The Rule of 72

(The following article has been printed -- well, nowhere. But it's been on my hard drive for a while, and since blogs need content, it has now found a new home. Hope you enjoy, and perhaps even come away a bit more enlightened on what I consider an important subject.)

The Rule of 72

 

I’d like to introduce you to a friend of mine. Unlike those special ‘friends’ who literally seethe with resentment should you be so fortunate as to enjoy a bit of good fortune, this friend takes enormous pleasure in your success. The more successful you are, the wider his smile grows, until he’s grinning like a drunken Jack O’ Lantern on All Hallow’s Eve.

And what is this friend’s name? Most folks know him as “The Rule of 72”. He is a wealth-builder, and his goal is to make even the most casual of his acquaintances as rich as Midas. In exchange, he only asks for three things: (1) a bit of cash, (2) fiscal discipline, and (3) time.

The Rule of 72 is a formula, a simple one, really. The trick is to solve for x:

x = 72/g

And what are the variables?

g = Growth rate, a whole number normally expressed as a percentage.
x = The number of years it takes to double a given sum of money.

It works like this:

Suppose you have an (empty) savings account which pays you 3% interest. You have $1000 which has been burning a hole under your mattress. The smell of singed feathers is starting to keep you up at night, so you decide to invest this money in your local savings account. Being a curious sort, you find yourself wondering how long it would take to turn that $1000 into $2000. So you pay your friend a visit at his place of residence, the local calculator. Here is what he tells you:

x = 72/3
x = 24

So turning an investment of cash, $1000, into $2000 will require an additional investment of time, equal to twenty-four years.

If your thoughts in any way resemble mine the first time I solved for x, they are probably not printable in a family-friendly blog like this. At best you’re likely thinking, “That’s pretty unimpressive.”

Not only is that timeline unimpressive, it’s also costing you money, because we have not yet considered inflation. According to inflationdata.com, the average yearly rate of inflation from 1914 to 2011 has been 3.24%.

In short, in the time it will take you to earn that $2000, not only will you have lost any gains your interest rate might otherwise have earned for you, you will have lost principal as well, spent most likely on frivolous luxuries like food, shelter, lotto tickets (also known as ‘a tax on people who are bad at math’), etc.

So what other options are there?

One can get rich by earning obscene amounts of money as a franchise sports star, a box office drawing celebrity, or (one of the most common ways during this century’s first decade) from bonuses earned as the CEO of a financial company with mediocre to downright poor results (I’m guessing they were paid for having good hair). The downside here is that sports stars accumulate injuries, movie stars lose their looks, and Wall Street CEO’s eventually drag their companies down so far that they are allowed to retire with golden parachutes in the seven to eight figure range . . .

Okay, bad example. But for those of us not fortunate enough to fit any of the above, not lucky enough to pick the right numbers for that lottery ticket, or who lack the foresight of being related to soon-to-be deceased relatives who are both fabulously wealthy and poor judges of character, we must consult our financial GPS and take a different route. And here is where our friend, who never learned not to pick up seedy hitchhikers such as ourselves, steps in.

There are two basic investment vehicles our friend offers, stocks and bonds. Both are legitimate investments, but for the purposes of our example, we’re going to stick with stocks, which over time tend to outperform bonds.

Since the beginning of the 20th century till now, the American stock market has experienced an overall growth rate with estimates ranging from 8-10%. We’re going to split the difference here and call it 9%. If we plug this number into our friend’s slot (a disturbing image, but only to the already filthy minded), here is what we get:

x = 72/9
x = 8

This means that were we to invest $1000 into a stock fund mirroring the overall stock market over a twenty-four year period, it would grow as follows:

8 Years = $2000
16 Years = $4000
24 Years = $8000

Not too bad. Even with inflation taking a bite, we will still end up coming out ahead. And while past performance is no guarantee of future returns, it’s a better option than storing your Benjamins in Madoff’s Savings and Loan.

But can one invest in the American stock market as a whole? Yes. There are index funds based on the Wilshire 5000 index, a market-capitalization-weighted index of the market value of all stocks actively traded in the US.

A better way, and with less risk, would be to invest in a very traditional balance of stocks and bonds, 60% stocks and 40% bonds, and then utilize rebalancing.

Que?

Okay, here’s the theory behind rebalancing. It’s actually a variation of a common (and snide) Wall Street cliche about how to make money in the market: “Buy low, sell high.”

It works like this: at the beginning of the year, your investments are divided 60/40 into a Wilshire 5000 Index Fund and a broad-based Intermediate Bond Fund. At the end of the year, your averages will be a bit different, maybe 64/36, or possibly 57/43, due to either the overall stock or bond markets outperforming the other. This is the reason for the split in the first place, the theory being that in a given time span stocks will either outperform bonds, or vice versa. So one takes the excess from the side above the average and transfers it to the lower. The idea is that, in the short term, whatever goes up must come down, so by transferring gains from the higher of the two, those gains are protected from the inevitable downturn. Buy low, sell high.

An even better distribution was published by an issue of Consumer Digest’s Money newsletter. It breaks down as follows:

S&P 500 Index Fund:  20%
Small Cap Index Fund:  20%
Global Market Index Fund: 20%
Intermediate Bond Fund:  30%
Money Market Fund:  10%

According to the aforementioned newsletter, this distribution -- rebalanced annually -- does a bit better than the previous one.

So, a better option. But can one do still better?

One gentleman thinks so. His name is Joel Greenblatt. He is the author of a small volume called The Little Book That Beats the Market, a NY Times best-seller. To summarize, this work explains – in simple, easy to understand language – how to invest in such a way as to generate returns of approximately 30.8%.

I will not go into Mr. Greenblatt’s formula (which he explains in his book), except to offer this one-sentence summary of how it works:  “The Magic Formula strategy is a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.” Anyone who wishes to know more is encouraged to read his informative – and frequently humorous -- book.

There will always be naysayers, and I have not as of yet attempted to use Mr. Greenblatt’s formula (preferring my own more proactive method of stock-picking at this time). However, it would at best be problematic explaining my own strategies, while Mr. Greenblatt’s method is quite simple, requires a minimum of time and effort, does not require extensive knowledge of investing, and can be done by anyone with a computer and an Internet connection. And if you are wondering why everyone is not out duplicating Mr. Greenblatt’s strategy, he includes an explanation for that as well.

For the sake of illustration, let us assume not only that Mr. Greenblatt’s method works, but that it does not even work as well as the theoretical average. Let us assume that, due to inevitable flies in the ointment, the average return over a 24 year period is only 24%, then solve for x:

x = 72/24
x = 3

Now let’s do the math:

3  Years  = $2000
6  Years  = $4000
9  Years  = $8000
12 Years  = $16,000
15 Years  = $32,000
18 Years  = $64,000
21 Years  = $108,000
24 Years  = $216,000

Better than $2000, to be sure. And it even provides a cushion against that pesky inflation.

But (and this by now should sound familiar), can we do even better?

In the US there exists something called a Roth IRA. This is a retirement account most financial institutions offer. It has a maximum contribution limit of $5000 ($6000 for anyone over the age of 55). Unlike its cousin, the deferred IRA, there are no tax benefits for contributions made to it. However, any earnings made on contributions and then withdrawn during one’s retirement are not subject to taxes.

So if instead of $1000 in a savings account, we instead put $5000 into a Roth IRA and followed Mr. Greenblatt’s formula, what kind of returns might we expect?

3  Years = $10,000
6  Years = $20,000
9  Years = $40,000
12 Years = $80,000
15 Years = $160,000
18 Years = $320,000
21 Years = $640,000
24 Years = $1,280,000

And this with no taxes, as well as no further contributions beyond the initial $5000.

There is a biography of the famed investor, Warren Buffett, called ‘Snowball’. The reason it is called this is because of the snowball effect, how a small handheld snowball rolling down a mountainside can grow to enormous size by the time it reaches bottom. A similar principal is at work here. Or, as Albert Einstein once supposedly said, “The greatest known power in the universe is compound interest.”

So now, of course, anyone reading this will go out, make their fortunes, and the world in 24 years will be so full of millionaires you won’t be able to shop the express line at Walmart without tripping over half a dozen, right?

Nope. Not a chance.

Why?

At the beginning of this diatribe, I said there were three things required to build wealth. One was time. Well, most folks have time; even older ones like myself. Twenty-four years isn’t all that long, unless one is elderly already. So we’ll give that one a pass. Where almost everyone who reads this will get tripped up will be by the other two, which are: (1) A bit of money and (2) fiscal discipline.

How is that? After all, with huge gains such a reasonable possibility, how could one not put aside a ‘bit’ of money? Well, primarily because of (2).

Most people spend all of their money to improve their quality of life. And once that level of spending has been established, it is very difficult to change their fiscal habits. Theoretically it shouldn’t be hard, the optimist might suggest. Everyone knows someone who lives at, say, 90% of what one’s self earns, so it’s doable. Just live like that person, the optimist says, and invest the remaining 10% as has been illustrated above. Right?

Wrong. The sad truth is that many people would rather spend money buying lottery tickets than putting that same amount of money into an account set up to achieve the amount of returns described above, because those returns are contingent upon one thing: delayed gratification.

Well, someone might say to me, if you’re such a pessimist, then why bother taking all of this time making your case?

Truth? I’m not sure. But maybe, like the famous glass, I’m only half a pessimist.

Giveaway (and Part II of my Interview with Jennifer Lafferty)

As of today, August 16, and in cooperation with Goodreads, I am running a Giveaway promotion offering the chance to win a copy of one of ten signed trade paperback versions of my novel, House of Shadows. This offer will expire on September 16. To enter, click on this link: http://www.goodreads.com/giveaway/show/31339-house-of-shadows

I would also like to share with you that House of Shadows is currently being offered for free from the Kindle Lending Library for members of Amazon Prime.

And now that I have your attention (he said with a smile)...

If anyone would like to preview the first twenty-nine pages (so chosen because of the teaser this section ends on), you may get the full effect by clicking here and scrolling to the link at the bottom of the page: http://www.sff.net/people/walter.spence

But be forewarned, I did say 'teaser'. . . .   

And for those who would like to read Part II of my interview with Jennifer Lafferty, you may do so by clicking here: http://www.goodreads.com/author_blog_posts/2803890-interview-with-author-walter-spence

My Interview with Jennifer Lafferty

Recently I was interviewed by fellow writer Jennifer Lafferty. The interview was split up and published on two separate blogs. I am providing the link to one here, and will follow with a link to the second within the few days:

http://www.examiner.com/article/interview-with-walter-spence-author-of-house-of-shadows?cid=db_articles

I have been fortunate enough to have attracted two five-star reviews thus far for House of Shadows. Anyone who wishes to view them (and any associated comments) can access them via the Amazon link to the right of this post.

So What Have You Written For Us Lately?

Now that I've introduced myself to you gentlefolk, the next question one might reasonably pose is:

"Who the heck is this guy?"

"What has he written?"

"And what about Naomi?" (Okay, that reference is a bit dated.)

In the beginning (because where else would we start?), I was a young fellow with a fascination for literally everything. During a early period in my life wherein I ranked among the unemployed, I took an aptitude test with my state's Employment Security Commission, the purpose of which was to assist in placing me amongst the gainfully employed. After taking said test, I sat down with my counselor who, after rattling the paperwork in front of him, looked me dead in the eye and (with the sorrowful compassion normally reserved for telling a child his puppy has gone to Heaven) told me what the examination revealed I did best.

"Learn."

We took stock of the varied and sundry employment opportunities such an aptitude offered me. Then, four seconds later, he gave me contact info for a local company that made aluminum storm doors and wished me luck.

Since the list of employment opportunities for professional students was a tad limited even then, if I were to become the kind of overnight success it took Eddie Cantor twenty years to become, it soon became obvious I would have to reconsider my future career options.

So I decided to become a writer.

(Hilarity ensues.)

Okay, thirty years then.

While I had made several attempts at playing around at writing after graduating from high school(including, but not limited to, attempts to write spec television screenplays for series like Charlie's Angels and The Incredible Hulk), I had not yet made any attempts at conventional fiction like short stories and novels.

Then I received an invitation to join an outfit called The Unknown Writer's Group.

There will be opportunities galore later on to chat about my experiences with that august assembly, so for now I will simply say that I had discovered true nirvana, folks like myself who were intelligent, literate, and who took the act of committing literature seriously. I jumped into the pool, and after promptly sinking, some kind soul dragged me to safe ground, after which I jumped in again.

This went on for a while. Eventually I learned how to dog paddle and we went from there.

At first I stuck to short fiction, and even made a couple of sales to various periodicals, the happy circumstances of which were quickly followed by the untimely cancellation of said magazines. Ultimately I took pity on a steadily-shrinking industry and decided to try my hand at novel-length fiction instead.

During this time Holly Lisle, our most successful author and the primary reason we ended up changing the name of our little gang from the Unknown Writer's Group to Schrodinger Petshop (We're Strange, but Cats Like Us), had received an offer from her publisher, Baen Books, to do a series of collaborations on a series called The Devil's Point novels. After everything had been sledge-hammered out, she offered me the opportunity to do one of them, a novel titled The Devil & Dan Cooley. It was that sale, and subsequent contract, which qualified me to join SFWA (Science fiction and Fantasy Writers of America).

Then life happened and turned into a roller coaster which I rode for the next fifteen or so years. During that time I started and worked on a novel I had titled The Caballa.

The writing of that piece of work was one of the most arduous events of my life. And when I was done, I took at long, cold look at it and thought, "It's not bad. But I can do better."

I consider myself a writer, and I cannot tell you how hard it was to admit that. I had put an enormous amount of time and effort into that novel. But my craft had improved to such a degree during the process of writing it that I felt unsatisfied with the final product. And by that point I was so burned out that even the thought of starting over on it made my eyeballs ache.

So I decided instead that I would put The Caballa to the side and write something just for me. I would tell the kind of story I had always searched for, but which no one else seemed to be writing, and I wouldn't give a single, solitary damn about its saleability or its marketability. And when I was done, I wouldn't even try to submit it to any agents or to the traditional publishing industry. More and more folks were self-publishing their work, so that was what I would do. I would assume the financial burdens of its production and its marketing, and whatever happened, would happen.

That novel became House of Shadows. It was first published as a trade paperback on June 14, 2012, then followed by a Kindle version two weeks later.

Being such a recent project, I'll share its story here as time goes on. Perhaps said tale will amuse some and educate others. But regardless of what ultimately happens to and with it, all I can say is that I told the story I wanted to tell. And that, as someone once said, makes all the difference.

An Introduction of Sorts

First, an explanation of the name of this blog, since I'm guessing most folks are not terribly familiar with William Butler Yeats. The title comes from his poem, The Second Coming, specifically from its final two stanzas:

"And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?"

"Slog" has several definitions, but the one most applicable to my situation would be this one:

Slog: to plod (one's way) perseveringly especially against difficulty.

This is quite appropriate for my situation since, as of June 14, 2012, I took it upon myself to become an independent author.

'Independent'. Sounds a tad more eloquent than 'self-published', which is a concept not only more easily grasped, but also comes laden with tons of baggage. To most readers, who cut their teeth on the product of what is quickly coming to be known as 'legacy publishing', this is the formula:

Self-Publishing = Vanity Publishing

The term 'vanity press' has been attributed to publisher Johnathan Clifford, who claimed to have created the term in 1959, though it had appeared in mainstream U.S. publications as early as 1941, according to Wikipedia. While a traditional press created earnings by selling its work to readers, a vanity press made money by selling its product to authors, who would then (typically) turn around and attempt to resell said product to their presumed (and largely theoretical) readers.

There were any number of problems associated with business model, not the least of which was the fact that the initial monetary outlay required to produce such books was the responsibility of the author. The primary difficult, however, was one of distribution. How to get one's wares to those anxious readers slavering for the writer's peerless prose?

For traditional publishers, this need has always been fulfilled by book distributors such as Baker and Taylor, Ingram, etc., who act as middle-men and go-betweens, taking the finished product and distributing it to the various book store chains and individual outlets. Cracking this nut was, to say the least, highly problematic for would-be authors with limited access to these businesses, little to no marketing expertise and even fewer funds.

Then came the ebook and the marketing muscle of Amazon.

Elaborating on this subject is beyond the scope of a post such as this, but suffice it to say that traditional publishing is still reeling from the aftershocks of this new paradigm. And they haven't subsided yet. Now new authors could bypass the gated communities of the Big Six and take their wares directly to a market panting for their work in barely-suppressed anticipation. Right?

Not quite. One of the tenets of economics is the relationship between supply and demand. As demand increases, supply decreases. This has been a truism for most of human history, and is no less true here, as is its converse.

While production times vary with the author, the typical novel (or novel-length) work of fiction on average takes around a year or so to complete, sometimes longer (as fans who waited five years for A Dance With Dragons by George R. R. Martin can attest to). And since traditional publishers have always kept the bar for new entrants high, product by the previously unpublished has always been kept on a limited and very short leash.

Then came the ebook and the marketing muscle of Amazon.

(There an echo in here?)

By eliminating barriers to entry in the marketplace, Amazon made it possible for just about anyone to create and market ebooks, thereby dramatically increasing supply. And what happens when supply increases?

Demand decreases.

With every new ebook which hit the market, the value (and corresponding price) of all other ebooks took a tiny hit. Not so much, individually.

But there are a lot of ebooks.

There is an ancient Chinese tale, about an emperor who had a problem, solved by a petitioner to his court, Filled with gratitude, the emperor offered much gold to the fellow, who waved off the offer and instead requested that the emperor simply take a chessboard, place a single grain of wheat on the first square, then double the amount for every following square (so that one became two, two became four, four became eight), and this would be his reward. The emperor, relieved not to have to part with his gold, agreed to this bargain. Until he discovered that fulfilling the petitioner's payment would require all of the wheat in the kingdom.

Then he had the petitioner executed.

While vast supply has resulted in a corresponding drop in ebook prices, the business model is not completely broken. Traditional publishers, inside their aforementioned gated communities, still exist, as do the hurdles authors must transverse in order to publish with them. This means that there is still value in their product, which continues to be restricted, thereby keeping demand high for their own unique wares, and prices correspondingly higher as a result.

But these community walls are starting to crumble. Established authors are, more and more frequently, taking their product directly to the marketplace, experimenting with this new model. If this goes on (a longtime science fiction cliche) -- well, you get the picture.

This new reality of publishing means the market is swamped with ebooks. Retail prices for new entrants have dropped dramatically, with new authors oftentimes being forced into massive giveaways in order to create brand-awareness. And on the heels of this have come those who can only under the most liberal of defintions be described as 'writers', but who are quite savy with how the ecommerce system works, and who are quite good at 'gaming the system' in order to market a questionable product. All of this means that good product is easily lost in the shuffle, and that the producers of quality work must slog their way along in terms of marketing it. And since 'quality' is a somewhat subjective term, there is little in the way of quality control other than a handful of reviewers who are themselves swamped by the tsunami of ongoing content, not to mention the aggrieved feedback of those whose wares they comment upon in a less-than-adulatory fashion.

This is the new reality. And as a new independent author myself, it is one I (and many like me) must contend with.

Which means we independents have two basic options in marketing our work. Either we pay someone to do it for us (an expensive proposition), or we do it ourselves.

The financial wizards among you can likely guess which path I've chosen. Hence this blog.

A hardcore truism is that one can only succeed in business by giving excellent value. Savy writers know this. And while there are no fees associated with this blog, there is another currency it demands. The reader's time.

With this in mind, I promise I will do my best to make this blog a commanding value for you, its readers.

This concludes our broadcast day.