Strategies: How to build, and Transfer, Personal and Inter-Generational Wealth

The purpose of this Manual is to encourage and assist you, and other readers across the globe, to adopt the Building, and Forwarding of Wealth, from one Generation to the next, as a Mandate to enrich yourselves You, too, and your children and their children, are entitled to some of the wealth of this world.

I want you, and other readers yet unborn, to get to the stage in your investing programme such that you can use the transformative and wealth-building powers of Compounding, and Time (as measured in the decades of your own lives) to generate Family Income on a revolving basis into the future for as long as your Family remains in existence. 

This Manual is in support of this Mandate and is to be passed down from generation to generation. A copy of this Original is to be kept in the vault of each Family head and each Family Member is to be given his/her own copy as they become of age.

A: The Mindset (Your most important asset)

The objective of this Manual is

  1. Putting ‘front of mind’ the concept of ‘money at work for man vs man at work for money’. This way, ‘John’ or ‘Mary’ can invest their money in the stock market….
  2. while they pursue the career of their choice and…..
  3. sleep well at nights…… 
  4. while keeping a check on their Bank Account to…..
  5. see the cheques which are being lodged from the dividend-paying companies whose shares they own.

Most people ‘work for money’ all their lives but never have enough! 

The purpose of this Manual is to show you how, to ‘put your money to work for you’ by giving you the ‘open secrets’ of compounding and Time (as measured in the decades of your own life)

The strategy

In building some wealth for yourself and your children, many things will come into play and maybe, the most important of these will be the approach that you bring to the assignment. The whole concept of wealth building is not ‘native to many of us’ because, our own families might  not have been wealthy themselves. And then, to further compound the issue, all their lives, and ours, we have been told that ‘by his brow man shall eat bread’, instructing, or at least implying, that man should work for his money and or his daily bread. 

However, the billionaires have demonstrated to us that this is a false concept, subscribed to only by those who do not know the ‘full truth’ as we would say in Jamaica, West Indies. That full truth is that it is not man who should work for money but the reverse. What man should do is direct his money to work for him and, as you become more attuned to the need to build some wealth for yourself and your Family (starting with the little that you have) you will come to find that there are many ways in which you can do this ‘directing money to work’. The bottom-line here is that you, too, should make the switch from the old to the new and buy into the new concept with conviction.

Make sure you work too!

So should you work, too?! The quick answer is a resounding ‘Yes’. You will want to work to pursue your own life ambition to become whoever you want to be. The idea is for you to pursue your career of choice and get the satisfaction of contributing to society but, while you are doing this and sleeping well at nights, your money should be working for you even if you only have ‘peanuts’ at this time. Put another way, every time the billionaire makes 100% on his billion dollars of investment, you should also make 100% on your ‘peanuts’! Once you understand this concept, which looks very simple and straightforward but is difficult to digest, or implement you, or your child, are on your way to becoming wealthy too.

Its not just for you

Saying you, or your child in the 3rd paragraph above is by design! Most of us who have not inherited a legacy from our Family, or started our own business, will have run out of time to become billionaires but, your children, and their children yet unborn, could become billionaires if they get a start from you and follow the plan.

B: The Basic Building Tools

Get a Wealth Advisor

It is not necessarily easy for anyone to start anything from scratch by themselves. That is how many ‘self-starters’ have done it but they are a special breed by themselves. In your case, my suggestion is that you get a trusted and knowledgeable Wealth Advisor to mentor, and guide you, through the process of becoming a successful investor of your money. The focus is on trust-worthy and knowledgeable. These advisors are like the rest of us. Some are ‘the best’ and will treat your few dollars as though they were their own I.e. look out for you and ensure you put your money where it offers the best options for your portfolio to grow. Additionally, they will help you build your stock market knowledge-base in the process. But remember, the market has a ‘mind of its own’ and when it swings ‘south of the border’, your advisor, and you, will become as vulnerable as the next investor. Read up on market volatility and what the investing trade calls a bear market to get a fuller perspective on how the market can disrupt the best laid plans.

Learn about the ‘miracle’ of Compounding

Remember the math class in which the concept of compounding was introduced back in school? Go find those books and refresh your mind. It is the heartbeat of the money and wealth creation process. One of the best minds of the last 100 years (Albert Einstein 1879-1955) called it the Eighth Wonder of the World and, in its wealth building capacity, is reputed to have said that “he who understands it earns it, and he who does not, pays it” All of this is to say that compounding is the ability of anything to grow, or multiply itself over time. 

Interestingly, money fits nicely into ‘this grove’ and, it is because of this why when you borrow a bank’s money to buy a car on what they call a hire purchase plan, or buy your house on mortgage, you pay back to the bank or lender much more than you got upfront and, the longer the payback time, the more is the payback amount. 

This is because the borrowed money has more time to multiply itself and grow a little bigger. In effect, what the banker or money lender is doing is using the concept of compounding against you. And, if you understand this, it means that on a different occasion, you might want to use the same strategy, but in a reverse way, to enable your investment, however small at first, to do the same thing. This is one of the main planks on which billionaires build their wealth.

Learn about the transformative power of Time (as measured in decades)

In respect of the stock market and wealth-building, the first transformative importance of the concept of TIME, is to emphasize that it is not measured in a few months or even a few years but, for better results, in terms of decades. Let this ‘sink in!’ When it does, the decades in your own life will take on a different meaning.

If you go back to your math class on compounding (yes! I understand that you can’t find the books now) one of the things that will stand out is that all the exercises with the longest periods (time in decades) always turn out with the biggest ‘answers’ because, Time, in decades, always has this kind of transformative impact on the concept of compounding. Put another way (again) the longer the period that compounding has to compound, the greater will be the result. 

Another interesting thing that we found out is that our own lives are measured in years and decades and that, if we don’t die young, it means that our own lives will contribute a very big part of the formula for wealth creation. Has anything jumped out at you yet? 

Why not make the sacrifice, you and or your child, during your first job (upon graduation), to make a little investment and leave it there during your time of employment to work for you too? You would be leaving it there during all the decades of your employment to do the work of building wealth (for you) while you pursue your career of choice and sleep well at nights. 

Buy shares of dividend paying companies

With the help of your Advisor, you are now ready to make your first purchase in the stock market. My advice is that you start by buying the shares of a dividend paying company. There are many reasons for this but maybe the most important is that you will be able to use the dividends from it to grow your investment value over time, such as the many decades in your own lifetime and without necessarily investing another dollar from your pocket. This strategy is called DRIP, abbreviation for Dividend Re-Investment Plan. (See at section B-6 below)

Personally, I have a preference for financial stocks because, usually, 

  1. They have ‘better’, meaning stronger managements.
  2. Are very mindful of the obligation to pay dividends to their shareholders
  3. Usually run a more cost-efficient organization, and
  4. Tend to pay better dividends to their shareholders.

It is important to recognize, however, that this is not necessarily always so and care must be taken in choosing companies in whose shares to invest. For example, in the USA, one of the best dividend payers is not a financial company but the Altria Group (MO, NYSE) a company in the tobacco/smoking/recreation area. Interestingly, a similar situation applies in the much smaller Jamaican market where the biggest dividend payer is Carreras Jamaica Ltd (Car, JSE) which, also, is in the tobacco/smoking/recreation area (despite the strongest regulation from the health authorities.) Carreras is currently paying a dividend yield of about 9%. And so is the Altria Group.

Once the idea of dividends comes up, the concept of dividend yields will arise. It is one of the important performance metrics, or yard sticks, used to measure, or select, the companies in which to invest for the payment of dividends. This concept of dividend yields is discussed under Section G (How to count and measure your wealth)

Learn about, and understand, the transformative impact of stock splits and bonus shares

As you know by now, companies listed on any stock market anywhere in the world is made up of, or composed of, individual units called shares. The total value of a company, called its market capitalization, is the price of each share multiplied by the number of those shares of which it is composed.                                                                                                                                                              Many times, and for a variety of reasons, a company will literally break up, or split up, each share into a multiple of itself. In this case, if each share is split into ten units, or ten mini-shares, it means that a shareholder who, prior to the split, hand 100 shares, would end up with 100 times ten for a total of 1,000 shares. 

A key concept to understand is that, at the time of a split, it has no immediate impact on total company value or market capitalization. There is, though, a commensurate change in the value of the new pieces into which the former whole share was split. In the example we have been using, if the one share prior to the split was selling for $10, (and it is broken into 10 new ones) post the splitting, each of those ten mini shares would have a commensurate value of $1.0 which is $10. divided by ten new shares. 

One of, if not the main reasons for splitting a company’s shares into smaller units is the view that the share price might have gotten too high for most investors to be exited to buy them at their high price. 

The most important thing to recognize about the splitting of shares, however, is the expectation that, in due time, the value of each mini-share will grow beyond ‘what it was’ into a higher price and thus do two transformative wealth-building things, i.e.

  1. enrich the holder of the pre-split share, (more shares at a higher price each) and
  2. do the same for the overall market value or capitalization of the company.

For illustration, here are some examples of the powerful impact of share splits, using some real companies in the big American, and also the much smaller Jamaican stock markets

Amazon (AMZN/Nasdaq) one share became 12 in 20 years after 3 splits up to end 2017 

Apple (AAPL/Nasdaq) one share became 56 in 37 years after 4 splits up to end 2017

Access Financial (AFS/JSE) one share became 10 in 6 months after 1 split in 2010,

Scotia Group Jam (SGJ/JSE) one share became 638 after 14 splits (from what I call the ‘glory days’ of the Bank on the JSE 1967-2005)

To further dramatize the powerful impact of stock splits, compare the share price at IPO of the respective companies with what they were at the end of period after the given number of splits at last trading in 2017 and, compute the new market value at any time you wish, since.  For example, 

Amazon at its IPO in 1997 sold at $18, 
Apple in 1980 sold for $22, 
Access Financial in 2009 sold for J$18,34 and 
Scotia Group Jam in 1967 sold for J$1.00

Learn about Dividend-Re-Investment and the power of Compounding.

Reference was made earlier to DRIPs (see at B5 above) It is the strategy of using dividends from your share-holdings to

  1. buy more shares from the company that paid it or
  2. From another stock or investment

But, the important thing is to recognize that you can also designate 6 (a) and (b) above as your personal pension building programme. This point is being made deliberately for the important reason that, according to WHO, people are now living longer, and, in America, according to the IRS, people who retire at 65 can expect to live for another 20 years or so but, these figures are averages. What, if in your own case, you live long beyond these averages and spend more years depending on your regular pension? Having your own supplemental pension might be one of your best decisions.

But, what happens when you use up your dividends in any of these ways? You are now employing a strategy that the billionaires and other wealth-builders use. It is the strategy compounding because, you are now using the proceeds of one investment to buy another investment which will, itself, generate more income which can be re-invested to generate more income ad infinitum. 

The purpose of this Manual is to encourage, and assist you and future Family Members, to get to this stage in your investing programme, such that you can help generate Family Income on a recurring basis into the future for as long as your  Family remains in existence.

C: How Does The Stock Market Build Wealth for investors?

Learn the basics about the stock market

From what has been said before (in this Manual), you will likely have gathered that we have already touched on most of the important concepts and strategies of wealth-building. To recap (emphasize) the two main concepts are

  1. Compounding and
  2. Time (as measured in decades)

And, in terms of strategies for wealth-building, it is anything that enables you to use income already generated to generate more income especially when you can automate the income generation. Again, to recap, the following strategy illustrations apply;

  • using the interest payment from a bond (money you loan to a company) to buy a dividend-paying stock and using the dividend from that purchase to buy more of the shares of that stock (Ask your wealth advisor to assist you on this)
  • DRIP (Dividend Re-Investing Plan) when you set up a DRIP Account, (many American companies will do it for you) you set in motion a strategy that grows your share count over time and, as you know, usually (except in a bear market) prices tend to rise over time, and hence, with share count up,  and share price up also, the outcome will be a higher total value for you and a higher market capitalization for the company.
  • Another strategy that grows share count is stock splits explained earlier at Section B 5.  An important difference between stock splits and DRIP is that you, as the investor, have the option to initiate DRIP but, stock splits are completely out of your hand and is the prerogative of the Board of a company. The net effect is the same, however, in pushing up your value, and that of the company. Note, however, that both happen at their own respective pace and there is no necessary intertwining relationship between the two.

Learn to respect, and benefit from market cycles

As mentioned earlier, stock markets the world over tend to operate at their own beat and, as a consequence, sometimes most prices in said markets tend to be on the high side and this keeps investors very happy for a range of reasons such as when an investor wants to borrow from the bank against the value of his shares, using them as collateral. This kind of market where share prices tend to be high is called a bull market. A good way to visualize this market is to think of a ‘rising tide that floats all ships’

But there are times when the reverse is true in a particular market or in many markets at the same time. Its like the high tide recedes and ships are now even below where the ‘normal water level was’ and, its like some are actually just skimming above the bottom of the harbour while others even seem to be stuck in the mud and sand. When this happens in a stock market, it is said to be in bear phase

It is not entirely true, however, to say stock markets get into a bull or bear phase on their own. Usually, the markets are simply responding to issues in the economy but, since there is usually a lag in time between the two occurrences, it may not necessarily be easy to link the two. 

What is undeniable, however, is that over the long run, even the worst bear markets correct themselves, and the market thrives again until it is ‘time again for another bear to visit’

In bear markets, especially deep ones, this is where an interesting thing tends to happen. That is; 

  • While some investors sell their holdings (at a loss mostly) and curse the market, others
  • See its depressed state as a bargain and will invest nearly every cent in their bank account in it. For example 
  • Charlie Munger, Warren Buffet’ business partner at Berkshire Hathaway says “The stock market is the only market where things ‘go on sale’ and all the customers run out of the store” and
  • Former investing great Shelby Cullom Davis said “You make most of your money in a bear market. You just don’t realize it at the time”

The key take away here is likely the observations at ( c)  and (d) 

 D: How to enrich your own children and their children

To enrich your own children, and their children, my recommendation consists of two strategies as follows 

  • Give a birthday present/investment in a dividend-paying company at birth or as soon as possible thereafter, and
  • Implement DRIP and leave the investment to grow with the child

 E: How to pass down the wealth from one generation to the next

This Manual, with its wealth-building concepts and strategies, is to be passed down by you from each  generation to the next in line. The strategy of passing down is, however, almost as important as the wealth it is expected to generate. Accordingly, my suggestion is that;

  1. Every parent should observe the request to give each child an investment in a dividend paying company as outlined at D (1) and 2) above, and
  2. As a matter of Familial Obligation to be developed into a Family Tradition, at Christmas every year, I am recommend that the full Family have a ‘round table meeting’ to
  3. Discuss this Mandate in general
  4. Review the investment for each child
  5. Discuss in specific terms the strategies in place to supplement retirement income for the parents, and
  6. Review the strategies for passing down residual parental wealth to the next generation 

F: Learn to give back 

Mentor somebody

I may be wrong but, I do not believe there is very much difference between us as people and the animals we seem to believe are beneath us. Maybe they have the same emotions but cannot speak. So dogs bark at us and other animals attack us viciously. Maybe that is their way of ‘speaking’.

But we alone seem to have the ability to care for one another. And, to work, deliberately, to make this world a better place for all of us. Many of us, ofcourse, are criminals and murderers most vile. Still, by and large, we the majority have the capacity to ‘do the best we can, to all the people we can, in all the ways that we can, for as long as we can’. This is what makes us human and I commend this philosophy to you.

Become a benefactor

Become a Mentor to somebody.                                                                                                                                Help somebody become the best version of themselves than they might have become without your intervention. And don’t expect any gratitude from those you help, or mentor, because, 

  • maybe you have already received your reward and don’t even know it, or
  • your thanks will come from someone else 

But, help somebody along the way, anyway, even if it is just by recognizing them in whatever is their situation, such that you cause them to feel that somebody cares.

And don’t forget worthy causes and institutions. Many of us are who we are because of the influence of worthy causes and or institutions that polished off our rough edges and given us the shine that everyone now sees and or admires. Help make this world a better place by repeating this good deed!

G: How to know, count, and measure your wealth

What is a share?

Companies in the stock market are made up of mini pieces which are the smallest unit in their makeup. Its like the brinks in a wall. It’s the bricks that make the wall.

What is an IPO?

IPO stands for initial Public Offering and means exactly what it says. …the very 1st time anyone is able to buy the shares of a company over a stock exchange. For this to happen, the shares must first be registered on the exchange. The process of this registration is called listing 

What is share count?

This is as the phrase implies…the number of shares if you should count them

What is market capitalization?

This is the sum total of multiplying the number of shares in a company by the price of each

What is profit?

Companies go into business to make money so they can cover all their expenses and pay a dividend to their shareholders. At the end of the financial year, the difference between net revenue (called income) and net expenses, is profit. A profit does not necessarily mean a company will pay a dividend. It might need the surplus to re-invest to grow. 

What is a dividend?

When a company makes a profit, or surplus, it might elect to distribute some to people who own its shares, called shareholders. The amount that it pays to each is called a dividend. The quantum of this dividend is tied, or linked, to the number of shares owned

What is Book value?

See at #4 also. Every company has a market value or capitalization. This value is established when an audit is done. The book value is when the audited capital of the company is divided by it number of shares outstanding. Shares outstanding refers to the number of shares in the capital of the company. If the audited value is $1,000,000 and the number of shares is 50,000 the book value would be $1.0M divided by 50,000 =$20. Note that this $20 might be more, or less, than what each share of that same company is being sold for in the stock market at the same time. 

What is ROE?

ROE is short for Return on Equity. It is the net income from running a company divided by the money used to finance the operation called shareholders equity. ROE measures management effectiveness and company profitability. The higher the better.  

What is dividend yield?

This is a measure of how much a shareholder gets as dividend out of each $100 of the price of a share at the time the dividend is declared. So, if the share price was $90 and the declared divided was $2, the yield would be 2 dividend 90 multiplied by 100= 2.2$ (Note: Not necessarily 2.2% when it is actually paid to shareholders because, by that time, the market price could have gone up or done. There is normally a time lag between the two) Under normal circumstances, the higher the dividend yield the better, especially for retirees who depend on the dividend stream to supplement their living expenses. At time of writing, (Nov 2023) the yield on the S&P500 is just north of 1.6% and, on JSE Main Market, slightly north of 2%

What is a bond?

A bond is a ‘borrows’ i.e., somebody, or an institution or company, borrows your money to run their operation on two bases;

  • they will pay you interest for the time they have your money, and
  • at the end of the agreed period of their use of it, they will give you back the full amount they borrowed. It is a case where you lend to them and they borrow from you

What is an interest payment?

Interest is the money that borrowers pay at 10(a) above for the use of the money they borrow from you. Its the same as when you borrow money from the bank or any other money-lending service. The economists say that money has a time value and, usually, the longer the period for which you have the bank’s money, or the borrower has your money (bond) the more is the payback likely to be

What is a bear Market? See at C(2)0 above

What is a bull market? See at C(2) above

What is market volatility?

Volatility refers to instability in price movement, or price swings . In the stock market, it refers to the up and down movement in the price of a particular stock and, or, the overall market itself. This means that the instability of a particular stock can be compared against that of the overall market. Investors use a measure called ‘beta’ to compute and compare volatility in price swings. Usually, the S&P500 is used as a kind of standard against which fluctuations in the price of a stock or another market is measured or compared.

What is collateral?

A collateral is something that is pledged to another person or institution as proof of willingness to honour an obligation. An illustration is like borrowing $1.0M from the bank with a one year repayment period and giving the bank the Title to an acre of land with a market value of $1.5M. The essence is that if the loan was not repaid the bank could sell the land and recoup the $1.M that was lent/borrowed

Who is Charlie Munger?

Charlie Munger is the business partner of Warren Buffett in a company called Berkshire Hathaway. Warren Buffett is generally regarded as one of, if not the most successful stock market investors in the world. Both gentlemen are famous for their pithy and topical investing comments

Who is Warren Buffett?

See above

What is CAGR?

CAGR is the abbreviation for Compound Annual Growth Rate. It measures the rate of growth of investments over time where all profits are re-invested. For example, in the case of Berkshire Hathaway, they re-invest all profits. (Berkshire does not pay any dividend. If you want to benefit from its growth, you will have to sell some shares) Through CAGR, we can compare our performance against that of any other investor, be he the celebrated Warren Buffett or another newbie like ourselves. The highly respected investor website Investopedia describes it as “the rate of return that is required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s lifespan”.

CAGR is the ideal measuring tool when 

  1. You use DRIP to grow your share count and investment value, and
  2. Your company employs stock splits to achieve the same objective

Happy Investing

Posted on Feb 14, 2024 by Lloyd-Vermont

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