High Returns from Low Risk. Koning Jan de

Thrifty Enters the Stock Market

      MR THRIFTY. If you were to ask people close to me during my childhood to describe me, this would probably be their answer. I was raised in a large Christian family in the Dutch countryside. Yes, we had tulips in our garden, but we hardly ever wore the clogs that fill most tourist shops in Amsterdam. Apart from these stereotypes my family was truly Dutch: savvy and willing to do business. My father, who was a co-owner of a family-run electronics store in our village, taught us that first you need to work hard for your money and then you need to carefully look after what you have earned.

      Well, believe me, I learned that lesson… How happy I was with the little pocket money I earned by working in the family store or doing jobs around the house. Almost every day I checked my savings and searched for ways to fatten my piggy bank. Besides trying to increase my income I also focused on cost cutting: the less money I spent, the more I would have. So I put myself on a financial diet and tried not only to save as much as I could, but also to be patient and let the magic happen. But what exactly was the magic?

      Early in life my father taught me another valuable lesson about the eighth wonder of the world, at least according to Albert Einstein. And no, I am not referring to his famous theory of relativity, but the ‘magic’ of compounding interest. The math behind it is simple (otherwise I would never have been able to grasp it at such a young age): if you put 100 dollars in a bank account, yielding 10 % per year, you end up with 10 dollars of interest at the end of the first year. However, in the second year, this combined sum of 110 dollars doesn’t generate 120 dollars, but 121 dollars (10 % interest on 110 dollars gives a return in the second year of 11 dollars) … Or, in other words (according to my boyhood reasoning): the magic of compounding would give me one free dollar in the second year. For a kid that was saving pennies on a daily basis, this ‘eighth world wonder’ seemed to be pure magic.

      One day, when I was 14 years old, I found an opportunity to let my money grow at a faster pace. Back in those days, in the early 1990s, interest rates were – by today’s standards – relatively high. My little treasure trove was yielding a whopping 6 % per year. My father told me he had invested some money in a low-risk fixed income fund, which yielded 8 % per year. I was sold, because it meant I would receive two extra guilders (NLG) for every NLG 100 I put into this fund.2 I slaughtered my piggybank (not literally) and put most of my savings in the fund. Then, on a daily basis I followed its price movements in the newspaper and on Teletext.3 But it was so boring! The daily price of the fund hardly fluctuated and if it did, it only moved by about 10 cents. After two years I couldn’t stomach it anymore. I impatiently decided to remove my money from the boring bond mutual fund and directly invest it in exciting companies with high upside potential. I believed I needed to be in the stock market instead of the bond market.

      My local bank advisor understood my impatience and advised me to invest in either a balanced fund or an equity fund. However, I did not like this idea for two reasons. First, I wanted to pick stocks myself as I believed I might be quite good at it and I would learn along the way. Second, I did not believe in diversification because this would limit my upside potential. Third, investing in individual stocks is far more exciting for a teenager.

      One of the first companies I invested in was a high-tech company; in fact, it was a Dutch aircraft manufacturer. Despite the appealing look of its planes, the price of its stock was not exactly trading in the stratosphere. Quite the opposite. As the demand for these planes was cyclical and the production costs were too high, the company found itself in dire straits.4 The turbulence that hit this company’s balance sheet eventually caused its stock price to plummet to very low levels.

      It first appeared on my radar screen during the spring of 1994. In those days the company was a renowned and well-respected producer of high-quality medium-sized airplanes, which were being sold to airlines all over the world. In 1992, part of it was bought by DASA, a German aerospace conglomerate (the precursor of EADS, the producer of the Airbus). Although the Dutch aircraft producer was facing some fierce headwinds, its German CEO reassured the employees and shareholders that they shouldn’t worry about the distressing situation facing the Dutch aircraft company. Quite the contrary: during a press conference he reassured those present in his strongly accented English that this company was his ‘love baby’ and would even receive extra care.

      1

      I’ve witnessed this counterproductive behavior at universities in the US, Sweden, and the Netherlands.

      2

      The Dutch guilder was the currency of the Netherlands from 1378 to 2002, when it was replaced by the euro.

      3

      Teletext was a text-based information sy

1

I’ve witnessed this counterproductive behavior at universities in the US, Sweden, and the Netherlands.

2

The Dutch guilder was the currency of the Netherlands from 1378 to 2002, when it was replaced by the euro.

3

Teletext was a text-based information system dating from the 1970s that was available on many TV sets in Europe. See also Wikipedia:https://en.wikipedia.org/wiki/Electra_(teletext).

4

Management blamed the strong German D-Mark for the high production costs, as the Dutch currency was pegged to the German D-Mark.

2

The Dutch guilder was the currency of the Netherlands from 1378 to 2002, when it was replaced by the euro.

3

Teletext was a text-based information system dating from the 1970s that was available on many TV sets in Europe. See also Wikipedia:https://en.wikipedia.org/wiki/Electra_(teletext).

4

Management blamed the strong German D-Mark for the high production costs, as the Dutch currency was pegged to the German D-Mark.