<FOOLISH WORKSHOP>

Overtime Work That Really Pays

by Ethan Haskel ([email protected])

[Ed Note: Ethan Haskel is on vacation this week. This article was originally published on August 30, 1996, as a Fribble.]

Baltimore, MD (Dec. 30, 1998) -- While many of us Fools enjoy investing and spend considerable time both online and off in this pursuit, there's no doubt that some of us spend significantly more time than others.

That got me to thinking about the actual time many Fools spend with their investments. Just what is the profit to be gained by these activities? Does the extra time we spend honing our portfolios really pay off, or are we better off putting in extra hours at the office and investing the extra income just a little less Foolishly?

Actually, an estimated value can be placed on the amount of time spent handling one's investments versus the opportunity elsewhere.

The following analysis is based on the assumptions below, which I think are reasonable, although one's own situation may deviate considerably from these depending on age, individual contributions, and the actual time spent on the investment process itself:

1. The investor starts investing at age 20 and pulls the money out at age 65.

2. The investor adds $2000 per year for the first decade, increases the yearly ante to $3000 for the next decade, and adds an additional $1000 per year each decade until she reaches her 60s, when she adds $6000 per year.

3. The annual return by passive investing is 11% (e.g. Vanguard Index 500 Stock Fund), 22% by the Beating the Dow (BTD) Foolish Four method, and 25% by active Foolish portfolio management (including individual small cap stock analysis as outlined in The Motley Fool Investment Guide).

4. The time spent on one's investment pursuits totals one hour per year for Beating the Dow and two hours per day, every single day, for active Foolish portfolio management. I've also assumed that maybe one hour per decade is required to maintain your portfolio, whether it be in the Index 500 Fund or BTD.

5. Transaction costs and capital gains taxes are excluded from the analysis for the time being.

Given the above assumptions, here are the actual portfolio results after 45 years:

The Vanguard Index 500, with its 11% return, grew to $636,422 with a total time commitment of 5 hours. Beating the Dow (the Foolish Four approach), with its 22% returns, grew to $14,580,205 and took 50 hours. And finally, the Active Fool Management's 25% returns grew to $36,499,972 and took 32,850 hours.

Given these numbers, just how much are we Fools earning per hour for our additional hard work? By using the Beating the Dow approach rather than the Vanguard Index 500, we spend an extra 45 hours, but the extra portfolio value equals $13,943,783 -- or $309,862 per extra hour spent. Using Active Fool Management instead of the index fund takes an extra 32,850 hours but generates an additional $35,863,550 in total value for the portfolio, or $1,092 per extra hour. And finally, using Active Fool Management versus the Beating the Dow approach takes an extra 32,805 hours and generates an additional $21,919,767 in total portfolio value, an additional $668 per extra hour spent.

The salient features of these data follow:

1. By far and away, the most cost efficient time one can spend is in implementation of Beating the Dow. Based on the assumptions above, your benefit per hour for this strategy (over $309,000) is far more than Michael Jordan will ever make. Your ultimate returns are limited only by your yearly contributions and the fact that it is impossible to spend more than one hour a year on this strategy.

2. For each hour that a Fool spends poring over the Fool's message boards, quarterly earnings reports, prospectuses, and the like, assuming that he successfully follows the Foolish principles, the benefit calculates to over $1000 per hour spent in these endeavors (compared to passive investors), and over $600 per hour compared to those using only BTD. Not too many professions even in our capitalist society can approach these figures.

3. Yes, yes. Of course those pesky taxes and transaction costs are not included here and will make a dent in the above figures. But isn't it also possible that many Fools can scrape together more than the yearly amounts suggested above, start investing earlier than age 20, or continue to invest after age 65?

So the next time your relatives or friends suggest that maybe your time spent investing could be more profitably spent elsewhere, just show them these figures and watch their collective mouths drop. And those hourly earnings sure make those online charges a lot easier to stomach!

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