1Q Newsletter- April 2023

The Unseen Power of a Quiet Man                                     

The American Dream is simply that a person of humble beginnings can make his/her own way and get ahead in life.  We have observed too many self-made millionaires, in various fields, ever to doubt it.  Opportunity is there, and always has been – though it disguises itself in different clothes at different times.  It is thrilling to see enterprising people succeed, and we especially love reading about investors who inconspicuously built fortunes, while living normal lives.

Last Christmas weekend (December 2022) the Wall Street Journal ran a memorial article about Edward Avedisian of Boston, who died earlier that month at age 85.  Edward grew up in Rhode Island, a son of Armenian immigrants who worked in the textile factories there.  As a teenager he got a job in a hardware store, but found he loved playing the clarinet.  He later won a scholarship to Boston University, where he earned bachelor and master’s degrees in music.  He became a fine performer and was invited to play clarinet with the Boston Pops Esplanade Orchestra and other ensembles.  Happily busy playing and teaching, he lived modestly in a Boston apartment and was single until he was 57.  That was what the world saw.

But Ed Avedisian had an interesting hobby.  In the early 1980s he got interested in the stock market, investing his savings – small sums at first – in companies he thought looked promising.  One of them was Microsoft, then just entering its great growth period.  He didn’t do a lot of in-and-out trading, but held on to his winners.  He also used options and margin (borrowed money) and sometimes bought IPOs – initial public (stock) offerings.  Leverage is risky because it magnifies losses as well as gains; but he was single, could take the risk, and he made it work for him.  No one could argue with his eventual results, which were astounding.  He must have chosen his stocks really well, because in his last years he donated $100 million to the Boston University Medical School, plus other gifts totaling at least $25 million more.  He founded a K-12 school in an impoverished neighborhood of Yerevan, capital of his ancestral homeland of Armenia.  He also made large gifts to the University of Rhode Island’s College of Pharmacy and a nursing program at Rhode Island College.  Money is power, and in the right hands it can be a great multiplier of good will.  In addition to being an inspiration for everyone, this story excites wonder.  How in the world did he do it?  What did he do that others did not?  His four decades of investment activity included a ten-year spell when stocks went nowhere, plus several major bear markets in which they fell very significantly.  Many times, there were serious doubts:  You may recall the Justice Department’s antitrust lawsuit against Microsoft, and the tech stock washout of 2001-2002.  Tenacious holding only looks easy in retrospect.  When fear is in the air, it can be a very tough decision.  Others might have panicked, or sold out trying to anticipate the next downturn.  Or they might have decided to use the money for something else.  Mr. Avedisian enabled compounding to do its magic – by staying put, as his winners grew and grew.

Your Personal Financial History – In One Picture

With our new accounting system at Monarch, you may have noticed the appearance of a new chart on your quarterly reports.  This long-term graph is worth some attention, for it illustrates how one’s own personal habits of saving (or spending) have combined with the returns on investment assets over the years, leading to the present value of the account.

The graph, rather blandly called “Value vs. Net Investment”, shows the market value of your portfolio (shaded area) year by year, going back to the time when the account was first opened.  The horizontal dark line shows “Net Investment” – which is simply how much money was put into the portfolio, minus how much has been taken out. The picture below shows an all-equity account that started out sometime in 2004 with a little under $70,000.  You may recall that during the financial crisis of 2008-2009, the stock market fell by more thanhalf–down about 55%from its prior high.  During that awful period, the account’s value fell significantly below its starting value – which was pretty discouraging.  But instead of panicking, this investor courageously put in more money, bringing Net Investment up around $120,000.  You can see this step-up in 2009 on the chart.  After that, no more was added, and none was taken out.  Net Investment has remained about $120,000 ever since, while the market value has grown to nearly $400,000.  It’s true that we have enjoyed a bull market in equities for much of that time period; but the benefit of having money invested, rather than earning very little in cash, is quite apparent.

The above happy result came to an investor sufficiently self-disciplined to invest his/her savings and leave them alone.  But for some people, a pot of money sitting nearby is just too great a temptation.  Large, frequent cash withdrawals can defeat any investment gains that the securities might deliver, with the result that the portfolio is inexorably spent down, down to zero.  Life sometimes does serve up an emergency in which major withdrawals just cannot be avoided.  But if a never-ending series of current “wants” takes priority over investing for the future, the buildup of wealth doesn’t get a chance to happen.  Temperament has a lot to do with it.  Some people are natural savers, others are not.  Very few of us would have the kind of self-restraint that made Edward Avedisian rich – living modestly on a musician’s income with many millions of dollars, untouched, sitting in his brokerage account.

However, investment success does not require a person to live like a hermit.  Withdrawing money from a portfolio, without crippling the investment results, is quite possible so long as it is not overdone.  Our second example, below, shows a long-held IRA account, containing both bonds and stocks, established in 1994 with an initial investment of about $350,000.

Since this account was opened, no additional money has been invested, but quite a lot has been taken out.  By law, with an IRA, when we get to a certain age (70½ until recently), RMDs – Required Minimum Distributions – must begin.  The government requires us to withdraw a specified amount each year from the IRA, based on our age and the account value, and pay income taxes on it.  This particular investor began making withdrawals – in small amounts at first – around 2003, twenty years ago.  In subsequent years, the annual required amounts get bigger, as you can see from the downward stair-steps of the Net Investment line.  Last year, the RMD was over $65,000.  The line has gone deeply into negative territory, showing that this person has withdrawn all of the initial $350,000, plus $260,000 beyond that.  Yet because the rate of withdrawals has been moderate, there remains, amazingly, a little over $1 million in the account – not bad considering the period 1994-2022 contains three major stock market washouts:  the dot-com bust of 2001, the financial collapse of 2008, and the recent Covid crash of 2020.  This investor just held on and rode out the turbulence, and now is in quite a good situation.  No one knows what future market returns will be.  But as this example shows, an ordinary IRA account, properly used, can be a very good way to build funds for our retirement years.

If Only It Were Always So Easy

The preceding comments might give the impression that all we need to do is buy stocks and hold them, in order to get exceptional investment returns.  That is not quite the right conclusion.  The great physicist Albert Einstein cautioned that “Everything should be made as simple as possible, but not simpler.”  Alas, there seems to be no pat investing strategy – even Buy and Hold – that works well all the time, in every situation.  U.S. markets have recently gone through a couple of decades characterized by declining interest rates and moderate inflation, a very friendly environment for stocks and bonds.  We have no guarantee whatsoever that the coming years will be so accommodating.  About all one can do is stay alert and try to make intelligent decisions.  That is the challenge, and the great fascination, of investing.

Written by George Donner