April 28, 2015

Jack MacDonald Secretly Built a $188 Million Fortune Investing in Stocks Then Donated It To Charity

Jack MacDonald was a frugal attorney who wanted to build a big net worth to give to charity.  He went a little far for my taste – having holes in his clothes so he could put more money to work to give to charity whereas I’m never going to give up the custom made dress shirts – but in the end, by studying stocks, he was able to amass a $188,000,000+ fortune that was just revealed when the charitable trusts he had setup to distribute the funds upon his death began writing large checks to educational and humanitarian institutions.

Jack MacDonald Secret Millionaire - Image from Seattle Children's Hospital

The retired lawyer loved studying stocks. He kept it a secret and amassed $188 million through the power of compounding, which now goes to charity.

My favorite quote, and one with which I can identify:

“His hobby was the stock market,” it continues, “and he delighted in watching his trust increase in value to benefit local charities.”

I know it’s not a surprise to this audience given the data from the Federal Reserve and Census Bureau but a lot of people still seem shocked how common this is.  Most millionaires opt for stealth wealth.  Their friends don’t know, their coworkers don’t know, their extended family doesn’t know.  In a few cases, not even their children know!  Wealth is accumulated through habits; at least in a free society like ours.  At the moment, something like 1 out of 25 households falls into the millionaire category, most of it self-made.

In this case, MacDonald’s secret is due in no small part to his age.  At 98 years old, that’s a heck of a lot of compounding.  You already know that average rates of return in equities (assuming historical mean valuation) results in a roughly 1,083% increase every 25 years, and this was a guy who had more than three-quarters of a century of investing under his belt since reaching adulthood, or 3 of those periods.  Had he just parked $1,000 in a basket of equities when he turned 18, it would have been worth $2,048,400 at his death.  And, though I can’t prove it without further data, reading his biography, I’m guessing he was doing much better than average.

My case study files of people like this are one of my favorite things in the world.  They make me happy, especially since almost all end up giving the money to charity; it seems to be a common motivation.  I understand it.  I didn’t even own my first house yet when I had already setup my charitable foundation.  It’s fun to watch it grow.  It’s fun to treat it like a game of Monopoly where the by-product is you get to make the world a better place.

As luck would have it, I was writing about this phenomenon tonight on the About.com site dealing with penny stocks, when I penned this in a passage dealing with other secret millionaires, “Perfectly ordinary people doing perfectly ordinary work have grown very wealthy with this formula; folks like secretary Grace Groner, retired IRS agent Anne Scheiber, science fiction writer Hayford Peirce, twins Robert and Kathleen Magowan, and elderly Californian Agnes Plumb.  Curt Degerman used this approach to leave a seven-figure estate he built by recycling spare bottles and cans then investing the small change he was paid.”

You can read the entire story here at the New York Daily News site.

  • Gilvus

    That article on the recycling man put me through an emotional rollercoaster. Here was a poorly educated guy who worked hard all his life and used the public library to amass a fortune…only to have his extended family battle over it after he died.

    The disparity between the two sets of behavior really gets me down :(

    • http://www.joshuakennon.com/ Joshua Kennon

      I know. I’m surprised there was any settlement at all. In a place like Kansas City, the Uncle would have had a legal claim to the assets under Chapter 474 Probate Code – Intestate Succession and Wills Section 474.010, which spells out the order in which inheritances are distributed, but only if no last will and testament were recorded. This man apparently left the money to his cousin, which would mean the cousin gets it all, at least here. I’m not sure how the laws of that country work.

      It does make me grateful that you can bypass a lot of this with many of the rules in the United States. For all intents and purposes, if you want a certain person to get your money, you can do things like use “payable on death” account designations that skip probate entirely. The other family members may never have a clue that the money existed in the first place. The person you want to get the money just shows up at the bank with an ID and the account is changed to their names, with no one else involved or notified. You can use beneficiary designations on IRAs, which override even your will – the account just goes to the person listed and they can use a “stretch out” withdrawal strategy to maximize their own tax benefits.

      That would have been my strategy were I in that position. I’d have hired an attorney with a note to be given to the cousin, specifically, that no one else saw. The cousin would be told to go to the financial institution, take possession of the accounts, and never tell anyone. The assets would have never been listed in my estate; disappearing entirely. Again, I don’t know how the laws work in that country, though, so it may not have been possible.

      • Andrew

        Thank you for this blog. It helped me decide that I want to grow my net worth to ridiculous amounts, just so I can give most of it away to good causes. I’m pretty young, so (hopefully) I have many many decades to compound the heck out of my wealth.

        (I just realized through your shared knowledge you’re “donating” many magnitudes more than your own net worth to the world. Your teachings are also a form of compounding.)

      • Gilvus

        You make it sound super-easy. I thought estate proceedings were far more complex than this if the estate’s fair market value went over a threshold. As I understand it, this number was recently lowered with the expiration of the Bush tax cuts.

        Are you saying that the attorney takes care of all of that behind the scenes, and the transfer would happen silently (thus preserving stealth wealth)?

        • http://www.joshuakennon.com/ Joshua Kennon

          Most people will never have to deal with that problem. At the moment, the estate tax is only owed if you leave behind an estate to a non-spouse worth more than $5,250,000, which is indexed to inflation. If the estate tax is owed, the deceased could have specified in the will how the tax would be paid (e.g., pro-rata across accounts or from a pile of municipal bonds built up on the side). If the person didn’t leave a will, I believe individual state laws governing inheritance are used to determine questions like this, so it could vary by jurisdiction.

          In 99% of cases, though, it really is that easy. There was a tax case out of Florida dealing with the estate of Barbara Kester a couple of years ago where this was upheld (you can read the actual decision here). The person listed as the beneficiary in the POD designation, even when the will said the assets were to be divided evenly, ended up with all of it, by-passing the other would-be inheritors even though the woman specified she wanted the asset split among her heirs.

        • Gilvus

          Whoa, I didn’t know that. If it’s this simple, then are estate attorneys mostly there for disputes that get taken to the courtroom? I can’t think of any other role they would fulfill, except to serve as executors, I guess.

        • http://www.joshuakennon.com/ Joshua Kennon

          Partly, but a good estate attorney can help you make sure you’ve structured things as tight as possible, or come up with strategies that avoid pitfalls you don’t even realize exist (e.g., perhaps you were married 30 years ago and haven’t seen the spouse since but funded a retirement account during your time together that, in some jurisdictions, gives him or her a claim on the assets). They can also serve as your executor in an impartial manner after your death, making sure the process goes a lot smoother. Most people don’t need them but they can be a great asset in some situations.

        • Gilvus

          So an estate attorney:
          1) Helps you plan your estate when you’re kickin’
          2) Helps you impartially transfer assets once you’ve kicked it
          3) Serves as sword or shield for or against people grabbing at a slice of the pie.

          This makes a lot more sense now. Thanks for explaining :)

  • mikecrosby

    These are my favorite stories too.

    The idea that these wealthy people just want to screw over the little guy is bunk (think Occupy Wall Street). Perhaps I’m wrong, but I think people like Gates et al constantly think how they can make this world a better place. But again, looking at how wealthy just the common man is in US is mind boggling.

    • http://www.joshuakennon.com/ Joshua Kennon

      I agree; I love stories like this.

      On another note, personally, I think the Occupy Wall Street movement had a marketing problem. It’s true there were some folks that were simply ignorant and motivated by misdirected class warfare, but there were also lot of very smart people who were protesting the fact that our nation’s banking sector had bought Congress, created unfair rules to its advantage, put the main street economy at risk, and the managers responsible largely escaped unharmed while wiping out shareholders.

      Had they demanded a 2-3 bullet point political agenda, I think they could have gotten it. For example, if they had been screaming for the reinstitution of separation between investment and commercial banks or bankruptcy reform laws that returned student loans to the same status they had been for most of this country’s history (instead of the new system that unfairly makes it a near impossibility to discharge in bankruptcy court), it could have been a success. They weren’t focused and organized in any meaningful way. They just yelled and got attention. That’s not good long-term. It doesn’t achieve anything. You need results; actually life-changing shifts in the structure that can make economic security and mobility better.

      It seems as if the moment they began to lose focus was when they started the “We are the 99%”. It made them drop in credibility among those with influence since the 1% begins at $388,000 in adjusted gross income, which is a heart surgeon married to a teacher. You can’t talk about the 1% and then only mention examples of the 0.01%. They made enemies of people who should have been on their side. This all started with the now infamous Tumblr blog being launched. While many examples on the site are legitimate failures of our system that we, as the people, need to address (e.g., someone being wiped out due to medical debt or death of a spouse), a majority are the result of the person making stupid decisions or not taking ownership of their own life; people who earned good incomes for 30, 40+ years and didn’t save a damn thing now think it’s everyone else’s responsibility to support them.

  • Jay Tank

    While I agree wholeheartedly with the premise that anyone can become a millionaire through compounding large-cap, high-quality, dividend-paying stocks over decades in tax-sheltered vehicles, it’s a whole another ballgame to become a deca- and hecto-millionaire with stocks alone (unless you happen to invest in those rare breed stocks in the early stages with phenomenal growth periods e.g. Microsoft with total return of 39,088% to date (per Morningstar).).

    Case in point: Mitt Romney’s Roth IRA with an estimated $100 million was not earned through normal stock investments, but rather through highly leveraged private equity buyout stocks at bargain basement values.

    • http://www.joshuakennon.com/ Joshua Kennon

      Exactly. Unless you are lucky enough to have a 75+ year run of compounding, you must have some other primary economic engine – a cash generator – providing the investment capital; at least in the very beginning until the compounding can start to snowball into larger sums.

      This gentleman built a private business and worked as an attorney to fund his investment hobby. Other people have very special skill sets (e.g., a heart surgeon) that allow them to sell their time for high rates (practically any average doctor in the United States should be able to amass $10 to $20 million if he or she has at least 25 years of compounding).

      I think of stocks as – to borrow a phrase – a way to “inventory” past profits. They are a great secondary mechanism to build wealth from money produced in a primary activity, beating nearly every other asset class. At some point, they begin to compound so much additional wealth they become a cash generator of their own, or even your primary cash generator. Case in point: Take the most famous investor alive at the moment, Warren Buffett. The entire genesis of his fortune can be traced not to his investment gains alone, but to his money management business – the override he took by using third party capital. That was his cash generator. When he liquidated the partnership, though, and began to use Berkshire Hathaway as his intermediary, it was the compounding alone that did it as he no longer needed the override. He had enough money working for him that it, alone, was a sufficient cash generator to accomplish what he wanted.

      I think choosing the right initial cash generator is one of the most important decisions in life. It’s how you’re going to be spending most of your time, so it also has huge ramifications for personal happiness.

      • Jay Tank

        Initial cash generator: if only we were all brought up to think of acquiring that instead of finding the best “job”, I know I, along with many others, would have pursued other opportunities in our youth. I’m currently part of the estimated 95% of people in the U.S. that trades in my skill set – albeit highly specialized – and time, for money.

        I’ve been currently looking and researching other ventures for maximal investment gains, and I wanted your opinion on limited partnerships. I know that most reputable partners require a potential partner to have the “Accredited Investor” net worth criteria fulfilled (usually defined as $1 million net worth), but I am still unsure of their effectiveness and profitability vis-a-vis risk entailed. Do you have any advice or pointers on what ventures to pursue, and pitfalls to avoid?

        • http://www.joshuakennon.com/ Joshua Kennon

          A limited partnership is just a legal structure; a shell, if you well. It would be like asking, “Should I invest in corporations?” Well … which ones? Doing what? At what price? On which terms? Buying a stake in Coca-Cola at 5x earnings is going to work out very well over long periods of time, but purchasing a local pet store at 100x earnings with a bad management, not so much.

          The reason a lot of limited partnerships require investor accreditation comes down to the regulatory laws. It was meant to protect smaller investors, making it impossible for them to buy into companies that they lacked the sophistication to understand. It makes sense, but it’s a hassle. Most partnerships would love not to have this regulation as it would make raising money much easier, but the compliance rules and costs are much higher if you don’t.

          When making an investment through a limited partnership, I would ask:

          1. What is the underlying cash generating activity. How does the partnership make money? What do we sell? Candy? Ice cream? Office supplies? Candles? Cheeseburgers? Software?

          2. How is the limited partnership structured in terms of distribution of profit? Based on my capital contribution, how much of the return do I get to keep and how much goes to management or the general partner?

          In cases of investment partnerships, you’re betting on the manager. Let’s imagine you showed up at my desk and said, “Joshua, some friends and I got together. Here’s $10 million. Let’s create a limited partnership and have you manage it. We’ll lock up our money for 60 months, and you have to retain all of your management fees in the partnership itself so you’re invested along with us.” And I think you’re rational enough that you will have a similar philosophy to me so I agree to do it on a standard 2-and-20 deal (2% of net assets per year, 20% of profits over a certain hurdle rate tied to Treasury bond yields).

          In that case, the partnership doesn’t yet have a business. You’re betting on me – that my mind, and my knowledge, are going to end up, net of fees, better off than you could enjoy going it alone. You sit at home and don’t think about it, while I do the work. It’s a different sort of situation, so in these circumstances, as long as you’re fine with the fee structure, it’s really about the person and the strategy they are using. Are you comfortable with both?

          Generally speaking, LP’s aren’t that popular these days. They are not nearly as useful as LLC’s structured as a partnership given the flexibility of these newer entities. You still (for whatever reason) see a lot of Texas-based investors preferring LP’s, but they are going the way of the dinosaur.

          Make sense?

    • joe pierson

      Jack MacDonald didn’t make his initial money from stocks, his wealth was inherited which was then invested, he didn’t spend any of it because he thought of himself as the steward of the inherited wealth

      “His wealth was inherited from his parents, who owned MacDonald Meat Co. in Seattle, and he sought to boost the funds by investing their money”

  • Tyler Phillips

    Wow what a small world.. apparently he donated $150,000 to my hometown because his grandfather lived there.