The Professor, the Janitor and the Farmer

Let's begin with two stories.

Ronald Read worked as a janitor and gas station attendant in rural Vermont. Every month he tucked away $300 into dividend-paying stocks, saving for retirement. Mr. Read passed away with more than $8 million.

Beverly worked for 30 years on her family farm and tucked away $300 per month into her retirement savings plan. She is heading into retirement with $450,000. If Beverly were to continue to invest $300/month over her lifetime, she will have the same results as Mr. Read, and amass $8 million. How can she turn $400k into $8 million?

I would love to give credit to superior investment returns, stock-picking, and a great financial planner. But they really followed the common sense approach of spending less. Also known as deferring instant gratification, we don't have much practice at this. We are inundated with advertisements that make frugal living difficult. Imagine what your kids and grandkids could do if they had $300/month that they learned to live without. And if life expectancies continue to tick upwards, their fortunes could be even greater.

A professor walks into a classroom and says, "It's OK to be wealthy." Several students walk out, muttering profanities under their breath because of the rudeness of the professor, pushing his unpopular belief system on innocent children. Imagine that! What does the professor not understand about human nature? What is making the kids not want to be rich, guilt?

A farmer with a roadside stand selling peaches understands human nature. She puts out her peaches and price sign and nails a cash box to the table. Enough honest people out there will pay for their produce, so the farmer doesn't need to stand there all day. But if she just left a cashbox with all her money it, and didn't nail it down, someone will eventually come along and take all of it.

Both of these stories, from two different retired professors, Dr. Tom Howard and Dr. Richard Thaler, point to a problem with investing: Human nature is not easy to understand.

A perfectly logical person might say, "of course it's ok to be wealthy." A person with integrity pays for the peaches. But we live in an imperfect world, and professors do their best to explain our behavior if, for no other reason, than they want to predict and plan for the future.

Professors, upon occasion, suffer from an acute condition known as Theory Induced Blindness. Economic professors are among the worst carriers of this infectious disease. Thaler once said that the Psychology department at his university was shocked at how naive and ignorant the Economics department was about human behavior. Instead of adapting their models to fit the way people actually behave, economists dig in deeper to explain irrational behavior with Rube Goldberg models.

We don't want to steal, and have morals to pay for food without being policed. But if we're facing too much of an opportunity, to steal an entire cash box, then one of us will do that and the farmer will lose it all. So she insures against catastrophic risks and is willing to pay the small price of "shrinkage" in her inventory, to avoid having to stay at the stall all day.

The students in a classroom are all, very likely, among the lowest earners in society. They'll defer their incomes for a short period of time, to make more later. That sounds rational enough. Another reason they may say they don't want to be rich is inertia, or "status quo bias." As a student, their poverty is part of their self-identity, and they have an established routine and social order. Money changes that, so they don't want to lose their current status.

More than the wealth he created, the miracle of Ronald Read is that he was able to keep the "status quo" social circles while he diligently tucked away an amount of money that many of us can afford. And Beverly, if she continues her frugality, may find herself with many multiples of her current life savings. With a planner, she might start to put some of this money to work for her grandchildren's benefit. Imagine that legacy.

Forego the cable bill and the cell phone bill and you too may rest as easy as Ronald and Beverly.

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