There are a lot of
personal finance gurus out there that give sensible advice, that if followed,
leads to a better life. Every once in a while they say something that on its
face is very motivating, but after you think about it, it is hard to believe.
When you look into it, you see that it's disingenuous, and this detracts from
the personal finance guru's credibility. Last time we looked at Dave Ramsey and his 12% returns. In part two, we look at Tony Robbins and the story of Theodore
Johnson.
There's an oft
repeated quote, supposedly uttered by Albert Einstein, that compound interest
is the 8th wonder of the world. Whether Einstein said it or not, it is true
that it's the compounding of gains over time that can produce large amounts of
wealth. And conversely, borrowing from and paying compounding amounts of
interest to someone else is a sure recipe for financial disaster.
In his books MONEY Master the Game: 7 Simple Steps to Financial Freedom and Unshakeable: Your Financial Freedom Playbook Tony Robbins and the experts he interviews offer a lot
of great financial advice, including the benefits of compounded returns over
time.
One of Robbins's
examples of the power of compounding in the books is the story of Theodore
Johnson. Robbins has recounted this story many times since the books'
publication in interviews and other media.
The Magic of Compounding and Theodore Johnson
The story goes
something like this. Theodore Johnson worked for UPS and never earned more than
$14,000 per year. He was persuaded to save and invest 20% of his salary. With
some effort he managed to do this. As a result, his investments grew to $70
million, $36 million of which he donated to education.
Talk about the power
of compounding! Johnson never earned more than $14k per year, but thanks to
compounding he was able to donate $36 million and still have $34 million left
over as spending money.
The moral of the
story is that you should invest as much as you can, as soon as you can, and as
often as you can. If you do, you too can be rich. Even if the amounts are
small. Just look at Ted Johnson, who never
earned more than $14,000 per year.
But if you think
about it, even just a little, it doesn't make much sense. The story leads one
to believe that Theodore Johnson had a low income. $14k a year is pretty much
nothing. Did he even graduate from high school? Forget about being able to
invest, how was he able to eat? Something about the story smells fishy. Maybe
this was a few decades ago and adjusted for inflation the salary wasn't that
low. Maybe he was a UPS delivery man or worked in one of their warehouses.
Not Quite as Exciting
Actually, Johnson
retired as Vice President of Industrial Relations. $14k a year for a vice
president position at UPS? What year was this? 1952. $14,000 in 1952 dollars is
roughly equivalent to $135,000 in 2019 dollars.
The story isn't as
exciting now. "Theodore Johnson never made more than $135,000 a year, but
he amassed a fortune of $70 million." This doesn't sound as good. It's not
turning a measly $14k salary into a fortune.
The other wrinkle in
the story is that Johnson invested heavily in a single stock, UPS.
Put that together
and you get, "a corporate executive earning $135k a year puts all his
money in the company stock and ends up with $70 million when he's 90."
Johnson retired in 1952. His fortune grew to $70 million by 1991, when he was
90 years old.
That's hardly
motivating and you might wonder what else Robbins says that leaves out salient
facts.
(Still, even with a
salary of $135k and getting lucky with a spectacular stock, it seems kind of
hard to end up with $70 million.
By the time he
retired, Johnson owned $700,000 worth of UPS. From 1952 to 1991, a 39 year
period, this amount grew to $70,000,000. That's a compound growth rate of
12.53%. Johnson's return from when he started buying the stock to 1952 had to
be a lot higher for him to end up with $700k when he retired.)
The moral from the
Theodore Johnson story is a good one, but I wish it weren't as sensationalized
and was more nuanced. Invest as much as you can as early as you can. However,
buying a single stock, no matter how much you know about the company, is not investing.
It is gambling. We never know what the future holds. This is why Ashvin Chhabra
says one's own business, or significant amounts of your employer's stock,
belongs in the "aspirational" risk bucket, the same place where
speculative investments should be allocated. It's where the potential rewards
are great but the risks may be greater. Imagine working for Radio Shack and
putting all your savings into its stock. Your story would never make the
personal finance press because you'd end up with nothing.
Tony Robbins does
not deserve all the blame. Here is how the NY Times tells it: "Theodore R.
Johnson never made more than $14,000 a year, but he invested wisely -- so
wisely that he made $70 million. Now he is donating $36 million of his fortune
for education." I get that newspaper articles are meant to sell papers and
personal finance stories are meant to motivate, but when you leave out certain
facts that, intentionally or otherwise, cause the audience to get the wrong
impression, you risk your credibility when the audience discovers the facts you
left out and their interpretation of the story changes from one of "anyone
can do this" to one of "that guy was already making a lot of money
and then he got lucky."
