Scrooge McDuck Taught Me to …

INVESTING FOR BEGINNERS PERSONAL FINANCE

How Scrooge McDuck Taught Me to Be Rich

•••

Real Life Lessons from the Chairman of McDuck Enterprises

BY JOSHUA KENNON Updated October 27, 2016

Hanging on the wall near the desk in one of my offices is a beautiful limited edition
work called “Embarrassment of Riches” by famed comic book artist Carl Barks. In it,
Scrooge McDuck, his nephew Donald, and his grandnephews Huey, Dewey, and Lewy
are measuring the depths of the gold and treasurers in the money bin. As I glance up
from the investment report in front of me at the time, I often think of the lessons that
Uncle Scrooge has taught me; things that are very much a part of the enterprise that
I’m building now and the way my investments are handled.

It may seem unconventional to those Advertisement

who don’t know me well, but it’s natural

that McDuck was one of my childhood
heroes. As someone born into a middle-
class family, I knew that it fell to me to
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build a fortune if I were to ever have one;
even winning the lottery had little appeal
because it wouldn’t have felt earned or
deserved (my parents worked
extraordinarily hard and that was instilled
in each of the kids). As I studied Peter
Lynch, Warren Buffett, Charlie Munger, Ben
Graham, and the rest of the greats,
Scrooge inevitably made his way into the
integrated framework that became my
investment style. It was partly the
lessons I learned from him that allowed Advertisement

me to go from an upstart with no capital

and little experience working from a library cubicle with Value Line reports, a Bic
ballpoint and a pad of paper to my current situation with gold-rimmed china, fine
fountain pens, and an on-demand research system that lets me monitor my
commitments from the comfort of an art-filled sanctuary.

Here are some of the lessons that I learned from the Richest Duck in the World. I’m
hoping they will help you build your wealth, just as they have assisted me.

Harness the Power of Trickle Back Economics

Scrooge didn't believe in Reagan’s “trickle down” economics. He believed in
something called “trickle back” economics.

As one website explains the theory, Advertisement

“When (Scrooge) pays his nephews their

wages of thirty cents an hour he knows
they will use the money to buy tall, fizzy
sodas at the nearest soda fountain. Then
the soda fountain people will use the
money to buy more fizzy ingredients at
the chemical factories, and the chemical
factory people will buy their ingredients
from the coal tar factories - and who
owns the coal tar factories? Uncle
Scrooge! By the time those thirty cents Advertisement

have trickled back to Uncle Scrooge they

have grown to sixty cents.”

In my own life, this was harnessed by creating a specialty e-commerce site that sold
personalized apparel. My family owned the wholesale factory that served as one of
the company’s main vendors so when we placed orders and paid for the cost of goods
sold, the money was sent from the e-commerce group, which we owned, to the
factory, a separate business that we also owned! To prove the value of this theory,
we put aside the funds at the factory into a brokerage account where it was used to
buy stocks, bonds, and mutual funds. Think of it as a company such as Berkshire
Hathaway having the Nebraska Furniture Mart buy its car insurance from GEICO and
selling See’s Candies inside of the store, albeit on a much smaller scale.

Study, and then Exploit, Supply and Demand Discrepancies

In one classic story, a disaster caused Uncle Scrooge’s money bin to blast wide open
and shower money down on the citizens of Duckburg. Suddenly finding themselves
fantastically rich, the ordinary folks gave up their day jobs and instead piled up as
much treasurer as possible. The restaurants closed, the police abandoned their
posts, the teachers went on vacation, and the office buildings were deserted.

Unflustered, McDuck took his now-panicked nephews (who wisely realized that the
town was blowing their inheritance) to a farm on the outskirts of the city. Not
understanding why Scrooge wasn’t emotional or distraught, they kept trying to
impress upon their uncle the nature of the emergency. Not paying them any
attention, he ordered them to help him pick up some tools and the four began sewing
seeds.

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As time passed, the harvest began to grow and the now seemingly poor family lived
on the farm.

At precisely the moment the crops were ready, the town had run out of food.
Scrooge turned to his nephews and explained that he now owned the only supply of
fruits, vegetables, and other foodstuffs in the area, allowing him a monopoly on
goods that were necessary for survival. Able to name his price, in no time, McDuck
had managed to recapture his entire fortune, while teaching the boys a priceless
lesson in hard work and the exploitation of the supply and demand curve.

Warren Buffett once did this very thing in his personal portfolio by acquiring copper
when the supply and demand relationships got out of balance. Later, he had
Berkshire Hathaway repeat the investment when it acquired a massive portion of the
world’s silver inventories.
Take Your Investment International
In nearly every story, Uncle Scrooge is either getting word from his global network of
businesses or traveling the world to find rare treasurers and artifacts. In his early
days, he made his fortune in the far-distant Yukon. The point is simple: There is no
reason to only own stocks and assets in the United States.

Now, if you are just starting out, it may not make a lot of sense to start buying global
stocks. Nevertheless, as a value investor, there is a lot to be said for effectively
doubling the number of potentially undervalued stocks you can find by looking
outside of America’s borders. Not that long ago, we published a piece explaining how
the average investor can buy ADRs, short for American Depository Receipts, which
are a way to acquire stocks on foreign exchanges without leaving the comfort of our
home country.

For years, I, as well as various members Advertisement

of my family, have owned shares of

the Tweedy Browne Global Value fund.

Well Bought Is Well Sold

The old retail adage “well bought is well
sold” could be seen in nearly every
business deal in which Scrooge took part
(save, of course, for a rather expense
open-cry auction that he attended – 
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Warren Buffett and Charlie Munger, of
course, have long warned that it’s a
mistake to go to those, but alas McDuck must not have gotten the advice).

This was the basic premise of Ben Graham’s investment style. The return you earn is
determined by the price you paid for an asset (for more information on this,
read Price is Paramount). All else being equal, the lower the price you pay, the less
risk. This was the philosophy that Rose Blumkin used to build the Nebraska Furniture
Mart and make her family extraordinarily wealthy despite being unable to read or
write.
Maintain Plenty of Liquidity at All Times
It’s highly likely that Scrooge overdid the liquidity principle with his money bin. In
some stories, however, he states that this is merely the working capital for his
operating businesses. If General Electric, Exxon Mobile, or Berkshire Hathaway were to
keep their working capital in a comparable bin, it would likely be just as large, so
perhaps all of those funds really are nothing more than a very large corporate cash
register.

The principle is true and plain: The greater your liquidity, the more flexibility you have
in making decisions including investments.

You can meet unexpected demands,

such as car repairs or health
emergencies. If you are constantly
strapped for funds, you might not be able
to take advantage when the
opportunity presents itself or, worse yet,
you might not be able to financially
survive something that otherwise would
have been a short-term blip. How many
people were wiped out in the October
1987 crash because they were highly leveraged when the markets plunged? Yet, by
the end of the year, the market had recovered all of the lost ground. For those who
lost their equity, they couldn’t participate in the recovery and it spelled total and
complete ruin.

Remember the words of Warren Buffett: You should be able to manage just fine and
be perfectly content with your investments if the stock market were to close for five
years. People often forget that prolonged stock market closures are not only
possible, they have happened in the past. You shouldn’t require the funds in your
investment accounts to survive. If you are living off of dividends, consider having the
shares registered directly with the transfer agent or keeping the certificates in a safe
deposit box so the dividend checks are mailed to you directly from the companies,
leaving you unscathed as long as the companies in which you have an ownership
stake continue to make their regular dividend payments (for more information
read All About Dividends to see how they are established, who decides what is paid
out to shareholders, and much more).

Keep Emergency, Hidden Reserves

Sometimes, things just go wrong. It’s terrible, it sucks, but it’s part of life. One of the
things that kept Scrooge wealthy was that he often had a backup, secret sources of
wealth about which no one knew. In one story, he was able to return to his claim in
the Yukon, knowing that he had clandestinely buried gold there to provide upstart
capital if he were ever wiped out or needed emergency funds.

There is great wisdom in this. It’s a lot easier to get back up on your feet if you have
some assistance. This is one of the reasons it is often a mistake to tap retirement
accounts when you get in financial difficulties. Not only will you pay massive taxes
and early withdrawal fees, but if you were forced to declare bankruptcy, you’ve wiped
out your long-term capital. In many cases, a court will allow you to keep
your retirement funds, putting them beyond the grasp of creditors. Why on earth
would you take them out of the account and make them fair game? You must think
defensively to protect yourself.

Invest in Yourself by Learning New Skills

I’ve written several articles on the power of this basic concept. Buffett has said many
times that your skills are what really matters because even if the economy, or worse
yet, the currency of your home country goes to nothing, a heart surgeon will still be
able to charge enough for his services to end up in the top end of the wealth
distribution chart.

In one story, Tralla La, Scrooge is rescued by a member of the Cathaway, an ancient

society. He was able to speak their language because he learned it when he was a
yak buyer in Tibet. There is little doubt in my mind that if McDuck were alive today, he
would know Mandarin and be able to conduct business in the far East knowing full
well that by 2050, China’s economy should be roughly twice the size of the United
States’.

In my own life, it was this principle that caused me to attend University on a music
scholarship, studying classical voice performance (opera). Along with exposure to
German, French, and Italian, my years were steeped in philosophy, accounting, piano,
history, finance, political science, and other humanities that gave me a much broader
worldview. Few people realize that the great investors also did the same thing – Peter
Lynch was a philosophy major, Alan Greenspan studied clarinet at Juilliard before
going to NYU for economics, and Ben Graham was offered a position in three
different departments at Columbia due to his extensive knowledge of the classics.

Diversify Your Asset and Income Streams!

In one story, The Seven Cities of Cibola, Scrooge opens with an observation: “Oil
wells, railroads, gold mines, farm, factories, steamships, theaters – I’ve made money
at just about every business there is on earth!” His butler then responds, “That’s
right, Mr. McDuck! You have sawmills, stores, radio stations –” and Scrooge
continues, “canneries, fisheries, race horses, and newspapers!”

This is a common theme in great companies such as Berkshire Hathaway and

General Electric. Insurance, candy, furniture, newspapers, banks, construction
materials, sheet metal, marketable securities, and jewelry … wind turbines, light
bulbs, medical scanners … the list goes on, and on. All else being equal, a fortune is
safer if it is backed by both diversifications in assets and income stream. The most
profitable horse and buggy company in the United States would have gone under if
they hadn’t expanded into other industries as the automobile rose to prominence.

This was tempered, of course, by Scrooge’s desire for simplicity. “I need to get into
some simple business that I can run with my own hands!” he cites in the same story.
Buffett shares this same philosophy (read KISS – Keep It Simple Stupid for more
information on this concept).

Have Fun
There is a fundamental law that is often ignored by entrepreneurs: He who has the
most fun, with the most discipline, is going to probably end up the most successful.
Donald Trump talks about passion. He’s told his children that if all else is equal, the
guy with the most passion is going to win. The reason? It’s not work. He’s going to be
out there, day in and day out, doing what he loves. You learned all about this in 10
Secrets of the Capitalist Class - How the Richest 0.9% of Americans Got That Way.

In my own life, I can tell you that there is nothing I’d rather be doing than plowing my
way through a pile of stock reports and acquiring shares of cheap businesses. It’s like
a real-life version of Monopoly where my academic and intellectual pursuit of value is
rewarded with dollars that serve as a scorecard. For some people, this calling might
be art, or cleaning, or journalism, or floral arranging. The point is, it’s different for
everyone. But if you can find a way to make what you love your work, you’re probably
going to end up ahead of the game. There are people who literally make hundreds of
thousands of dollars playing video games professionally!

Keep Your Integrity at All Times and Regardless of the Cost

Making money does not make you more valuable than someone else. It does not even
necessarily make you smarter or wiser. The acquisition of capital at all costs is a poor
bargain. Never, under any conditions, sell your integrity, or violate your ethics, to
make a few extra dollars (or even a few extra billion).

The best test I’ve ever heard about how to follow this rule was prescribed by Warren
Buffett. He said that each of us should live our lives as if the following day, all of our
actions would be on the front page of our hometown newspaper, to be read by our
friends, peers, colleagues, pastor, school teachers, parents, siblings, et cetera, with
the story written by a critical, but fair, impartial reporter. That will change the way
you conduct yourself.

Buy Assets that Generate Cash or Retain Value

Finally, if you are going to spend money, do so on the things that will generate the
most cash or that will, at the very least, retain their value. In my own case, I’ve been
building a Carl Barks and Scrooge McDuck art collection that will, someday, be
substantial. I have rare books, a collection of fine writing instruments, and
extraordinarily nice furniture.

This theme was illustrated in the bestselling books The Millionaire Next Door and The

Millionaire Mind, which showed people that the average American multi-millionaire
often drove an older car but had the best furniture. That’s because people that want
to build their net worth focus on something called life cycle cost. If you buy a piece
of cheaper furniture that is going to get ruined when you spill a cup of coffee on it, or
a pair of $200 tennis shoes that will fall apart in a year, they are going to cost more
per use than a comparable table or pair of shoes that costs five times as much. This
is counterintuitive.

To be like Scrooge, don’t squander your money on things that will lose value. Find a
mix of items that you will enjoy, provide you with utility, and will appreciate at a rate
higher than inflation. In the end, you’ll get the satisfaction of spending and the
benefits of investing. It can be done with diligent study, patient acquisition, and
disciplined execution.

More Information
This article is part of our How to Get Rich guide for new investors. For more
information on how to take control of your finances, generate passive income, control
your debt, and become financially independent, read How to Get Rich - A Guide to
Getting Rich.

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