Dear Henry,
At your christening the other day, I told a story that I asked your godparents to repeat to you at the right time. A Miss Gresham of Richmond Virginia, who was a friend of the family, once described for me the christening of her father, in about 1870. During the ceremony, General Robert E. Lee, incomparably the greatest figure in the old South, was spied riding past the church door. A member of the party went out and asked the general if he would come in and say something that could be repeated to the child when he grew up. The general was willing and, gazing at the little form, said, “Teach him to deny himself.”[1] This was duly repeated to Master Gresham, then to his daughter and thence eventually, I trust―to you. He did not mean that one should not be true to one’s nature or seek self-fulfillment or have a good time: just that a life dedicated to family, job and country is finer than one devoted primarily to self.
Sixty years ago this would not have needed to be said; and, by the time you are making choices, perhaps it will again be true. But for the moment, we hear more praise of self-indulgence than of virtue, which bespeaks the state of society. So do not pray for an easy life, but for the strength to rise to the challenges life brings.
One of the best things that could happen to you is to find a calling that brings you satisfaction and benefits others. And here I might differ slightly in emphasis from the general. I would say: be true to your nature first and thus, with luck, be better equipped to worry about mankind. I find engineers fully as praiseworthy as social workers.
* * *
The laborer is worthy of his hire, though, and there soon arises the question of how to apply your excess present earnings to provide for your own family and your own latter years. As to your family, the first rule is:
- Own your house as soon as you can. A family’s home is by far its most important asset, both materially and in other ways. It is a much more efficient way of providing shelter than paying rent with after-tax income, and it resists inflation, which you can be sure of.
As to providing for your own later years, I offer two rules:
- Start early
- There is nothing in the world like compound interest. If, starting when you turn 18, you put aside $2,000 for each of the next eight years and then stop, and you can keep the money compounding, and you will have over $1 million (less whatever tax is due) when it comes time to retire.
For this modest program to work, you need to achieve two objectives, neither of which is automatic: the money must be kept compounding at 10 per cent, and you have to minimize taxes en route.
The 10 per cent is a possible objective, being less than the return on a virtually unmanaged portfolio of growth stocks over recent decades. It cannot be done with bonds, which are diminished by both tax and inflation.
So assemble a list of great companies growing at 15 per cent a year, and reinvesting almost all their income for further growth, and reckon on holding them for a long time. As to taxes, you can put everything into a tax-deferred retirement account, or you can save that approach for your high income items, and hold the low-yielding growth stocks in your own portfolio.
Indeed, I propose to launch this process for you myself, without waiting 18 years. I expect to choose from such names as those below (which I own myself), buying some soon and some when they are weak: Coca-Cola, Duracell, Fastenal, Gillette, Intel, Merck, Microsoft, Wal-Mart, and Yum Brands.
In this type of investing, it is silly to trade. One should sell when there is a deterioration in the fundamentals of the company. Then, preferably on weakness, buy another wonderful company to take its place and leave the magic of compounding to do its work. In the fullness of time, you will doubtless impart these valuable truths to your own grandson, rendered even more persuasive when accompanied by a spot of cash.
November 1995