What Should Millennials Do After the Corona Crash? Max Out Your 401k and Buy Stocks!

It is now clear that the economic misery occasioned by the coronavirus pandemic, and the government’s response to the pandemic, will be a disaster in itself, entailing severe economic contraction and perhaps even significant deaths from suicide, impoverishment, overwork, crushing obligations, and feelings of despair.[1] As a result of the anticipated economic train wreck,  U.S. stocks have already gotten pounded: most indices are down around 25% from their recent highs.[2] We are already in a recession. I am emphatically not an investment advisor, but some advisors are saying that the recent dip in coveted U.S. stocks presents a real buying opportunity for the long term. Even those of us who are not professional investors know the injunction to “buy low and sell high.” Well, many U.S. stocks are lower than they have been in many months. It is not that anyone should try to find the market bottom or time the market, it is just, as Warren Buffet suggested, a decent time to buy good stocks a little more cheaply.[3]

Conservative investment advisers, like Buffet and Ben Stein basically advise Millennials and other young people to capitalize on their long investment horizons by increasing their 401k contributions and buying shares of stock in solid U.S. companies slowly and consistently over time. In the past, that has been one of the most secure ways for poor young people to become comfortable, rich old people. If you are young and you are new to investing, one easy book to start with is The Capitalist Code: It Can Save Your Life and Make You Very Rich (Humanix Books, 2017), by T.V. personality, lawyer, and conservative economic commentator Ben Stein. At a scant 121 pages (without appendices), Stein’s parvum opus is well worth the investment, although I am not a fan of the subtitle.  In The Capitalist Code (“Code”), Stein addresses three basic things.

First, he defends the virtues of democratic capitalism against those he believes naively tout the supposed virtues of socialism or falsely speak of a rigged or unfair system. Second, he urges Americans of all means to participate in the economic liberty offered by “the system of democratic capitalism as now practiced in the U.S.A,” which he describes as the “best, brightest, most hopeful plan for organizing human economic activity that there has ever been.” Code at 7. Third, and finally, Stein suggests a simple way for anyone who can save even a little money to become a part of the “ownership” class in America and to slowly but relatively surely become well-off – by simply buying and holding, from the earliest possible age, “stocks in a large variety of public corporations in the United States of America.” Code at 94-95.

Stein writes in a pleasant, avuncular style. His ideas are accessible even to novice investors, for whom the book is primarily written. Stein reveals his motive in writing the Code: it is to save young adults from believing what he views as hackneyed leftist critiques of democratic capitalist economies as “unfair” and “rigged,” while encouraging people to participate in the benefits of free market economies by saving and investing in gradual, measured ways. In combating leftist platitudes on the alleged “evils of capitalism,” Stein’s condemnation is pronounced and not everyone will agree with his perspective:

You [the reader] are being sold a false bill of goods about money, about the world you live in, and about how to give yourself a bright future, money-wise. Let’s start with the obvious: When your professors and your schoolmates tell you that capitalism as we see it in the United States of America right now is an evil, exploitive system, they’re lying. When they tell you that you’re being consistently ripped off by Wall Street, they’re lying and they’re hurting you [by discouraging you from learning to invest].

Code at 6-7. Stein’s critique sharpens against contemporary politicians and commentators who bash free market capitalism and mislead the public with false hopes of socialist equality, which has been tried and tried, again and again and again, in various forms and flavors all over the world, resulting in the deaths of over one hundred million persons. Referring to one attack by a politician who punctuated her comments with the quip “corporations don’t cry,” Stein comments as follows:

[I]t was then and there I realized that young Americans were being fed a diet of pure nonsense about how the world works . . . . The point is, of course, that [the] Senator . . .  had it totally wrong. Corporations are organizations of men and women who work to produce goods and services. Those people have emotions . . . feel exhilaration and also feel fear and pain and loss.

Code at 54 (Italics added). Stein pointedly reminds readers that it is governments, often governments bent on improving or remaking society, and not corporations, that are responsible for humanity’s darkest moments:

Corporations do not bomb Pearl Harbor. Corporations do not kill one-third of all Cambodians in the name of equality. Corporations do not starve to death millions of Ukrainians in the name of creating the ‘New Soviet Man’. . . .

Code at 57-58. Despite such grim reflections, the Code is not primarily polemical. Although Stein is “conservative,” he is not stridently so. The Code is not mainly a philippic against the historic blindness that cause some to cleave to communist ideals after they have been tried and failed a score or more times. It is more in the nature of a self-help book for Americans, particularly young Americans.

Stein is genuinely worried that young people will absorb anti-capitalist propaganda, including that foisted on students at our top universities, and will fail to take advantage of the historically-rare economic opportunities enjoyed by all citizens in democratic capitalist societies – including the opportunity to invest in some of the best private companies and to slowly become financially independent.

Indeed, the main reason for the cliché that “the rich keep getting richer,” is not some “rigged system,” but rather the inexorable power of math. Specifically, the rich keep getting richer because money, invested properly, almost automatically produces more money making the owner richer. Unlike many of us, rich people generally have two sources of income – their wages from work and their passive income from investments. Years ago, when Warren Buffet claimed he paid a lower tax rate than his secretary, he was being a little misleading. On wage income from his work, he would pay much more than his secretary (assuming his salary were large). But the lion’s share of Buffet’s income, as with most fabulously wealthy individuals, is passive income from his investments, which are in fact generally taxed at a lower “capital gains” tax rate than wage income for several sound reasons, including that the invested money was generally already taxed at least once when it was initially earned.

If I earn money as a lawyer, that money is taxed based on my annual income. If I invest that earned money and then sell the investments later, the gains are generally taxed again, sometimes at a lower rate based in part on how long I held the investments. Depending on my style of investing, the same dollar can be taxed by the government again and again and again. So, Buffet’s argument was a little misleading, because it failed to communicate the notion that the invested money was, in many cases, already taxed at a rate higher than his secretary’s tax rate and is being serially taxed as it moves through various investments. In any case, the rich keep getting richer because their money earns more money over time, unless they do something stupid with their money. It is not a rigged system at all: it is just math. Complaining about it is like complaining about why a snowball gets bigger as it rolls downhill. The same thing often happens with rich people’s investments: they grow bigger over time.

            Many otherwise smart people do not intuitively grasp the power of time on their invested wealth. Say you work, live below your means, and save $20,000 by the time you are 30 years old. If you have the discipline not to spend this money, and you invest it in the U.S. stock market, which has returned about 9% per year on average over time (varying a lot, of course, from year to year), you are likely to have over $720,000 by the time you are 70. Yes, $20,000 becomes over $720,000 (check it on a “financial calculator” online at 9% interest). If you can save and add just another $2,000 a year to your investments during that time, your savings will grow to an amazing $1.7 million.

            Understanding this simple principle, and implementing it, is the main reason some Americans are rich, and others are not. It is not race or gender or a glass ceiling or a rigged Wall Street system. It is whether you save something throughout your life and invest it wisely. A janitor, a single mom, a retail worker, a waitress, or a schoolteacher can end up well-off; it just takes more care and discipline. The hardest thing is getting the initial money to invest and not spending it on a vacation, new car, vaping cotton candy mist, or whatever.

Is it easier for people who already have some money or who make more money to end up rich? Of course. But many high earners still do not end up rich, as illustrated by magazine covers depicting celebrities or sports figures who are now bankrupt because they purchased three mansions and one Rolls-Royce in each available color (for some unfathomable reason) and never developed a disciplined savings plan. The key, whoever you are, is to work hard, earn money, spend less than you earn, invest the rest sensibly, and then leave it alone so it grows through the power of time.

What young people have over old people (besides good looks and vigor) is more time. Put yourself in a position to use that time to become rich, Stein argues, and thereby free yourself to do whatever else you are primarily interested in doing with your life. When things take a turn for the worse, and the stock markets dip in reaction to bad events, that is probably a good time to think about adding to your retirement account or buying stocks. Markets are dipping now. If you have money to invest, you might consider getting an investment advisor, or learning about investments, and buying some investments while they are beaten down. That is one way for young people to turn the challenges of these times into opportunities. What should you do after the Corona Crash, once the dust settles? Perhaps invest.

[1] Paul H. Beattie is Gravis Law’s Senior Litigator. He works as a litigator and trial lawyer, mostly in Washington and the Pacific Northwest. After a short career studying and teaching biology at the University of Chicago, Paul joined the Marine Corps as an infantryman.  Following that, he went to law school at the University of Michigan, helped to raise five kids, and worked as a litigator and trial lawyer for twenty-five years. Paul’s hobby is writing. Paul is NOT an investment adviser. ©2020  by Paul H. Beattie. All rights reserved.

[2] See generally https://www.politico.com/news/magazine/2020/04/02/coronavirus-economy-reopen-deaths-balance-analysis-159248

[3] https://www.usatoday.com/story/money/2020/03/21/stock-market-collapse-how-does-todays-compare-others/2890885001/

[4] https://www.fool.com/investing/2020/04/08/should-you-buy-stocks-now-or-wait-heres-buffetts-a.aspx