How Anne Scheiber Made $22 Million From Her Apartment
Lessons from One of America's Many Self-Made Secret Investing Millionaires
One of my favorite topics is self-made secret millionaires such as Anne Scheiber, a retired IRS agent who amassed $22,000,000 in wealth (Scheiber died in 1995, so adjusted for inflation, that's around $34,380,000 in current purchasing power) and Ronald Read, a janitor earning near-minimum wage but who built up an $8,000,000 portfolio that was only uncovered following his death. I'm sure my affinity for these folks is also enhanced by the fact that most secret millionaires seem to subscribe to the same brand of value investing, dividend investing, and passive investing I believe and practice to a large degree in my own portfolios and/or the portfolios of our family members.
Depending upon what the circumstances and temperament may be, long-term ownership that focuses on low turnover, reasonable costs, and tax efficiency, eschewing things like market timing and focusing on fundamentals instead.
Anne Scheiber, in particular, was one of my first case studies. Her story is inspiring and worth emulating if you want financial independence. I want to take a look at some of the investing lesson we can extract from her behavior; to appreciate how a long compounding period, prudent decisions, and a willingness to put in the work can cause capital to flourish For anyone who has several decades of life expectancy still in front of them (and even those who don't but who want to begin the compounding process for their children, grandchildren, or other heirs), Scheiber is worth more than a glance Take a journey with me back in time to see how this remarkable woman built her investing fortune.
Beginning Her Journey to Multi-Millionaire Status with Small Savings and a Pension
In the mid-1940s, Scheiber found herself retired. She was sitting on a $5,000 lump sum of capital she had saved. She also had a pension of roughly $3,150. Anne had been burned by stock brokers during the 1930s, so she resolved to never rely on anyone for her own financial future. Instead, given the fact she had nothing but time and didn't have to worry about getting a job, she decided to put the analysis skills she had learned at the IRS to work. She began looking for companies she wanted to own; companies she thought could continue to make money and pay her dividends as they prospered.
Going through annual reports, she would analyze income statements and read balance sheets. Using her capital and cash flow, she began acquiring positions, growing her ownership year after year, watching her passive income expand.
During the 50+ year period that followed her decision to begin managing money until her death, Scheiber operated from her tiny apartment in New York City. Toward the end of her life, she quietly arranged for her fortune, which had blossomed despite booms and busts, war and peace, and every kind of sociological change imaginable, to be donated to Yeshiva University, the funds devoted to a scholarship designed to help support deserving women. The donation came as a shock -- nobody knew she had the kind of money she did, nor that she intended to give it away so selflessly.
The secret to Anne Scheiber's investing method came down to six key principles.
1. Doing Her Own Investing Research and Buying Things She Understood
She had the knowledge, experience, time, and desire to analyze the underlying economics of stocks, bonds, and other assets. This gave her peace of mind when markets collapsed - and there were many times over her investing career when stocks declined by 33% to 50% - because she knew what she owned and why she owned it; understood how the earnings and cash flow were generated and that, relative to the price she paid, she was still likely to experience a satisfactory outcome if she held on no matter how bad it looked at the time.
2. Buying Quality Shares of Excellent Companies Even If They Appeared Boring
Investors get caught up in fads every bit as real as those that sweep the culture of Parisian haute couture. Whether its specific types of companies, such as electric utilities several generations ago, or different types of strategies, such as portfolio insurance in the 1980s or index funds today, Scheiber was not one to get sucked into the secular religion du jour. Her blasphemy? She, instead, focused on the thing she knew could make her richer: Every year, she wanted to have a bigger ownership stake in her diversified portfolio of incredible companies that sent more and more money to her as the top line and bottom line increased.
This meant sticking a large portion of her funds in blue-chip stocks. While it might have been heretical, the proof was in the proverbial pudding. Her willingness to think independently from the crowd was one of her shining achievements. Without it, we wouldn't be discussing her right now.
Today, these amazing businesses are often maligned as "grandma" or "widow" companies despite the fact that, over long periods, they tend to crush the broader S&P 500 due to their huge competitive advantages and high returns on capital. They are businesses like Colgate-Palmolive and Johnson & Johnson. In years where things like airline stocks boom, dragging up the broader index returns in what will inevitably be another round of bankruptcy years from now, they get left behind. But ignore the one-year, three-year, and even five-year returns and start looking at 10 years, 15 years, 25 years or more and their constant, never-ending gushers of money show up in the intrinsic value while providing greater protection during recessions and depressions.
She collected quality and stayed the course.
3. Reinvesting Dividends, Allowing Her Money to Compound On Itself More Quickly
As her dividends grew, Anne plowed them back into buying more shares so they, in turn, could generate more dividends of their own. Dividends upon dividends upon dividends, her willingness to shovel money back into her portfolio, constantly adding to her diversified collection of ownership stakes allowed her to not only reduce risk by spreading her money out among more firms, they accelerated her compound annual growth rate. To see how extraordinarily powerful reinvested dividends can be, take a look at this historical case study of The Coca-Cola Company.
One of the biggest flaws with both professional and amateur investors is that they focus on changes in market capitalization or share price only. With most mature, stable companies, a substantial part of the profits are returned to shareholders in the form of cash dividends. That means you cannot measure the ultimate wealth created for investors by looking at increases in the stock price. You have to focus on something called total return.
Famed finance professor Jeremy Siegel called reinvested dividends the “bear market protector” and “return accelerator” as they allow you to buy more shares of the company when markets crash. Over time, this drastically increases the equity you own in the company and the dividends you receive as those shares pay dividends; it’s a virtuous cycle. In most cases, the fees or costs for reinvesting dividends are either free or a nominal few dollars. This means that more of your return goes to compounding and less to frictional expenses.
You don't have to reinvest your dividends, of course. In fact, there may be situations where you get more utility by living off your dividends, enjoying your time and letting your portfolio compound a bit more slowly. After all, what is the point of having more money toward the end of life if you didn't spend your life doing what you wanted? The key is to remember something I've told you many times over the past decade and a half: Money is a tool. Nothing more. Nothing less. It exists to work for you; to help you get the life you want.
Force it to serve you. Do not serve it.
4. Not Being Afraid of Asset Allocation and Using Hers to Her Advantage
According to some sources, Anne Scheiber died with 60% of her money invested in stocks, 30% in bonds, and 10% in cash. (A lot of investors have a habit of never keeping enough cash in their portfolio.) For those of you who are unfamiliar with the concept of asset allocation, the basic idea is that it is wise for non-professional investors to keep their money divided between different types of securities such as stocks, bonds, mutual funds, international, cash, and real estate. The premise is that changes in one market won’t ripple through your entire net worth.
Legendary investor and thinker Benjamin Graham was a proponent of investors he classified as "defensive", meaning anyone who wasn't a professional, keeping no less than 25% of portfolio assets in stocks or bonds at any given time. I'm a fan of that approach as I've seen too many inexperienced men and women go 100% equity at the worst possible moment, when the world looks great, the skies are blue, and corporate profits are soaring only to sell out when the next regular economic maelstrom rages, switching into 100% bonds when it is precisely least optimal.
Figure out your desired asset allocation and stick to it. Write it into your investment policy manual. Don't be tempted to reach beyond what your risk parameters dictate. Even someone like billionaire Warren Buffett draws a hard line in the sand when it comes to certain allocation practices. For example, he won't allow his holding company, Berkshire Hathaway, to drop below $20 billion in on-hand cash reserves.
5. Adding To Her Investments Regularly
Unless you are living on the brink of dire poverty, there is almost no reason to spend your whole paycheck. Whether you're collecting pension benefits, receiving Social Security, or working a part-time job as a way to keep busy, always try to run a surplus so you can add a bit more to your holdings, even if you intend to give it away to someone else. There is something important about instilling what famed author Napoleon Hill called "the savings habit". By making yourself live within your means, and paying attention to the state of your finances, you can remove a lot of worries while building your collection of wonderful assets more quickly.
6. Letting Her Investment Capital Compound for More Than Half a Century
It has been said that time is the friend of the wonderful business. The longer you hold good assets, the more compound interest can work its magic. The time value of money kicks into effect and the results become truly jaw-dropping. Even better, the further out you go in time, the crazier the results get. Consider that a single $100 bill compounded for 30 years at 10% per annum would grow to $1,745. In 40 years, it would have blossomed into $4,526. Add another decade on the end, taking it to 50 years, and suddenly, that $100 bill grows to $11,739.
Make it 60 years and you get $30,448. Put another way, an investor who held for 60 years would have experienced more than 61% of his or her wealth accumulation in the final 10 year period, which represented only 16.7% of the holding time.
To some degree, there is an element of luck involved here. The best thing you can do for your net worth is 1.) start compounding early, 2.) use tax shelters to your advantage, and 3.) live a long, long time. The difference between someone dying at 65 and 95 is enormous. It's an extra 30 years on top of a productive lifetime, which causes the portfolio figures to get into some double-take territory. Taking care of yourself, restricting your calories so you aren't overweight, exercising regularly, visiting a doctor for at least annual checkups, taking care of your teeth, sleeping on a disciplined schedule, reducing stress from your life...
besides causing you to be happier and feel better, these are among the most important tasks on your agenda if you want to become a great investor.
To learn more about the power of compounding, read Pay for Retirement with a Cup of Coffee and an Egg McMuffin. With only small amounts, time can turn even the smallest sums into princely treasures.
Final Thoughts On Emulating the Best of Anne Scheiber's Investing Strategy
The great thing about the Anne Scheibers of the world is that they aren't all that unique, at least not in the United States. It does not take a genius-level IQ, a wealthy family, or extraordinarily good luck to build serious, multi-generational levels of wealth that can change your life. Instead, it's about getting your hands on productive assets -- ownership stakes in firms that churn out more and more money for you -- and letting them do their thing. It's about structuring your financial affairs wisely so a single disaster or stock market crash can't harm you no matter how bad it looks on paper.
It's about identifying risks and minimizing them as much as you can.
In other words, it doesn't require a lot of heavy lifting. Instead, you are harnessing a force of nature; something inherent to the universe itself and benefiting from it. Investors make it much harder than it is.