A recent report from the National Bureau of Economic Research concluded that if you own an iPhone, you are most likely a top quartile income earner in the U.S. Statements like this, while technically accurate, leave much to be desired in terms of deriving a meaningful outcome.
For starters, if you want to be wealthy, should you immediately go out and buy an iPhone? Of course not. Owning an iPhone may be a characteristic of people who have high incomes, but the ownership of an iPhone, itself, does not mean you will obtain wealth.
Humorously, earlier versions of this same study concluded in 2004 that if a family had Land O’Lakes butter and Kikkoman soy sauce in their refrigerator, most likely they were higher earners. In 1992, high earners were likely to be buyers of Grey Poupon mustard. I can only imagine what they’d conclude by analyzing my refrigerator!
Studies like this also warrant further investigation into the difference between “income” and “wealth.” In the consumption driven world we live in, it is not unusual to see people with high incomes, but little wealth.
Conversely, we live in a society in which people who earn at the low end, if disciplined, can amass significant wealth. Morgan Housel commented in one of his excellent columns at the Collaborative Fund, that having wealth comes from NOT spending money. The more money you spend, the lower your net worth. Don’t confuse high income and spending with wealth.
However, this runs counter-intuitive to societal norms. We see a big house, we assume mega-wealth. However, we fail to ask if there is a monster mortgage attached or what the annual holding costs are. If a Porsche drives by, they must be loaded. We fail to recognize that cars depreciate significantly over time. Someone flashes a Rolex, they must be rolling in the dough. Fancy toys are a characteristic of consumption, not wealth accumulation.
Rarely, does anyone say “hey, there is a lady who lives in a modest home who drives used cars….I bet she is loaded!
But that is exactly what the story of Grace Groner should teach us. Grace was an orphan at age 12 who never married and had no kids. She did not have a college degree. Grace was a career secretary who lived most of her life in a one-bedroom home. By all accounts, she was nice, but unremarkable. Grace never had an iPhone. I don’t know if she had Grey Poupon, but probably not. By all outward appearances, Grace was quite modest.
As such, it was quite a shock when Grace passed away at age 100 leaving a $7 million legacy to charity.
How could this happen? Grace did not inherit her fortune, nor did she win the lottery. And that is what is so reassuring about her story to all Americans.
Instead of focusing on a high income, Grace methodically accumulated wealth slowly, but surely.
She started with a low-cost footprint. Playing good defense and keeping expenses down provides a fantastic tailwind.
Grace was a long-term investor. When I say long-term, I mean fifty-plus years. That allowed her to reinvest dividends and interest and benefit from the eighth wonder of the world—compound interest. It also allowed Grace to be less concerned about any short-term blip. Grace invested during multiple wars, recessions, inflationary times, oil embargoes and stock market corrections. She had seen it all, yet always persevered. She was “the little engine that could.” Every day Grace diligently worked, saved and lived below her means.
Smart investors focus on the long-term and are mentally strong and stable. Reacting to every soundbite or tweet will not help you accumulate wealth. However, having a very long-term goal, and staying focused and disciplined on achieving that goal will give you “investing superpowers.”
Even better for all American’s, if you follow Grace’s path, you don’t need an MBA from Harvard. You also don’t need an income that places you in the top 1% of earners and you probably don’t need an iPhone. Concepts such as frugality and discipline may be rather out of style in today’s world, but they put you in control of your life.