How Scrooge McDuck Taught Me to Be Rich
Real Life Lessons from the Chairman of McDuck Enterprises
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 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 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 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, “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 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.
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 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 – 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).
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.
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.