Client Letter: A Great Story

This is the letter that we sent to our clients in mid-April:

As spring has arrived with thoughts of warmth and renewal, we thought this would be a great opportunity to share a wonderful story, which is interwoven with many lessons and insights, which we can all learn from.

A 100 year old woman died in a northwest Chicago suburb in January, leaving her entire fortune of $7 million to her college alma mater, Lake Forest College. Orphaned at age 12, Grace Groner got her college degree and went to work as a secretary for Abbott Laboratories, where she worked for 43 years. When she began working at Abbott, she purchased 3 shares for $60 each in 1935.

So what happened to that $180 investment over the last 75 years?

• With dividend reinvestments, and no sales, her 3 shares grew to over 100,000 shares, worth approximately $7,000,000. This was an annual return of 15.13%.
• Compare this return to other asset classes and what the result would have been:
o US Treasury bills - $3,046 (3.84% annualized)
o S&P 500 - $210,000 (10.87% annualized)
o US small value stocks - $6,900,000 (15.75% annualized)
 Note the phenomenal difference in compounded effect of just a few % points of increased return, over a very long time horizon!

• Our investment strategy generally emphasizes small and value stocks, both US and globally, over a more traditional US growth stock bias, which would be represented by the S&P 500. Note the tremendous performance difference in these two asset classes since 1935.
o Further, as we did not believe the amount of the difference ($210,000 vs. $6.9 million), we re-calculated the figures to prove it ourselves!

• Groner’s strategy, which we would never recommend (hers was the absolute opposite of the broad global diversification we advocate), did require many of the fundamental behavioral concepts that are necessary for successful investing: patience, discipline and the ability to weather the periods of bad performance of the stock market (or her one stock).
o She did not sell, even though Abbott lost 1/3 of its value in 1937.
o Though she paid $60 a share, the price did not again exceed the mid-50s from March 1937 through March 1944. Would you have been as patient with a single stock or your entire portfolio?
o She endured plunging stock prices in 1962, 1970, 1974, 1982, 1987, 1990, 2002 and 2008. Yet, she did not sell.


• Can you predict a great growth stock in advance and have the patience to hold on, over long periods of underperformance?
o During the 1950s, most stocks did quite well, as measured by the Dow Jones Industrial Average, which more than tripled. Abbott only increased 22.7%.
 Would you maintain your holding in such a “losing” stock when “everything else” is doing much better?
 Would you continue holding an asset class, when others are doing much better?


• Groner was truly lucky, based simply on where she was born and chose to work.
o For the 50 year period ending in 2009, only seven stocks had higher returns than Abbott in the entire US stock universe.
o Unless she had worked at or invested in Altria Group (formerly Phillip Morris), Kansas Southern, Loews, Walgreen, Radio Shack, Dover or Johnson & Johnson, she would not have done as well.
o If she had worked at many other companies which were in the DJIA at the time in the 1930s, such as DuPont, National Steel, Chrysler, General Motors, US Steel, Woolworth or Sears, her investment would not have grown to be nearly what it eventually became. It certainly would have been very different outcome.

So while this woman is truly to be admired, and her alma mater will benefit wonderfully, we do not advocate her investment philosophy.

We do advocate and admire her long term approach, her discipline to stick to her plan (even if we disagree with it) and her ability to be resilient and maintain her stock position, during long periods of stock market declines and uncertainty. Those values and behaviors resulted in her tremendous financial success. We hope you are able to follow those traits, as it will do you, your family, and your beneficiaries well over the long term.

Sources: Chicago Sun Times, LA Times, Dimensional Fund Advisors, Center for Research in Security Prices (based at the University of Chicago).