Last year I read a report produced by David Collum called Thirty Years of Investing from the Cheap Seats (See attachments below). Now, up until reading this report I had never heard of the man before. He is a professor of Chemistry and Chemical Biology at Cornell University and not a financial big wig necessarily. Since reading this report of his, I haven’t read anything else by him – at least knowingly. Why not? No good reason besides that as far as I can tell he doesn’t have a blog for these types of publications of his, but rather just gets them produced by other sites, so unless one of the sites I frequent posts his material I just won’t see it. That being said, the linked too article from 2009 is an outstanding article to read for newbie investors like myself and presumably long time investors. Though as I’m relatively young I can’t say I qualify for an opinion on long time investors; but his writing matches up well with the investors I do read commonly.
Alright, introduction aside I wanted to re-post his article for a few reasons.
- It’s an excellent overview of investment history from the perspective of one man who has done rather well for himself in terms of investments.
- He introduces me to a simple concept of how to view your current and historical wealth that adjusts for inflation on a personal level
- And lastly, frankly I couldn’t find this report on the web anymore; so being glad that I saved the PDF I simply had to re-post it.
I won’t retype what the original article discusses, but to give you a brief summary he goes through his years of investing.
His first “period” starting in 1955 to 1980 as the Formative Years.
Next we have the 1980-1987 Nothing But Bonds years then:
1987-98: Birth of an Equity Bull
1998-00: Y2K and the Birth of an Equity Bear and Gold Bug
2000-09: The Decade of Hard Assets
2010-20: The Toughest Decade?
Overall, an excellent historical read to put some personal perspective on where we’ve been and where we might be going.
Gross Salary Multiple
So here is the primary reason I wanted to discuss this article. This is such a simple concept, and I love it. He measures his overall wealth increase in terms of what he calls his Gross Salary Multiple, and is defined as: (Italic emphasis is mine)
I define gross salary multiple as my total net worth divided by my gross salary. This is wealth measured against the moving benchmark of a rising salary. See picture below for David’s personal graph:
Brilliant eh? Having since seen this, I have incorporated it into my own finances. I did make an adjustment however which improves it to my particular situation. Rather than having the multiple be my networth against my gross salary, I put my networth against my annual living expenses. Meaning, every December I see what the last 6-12 months average spending was and divide that by total net worth. I’ve included my current graph below. As you can tell, I didn’t save nor invest much in first few years. I generally didn’t see a reason to save money at the time so I gave much of it away or would travel (Kenya, Fiji and New Zealand). When you don’t have much, leaving the country for 3-6 months is a great way to spend all your savings. It was well worth it in the short run and should be in the long run (10+ years). Personal Education is one of the best expenses an individual can make.
The reason I switched to a ratio of Living Expenses versus salary is if I lose my job tomorrow and want to maintain my lifestyle as is – sans investing and saving – the ratio is essentially how many years I can live on my savings. David’s chart is similar but different in that it tells him how many years he has left of his current lifestyle including saving & investmenting. For me personally, it’s easier to read if I remove saving & investments from the graph. For example, my Living Expenses have gone up and down by factors of 25%-30% since 2005 and have more than doubled in 2010 (house purchase and marriage). I’ve reposted the above graph below but as a Gross Salary ratio, similar to David Collum’s method. The differences aren’t huge but as my living expenses are naturally less than my salary the above graph is going to appear to grow faster than the below. Further examination does show a few interesting things, the bar for 2010 is about the same size in both graphs but the bars adjoining (2009 and 2011) are quite different. 2009 is half the size below when compared to above, mainly because while my salary didn’t change much between 2009 and 2010 my living expenses doubled (house and marriage).
Anyways, before I ramble more about personal finances which is not the focus of this post; what I just wanted to introduce you to is this method of putting your current and historical wealth in a unique, healthy perspective. It is inflation adjustable as your living expenses are really how you measure inflation on a subjective level. It retains a historically accurate perspective because it’s a ratio that is applicable only in the year the ratio was taken; so 30 years from now the ratio will be the same no matter the value of the dollar, yen, euro, gold, silver, or whatever. So again, check out this annual personal report from David Collum . It is well worth the read. I’d love to here your comments about this method of financial tracking. What do you use? Something similar? Totally different? Or do you not look at your historical wealth?
Thirty Years of Investing from the Cheap Seats