Sometimes the best way to learn is to simply watch the masters, and then mimic what they do. But what if you're looking to learn how to "accidentally" turn $1 million into $1 billion – or even just $10,000 into $10 million -- and in just 35 years? And despite this brutal bear market?
Accidental billionaire?
In that case, I'd suggest you dig through your back issues of Forbes. About 10 years ago, the magazine ran an article about an "accidental billionaire" named Franklin Otis Booth Jr.
In the early 1960s, Booth tried to buy a printing company that contracted with The Los Angeles Times. The deal fell through, but he became good friends with the lawyer working on the case.
After discovering they had similar investment philosophies, they partnered up to build a 40-unit condo complex in Pasadena, Calif. -- and managed to double their money in just two years.
Booth decided he wasn't up for pursuing further real estate development, but he did agree to put $1 million into an investment partnership the lawyer put together. Thirty-five years later, his stake was worth $1.2 billion -- despite multiple market crashes and prolonged bear markets.
How'd he do it?
You may already know where I'm going with this, but either way I'd suggest you stick with me. After all, who among us doesn't want to learn how to "accidentally" increase the value of his portfolio 1,000 times over just three decades?
The cynics and risk-takers among you will undoubtedly chalk Booth's success up to "luck."
Granted, his is a case of being in the right place at the right time, but the actual process that grew his fortune had very little to do with luck.
He didn't dump his money into penny stocks that took off. He didn't get in on the ground floor of Intel
And he was already a billionaire long before anyone was talking about Research In Motion
Things are about to get boring
What he did do was hand his $1 million over to that lawyer and a "clever young fellow." They, in turn, made big bets on unexciting businesses with wide moats that were selling at a discount to their fair value. These businesses all had strong brands, outstanding returns on capital, consistent or improving profit margins, and substantial cash profits.
That's all -- big bets on great companies selling at good prices.
Among their biggest winners were Coca-Cola, Washington Post -- which turned $11 million into $1.3 billion between 1973 and 2006 -- and Wesco Financial, which was run by Booth's lawyer friend and returned nearly 200 times its investment over a 31-year period.
Of course, by now I'm sure you know that the lawyer was Charlie Munger and the clever young fellow he teamed up with was none other than Warren Buffett. But here's something you may not know ...
How you can do it, too
Even if you don't have $1 million to invest, you can drastically increase your wealth by following Buffett's lead and buying great businesses when they're selling at good prices.
Just take a look at this data from Jeremy Siegel's book The Future for Investors. These are the top 10 "survivor" stocks of the original S&P 500, from inception until post-2000, along with the average annual return you would have secured had you held these rock-solid, well-known, well-run businesses in your portfolio.
|
Company |
Annual Return |
Average Price-to-Earnings |
|---|---|---|
|
Altria |
19.8% |
13.1 |
|
Abbott Laboratories |
16.5% |
21.4 |
|
Bristol-Myers Squibb |
16.4% |
23.5 |
|
Tootsie Roll Industries |
16.1% |
16.8 |
|
Pfizer |
16% |
26.2 |
|
Coca-Cola |
16% |
27.4 |
|
Merck |
15.9% |
25.3 |
|
PepsiCo |
15.5% |
20.4 |
|
Colgate-Palmolive |
15.2% |
21.6 |
|
Crane |
15.1% |
13.4 |
Source: Jeremy Siegel, The Future for Investors. Returns with dividends reinvested.
Follow the leader
If you need a little help finding great companies selling at good prices, you might want to consider taking a free, 30-day trial of Motley Fool Stock Advisor.
After all, Motley Fool co-founders David and Tom Gardner have spent years studying masters like Munger and Buffett, and they've dedicated themselves to uncovering America's best businesses -- the kinds of businesses that can grow your wealth by 15% or 20% annually.
Among their more recent picks is MSC Industrial Direct. Tom Gardner originally recommended this equipment supplier for the industrial, manufacturing, and service industries back in May -- but he has since re-recommended it because he believes it has several things going for it in today's market:
- The parts and equipment that MSC supplies are for maintenance, repair, and operations -- stuff its customers need to keep their doors open. Though some of these businesses have been delaying orders, there's really not a lot of discretionary spending in this area. When your drill press breaks, you must get another one. This is not to say the slowdown hasn't hurt MSC, but its cash flow should stay healthy.
- MSC provides value to its customers. By choosing overnight delivery from its industry-best, 600,000-item Big Book catalog, its customers can run a just-in-time inventory system and save money doing so.
- The company has a strong ownership culture. Chairman Mitchell Jacobson is the founder's son and owns 18% of the business, worth more than $500 million. Several other executives own significant stakes as well, and we believe the team has a long-term vision that aligns neatly with shareholders' interests.
- MSC leverages its size and financial position to squeeze smaller competitors and take market share. It's in a strong position in this highly fragmented market and will emerge from the slowdown bigger and stronger than ever.
Not to mention Tom Gardner thinks that plenty of bad news is already priced into MSC’s share price. In other words, he thinks this a great business selling at a good price. And it could be a great addition to your portfolio, too.
To see all of the other great businesses David and Tom are recommending to their Stock Advisor members -- including their two top picks for new investment money -- simply click here to begin your free trial. It's risk-free, and there is no obligation to subscribe.
This article was originally published Aug. 13, 2008. It has been updated.
Austin Edwards owns shares of Apple, Coca-Cola, and Altria. Apple and MSC Direct are Motley Fool Stock Advisor recommendations. Coca-Cola, Intel, and Pfizer are Inside Value picks. Pfizer and PepsiCo are Income Investor selections. Pfizer is a former Motley Fool holding. The Motley Fool has a disclosure policy.
