about coming from if she is reinvesting all her dividends? What kind of comparison to today is a woman's decision to never take a cent for herself all those years? What kind of imbecilic notion is it to say that $40,000 times 15 heirs which is $600,000 plus $1 Million is nearly $2 Million? A difference of $400,000 is 20 percent of $2 million. Come ooonnnnn......we're Fools, not idiots! This kind of buy and hold and never do anything else advice is not the kind of quality writing I have consistently seen over the years of reading the Fool. I saw this artice months ago and didn't comment then, but to see it again, tells me the Fool is in need of some good writers with sensible advice, not this sort of nonsense. Why is this nonsense and why do I call $1.6 million a paltry sum? By today's standards, the simplest answer is that if she started investing in 1940 and died in 2000, then 1,600,000 divided by 60 years equals an average of $26,000 a year. That sounds pretty good on the surface, but when you factor in the cost of the those investments plus subtract the value of inflated, devalued, non-gold standard currency over the 60 of some of the biggest producing years of this country's financial growth in history, I wouldn't want to end up in a nursing home with my $1.6M making 2-1/2 percent on T-bills to pay for a $50-60,000 a year bed.... and that's a cheap filth hole of a place. Lucky for her, she died at 95 instead of lingering a long time in one of them and having her fortune sucked dry by them. Don't get me wrong, $26,000 a year average growth is nothing to sneeze at, but it could have been $16,000,000, ten times more by using some common sense in moving assets around sensibly from time to time. My final comment is this story sounds contrived. Happy investing.

  • Report this Comment On May 26, 2010, at 7:32 PM, Fliujniligui wrote:

    You can also buy NBG until it stops falling and then wait 3 years and then see the huge dividends back and growth powerhouse in Turkey boosting your share price from sub-3$ to supra-10$.

  • Report this Comment On May 26, 2010, at 7:58 PM, TMFGebinr wrote:

    Hi stanton17,

    Good point and thanks for providing that list. Those who think that today's troubles are world ending I think need to look at history more often. While I haven't lived through that entire list, I have lived through enough of it to remember that they each had their own "this is the worst" songs being sung, so to speak.

    Hi rmfool100,

    Yes, she could have picked some bad companies to invest in. Everybody does. But the great thing about her strategy is that, over time, the winners so outperform the losers as to make those losers almost irrelevant.

    Hi vincetabacco,

    Obviously, I could not include the entire story in the article, so some of your assumptions are a bit off. Expanding a bit: According to her grandson, Jean and her husband lived on the dividends being thrown off by the companies they had invested in, plus a modest pension. They did this from 1959 onward, over 40 years by the time they both passed away. During that time, she continued to reinvest dividends.

    In each of the last four years of her life, she paid out $150,000 as her investments reached the $1 million mark. Climbing back up from $850,000 to $1 million is a 17.6% return -- very healthy. Actually, probably higher than that because she was drawing living expenses off of that, too.

    Not knowing how much she withdrew over the years to live on, we cannot calculate what her returns would have been if she had never done so. But I'm confident they would have been much, much better than an average of $26,000 per year.

    As for $1.6 million being "nearly $2 million," yeah, it's a bit of a stretch, but not outrageously so in my opinion. Do note, I wrote "more than $1 million" for the size of her estate Unfortunately, I don't know how much more, but that stretch to "nearly $2 million" is probably not as big as it appears.

    Hi Grybear1951,

    Yes, living a long time helps. But the fact that she lived longer than many doesn't diminish the power of her strategy.

    Regarding what else you wrote, only time will tell if "this time is different" or not. But I'm sure the people living through the times on the list provided by stanton17 also thought they were.

    Thanks, everyone, for reading!

    Cheers,

    Jim

  • Report this Comment On May 27, 2010, at 7:11 AM, afamiii wrote:

    The real secret is that there are no secrets to success in the markets.

    You need only visit a modest library and bookshop and after a few hours reading you will find that to succeed in anything (including stocks) only requires for you to learn the fundamentals of the business and then spend a few years mastering them.

    For the investor in common stocks, this means learning how to

    i) recognise a good quality company (and tell it apart from lower quality issues),

    ii) estimate their value and

    iii) have sufficient emotional control to buy good businesses when they are cheap and not to sell them at the wrong times.

    It will take any average mind no more than 2 months to learn the concepts and at least 2 years to gain mastery in these 3 areas.

    The reason most people do not do this is:

    i) Most of us are not interested in investing two or three years achieving mastery in anything. We prefer to look for 'secret formulars'. Which will make us rich (or at least give us enough to pay off some bills) really fast.

    ii) Achieving emotional control is too hard. It is one of the greatest luxuries and indulgences and it doesn't cost anything up front. It frequently means giving up an immediate pleasure for a possibile but uncertain greater payoff in the future.

    And as for the 95 year old lady. Good luck to her in my book there is absolutely no point in making a fortune and having to wait until you are 95 to enjoy it. Most people myself included would like to enjoy some of our effort before we reach our 90s (even before our 40s)

    Would you take $100,000 now or $2 million when your 95. Its a no brainer, you probably won't even last till then.

  • Report this Comment On May 27, 2010, at 7:17 AM, manohar72 wrote:

    This article is a joke...with the amount of fraud going on in financial industry, there won't be anything left if you follow the buy and hold way...you need to know when to raise cash and stick to your numbers........

  • Report this Comment On May 27, 2010, at 7:46 AM, vincetabacco wrote:

    Dear TMFGebinr, your responses are appreciated and the bevy of comments generated have great value to those who are still learning, which means all of us. However, I stick by my original inference that your article is very poorly written as a promotion of investing, which is what most of the articles on Motley Fool have become. You contradict yourself regarding the statements about dividends and the lack of details to flesh out the story is not going to be found out by people who don't take the time to read 10-15 follow-up response posts. There are times to buy and hold, reinvest dividends or live off of them, and there are times to move assets. The post by "afamiii" is the most helpful of all to anyone reading this blog because it characterizes the "big picture" regarding an investment background required to achieve security and stability in today's world. So, your article is not a total waste after all for anyone going into the posts far enough to read his comments. Hats off to "afamii" for telling it like it is. Learning how to invest over the 2 - 3 years it takes to develop experience and sensibility is what makes the difference between people who "play" the market and people who "work the market by making the market work for them". Money is similar to dirt...... it will just sit there totally idle unless you plant something in it. Plant something good, tend to it regularly with diligence and good care........you'll be able to harvest something worthwhile and come back to do it again. Let it develop on its own without a watchful eye and you'll have a bunch of weeds using up your dirt potential completely. Remove the weeds regularly that creep into your good crop and you get a healthier harvest when the time comes to enjoy the fruits of your labor. Save some of the seeds in a safe place when storms destroy the whole crop and you can replant when the seasons change back to better weather. Happy investing.

  • Report this Comment On May 27, 2010, at 11:53 AM, Survivn2 wrote:

    I have to agree, the majority of articles I am seeing are marketing pieces--which makes me want to stop reading them.

    Motley Fool, either say something intelligent, or don't say anything at all.

  • Report this Comment On May 27, 2010, at 12:49 PM, motleymarty wrote:

    I would have to agree with vincetabacco: The comparison to dirt and carefully tending yor "crop" until harvest. Some years the earth must be fallow (unseeded) to allow for replanting and a better harvest. And while your "crop" is in the field, a "watchful eye" is essential, otherwise what you've planted could be destroyed. To the average investor this simply means what the article doesn't say explicitly: it is never a given that a once high-flying stock won't one day find itself underwater - witness the dividend cuts by large, so-called "safe" investments such as GE. Take vincetabacco's advice, rebalance when necessary; get out of the market completely, sit on the sidelines and take a breather if need be, and replant when the market is ready for your "seeds" to mature. In other words: take a lesson from farming: allow your fields to lie fallow (sit on the sidelines), save your seeds (money for investing), replant (invest) when conditions improve, and weed as necessary (purge the under-performing stocks). This has worked for me!

  • Report this Comment On May 28, 2010, at 11:19 AM, mikecart1 wrote:

    The Real 3 Steps To Getting Rich:

    1) Don't listen to TMF

    2) Invest in stocks like MO and never sell

    3) Repeat #1

    HAHA

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