In 1981, Lou Eisenberg won what was, at the time, the largest-ever lottery payout. Today, he's broke and living in a mobile home, supported by $250 per week in Social Security and pension payments.
It's a pity, because he was handed a golden opportunity to have both a very comfortable lifestyle and a secure future. Instead, he may have some great memories, but his golden years are turning out to be anything but golden.
What might have been
Even by today's standards, the $5 million he won isn't exactly chump change. In fact, the $130,000 per year after taxes he received for 20 years would still make a tremendously good take-home pay today. Had he lived on half of his after-tax take and invested the rest, he still would have lived a very comfortable life while the payments were coming in, and today, he'd be in a far better spot than he is.
Assume he had invested half his after-tax take in an S&P 500 index fund at the end of each year he received a payment. By the time he cashed that last check, he would have had more than $5.5 million to his name. That's more than his lottery winnings, and that's after living a pretty good couple of decades.
But what if, instead of merely trying to meet the index, he had invested that money with a man who already had a long-term track record of beating the index? And not with some exotic strategy or complex derivatives, but rather with a time-tested market-trouncing approach that had already been proven successful for decades. Would you believe that he could have wound up with more than $30 million instead?
How is that possible?
Had Eisenberg invested $65,000 per year with Warren Buffett in Berkshire Hathaway stock, he would have wound up with that $30 million nest egg by the time his lottery checks ran out. While Buffett is clearly the modern-day master of the value investing strategy that has put him among the world's richest people, value really got its start on the heels of the Great Depression.
Buffett's mentor, Benjamin Graham, and his partner, David Dodd, first put pen to paper to describe value investing in their seminal 1934 book, Security Analysis. So for more than 40 years before Eisenberg won the lottery, value investors were trouncing the market. And as Buffett's more recent experience has shown, they're still doing so today.
Best of all, Buffett and Berkshire made that fortune investing largely in companies you probably already know. Searching through a recent SEC filing required of institutional money managers revealed these companies among Berkshire's portfolio:
|
Company |
Berkshire Holdings |
Recent Market Value
|
|---|---|---|
|
Coca-Cola |
200,000,000 |
$10,930,000,000 |
|
Wells Fargo |
302,609,212 |
$8,839,215,083 |
|
Burlington Northern Santa Fe |
76,777,029 |
$6,309,536,243 |
|
Kraft Foods |
138,272,500 |
$3,590,936,825 |
|
Wal-Mart |
19,944,300 |
$996,616,671 |
|
General Electric |
7,777,900 |
$125,846,422 |
|
United Parcel Service |
1,429,200 |
$79,992,324 |
It just goes to show, you don't need to follow an exotic strategy to make your money investing -- you just need to buy solid companies at bargain prices and let time and the market do the rest. You'll be rolling like Buffett if you can find companies with:
- A sustainable competitive advantage (i.e., an economic moat).
- A market price below the company's intrinsic value (i.e., a solid margin of safety).
- Managers who make intelligent capital allocation decisions (as evidenced by dividends and/or prudent use of retained earnings).
Wind up in a better place
Unlike Eisenberg, you'll likely never have a few million dollars fall out of the sky and into your lap. But you can wind up in a better spot than he did, by following the value investing principles that have made generations of investors wealthy.
At Motley Fool Inside Value, we've been following in Buffett's, Graham's, and Dodd's footsteps since our 2004 inception. If you want a shot at building your own substantial nest egg from what cash you do have to invest, you can join us today in our quest to be among the next generation of market-beating value investors. Simply click here to start your 30-day free trial and learn more.
At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of General Electric. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Berkshire Hathaway, Coca-Cola, and Wal-Mart Stores are Motley Fool Inside Value selections. Coca-Cola and United Parcel Service are Motley Fool Income Investor selections. The Fool owns shares of Berkshire Hathaway. The Fool has a disclosure policy.
