Source: New England Historical Society

You might not be familiar with the “witch of Wall Street.” Hetty Green died in 1916 after accumulating a fortune worth an estimated $200 million, or about $4.5 billion in today’s dollars. You probably have heard of JP Morgan who lived around that same time, yet had a fortune of just $80 million.

Before we get to her investing secrets, we will answer the question you almost certainly have which is why she was called the witch of Wall Street.

According to the Smithsonian Magazine, the “most memorable image of Green–and the one that earned her the sobriquet “witch”–came after the death of her husband, when she started wearing mourning clothes.”

At the same time, “her fixation with making and maintaining money grew and grew, to the point where she wouldn’t seek medical attention for herself or her children because of the cost, and they all lived in cheap housing and moved frequently.”

The New England Historical Society explains some her habits included “eating a lunch of oatmeal heated on a radiator. She moved frequently among cheap apartments in Brooklyn, N.Y., and Hoboken, N.J., to avoid establishing a residence and paying taxes.

According to the most damning story about Hetty Green, she wouldn’t pay for a good doctor when her son injured his leg in a sledding accident. Doctors later amputated his leg.”

The Mother of Value Investing

Hetty was short for Henrietta and Henrietta Green may have been the first women on Wall Street. And, to understand how unusual it was for a woman to do things like this, consider the fact that she died before women were allowed to vote nationally, a right they won in 1920.

Like Warren Buffett, her business career began when she was young. Her family owned a large whaling fleet in New England when whale oil was used for light. She began reading financial news to her father when she was 6 and was responsible for maintaining the financial statements for the family business by the time she was 13.

According to the Telegraph, “For her 20th birthday her father endowed her with a wardrobe full of the finest dresses of the season worth $1,200 in order to attract a wealthy suitor. But her reaction to the gift demonstrated her priorities: she sold the clothes and invested the proceeds in government bonds.”

She inherited an estimated $7 million when her father died in 1865 and became a full time investor.

Her secret to success was simple, although she insisted there was no secret, “There is no great secret in fortune-making … All you do is buy cheap and sell dear, act with thrift and shrewdness and be persistent,” she said.

Be Greedy When Others Are Fearful

Like Buffett, Green was ready for crises. Panics were a regular occurrence during her investment career. In the financial panics of 1873, 1893 and 1907 she had cash available to buy bonds, shares of railroad companies and real estate at deep discounts.

The Panic of 1907 is long forgotten but was steep. The Dow Jones Industrial Average lost almost 49% in the bear market.

According to the Federal Reserve,“The Panic of 1907 was the first worldwide financial crisis of the twentieth century. It transformed a recession into a contraction surpassed in severity only by the Great Depression.

The panic’s impact is still felt today because it spurred the monetary reform movement that led to the establishment of the Federal Reserve System. [Economists have] argued that the experience of the Panic of 1907 changed how New York Clearing House bankers perceived the value of a central bank because the panic took hold mainly among trust companies, institutions outside their membership.”

While the panic ruined many on Wall Street, Green’s cash provided an opportunity for her to grow her fortune.

She would later say, “When the crash came, I had the money, and I was one of the very few who really had it. The others had their securities and their values. I had the cash and they had to come to me in droves.” 

In 1907 she bailed out the City of New York when the banks were unable to. She was part of a group that JP Morgan famously put together to limit the impact of that crisis. She loaned $1.1 million and took short-term municipal bonds for collateral. The bonds paid a relatively high interest rate of 5.5%.

In this way, her actions were again similar to Buffett’s. The Oracle of Omaha provided billions to Goldman Sachs and General Electric during the financial crisis and enjoyed an above market interest rate of 10% on his investments, 100 years after Hetty Green did the same thing.

Green was truly a value investor. She did not follow a buy and hold approach, preferring to move on to better opportunities when they became available “I never buy anything just to hold it. There is a price on everything I have,” she said. “When that price is offered, I sell.”

Although Green seemed to have traded in any financial instrument that offered value, she seemed to favor hard assets. She invested primarily in the shares of rail roads, which were the largest sector of the stock market at that time, rail road bonds, real estate and mortgages.

In the late 1800s, rail roads offered an investment in their operations and in land. The government gave the companies thousands of acres of land to build on and included mineral rights in the land grants. An example of the breadth of these grants is below.

Source: Wikimedia

At the time of her death she was reported to have owned 6,000 properties in 48 states. Along with railways, hotels and office buildings she also owned cemeteries and held mortgages on almost 600 churches.

Her approach to land was to look for fast growing cities and buy land on the outskirts of the booming city. In other words, she waited for the city to come to her and was rewarded for her foresight when it did.

Despite her great wealth, Green is largely unknown today. While other rich families created foundations or focused their philanthropy, Green’s wealth passed to her children and was eventually divided among 64 colleges, churches, hospitals, and other charities.

But, her investment lessons live on. Buy cheap assets. Sell when they are overvalued. And, have cash reserves at the ready when opportunities become available.

Learn about Good investment ideas / opportunities for small investors, Goldman Sachs is a Wall Street legend. The company has been completing large deals for about 149 years, since the firm was founded by Marcus Goldman and Samuel Sachs in 1869. Since then, the firm has grown and generated more than $42 billion in revenue.

In the financial crisis, under pressure because of derivatives trades that suffered large losses, Goldman became a traditional bank holding company, ending the business model of an independent securities firm. This move made the company eligible for assistance from the government under the Troubled Asset Relief Program, or TARP, as it was known.

Goldman would eventually receive a $10 billion bailout in the financial crisis. But, since then the company has moved into traditional banking and it is now the fifth largest bank in the US with assets of about $930 billion.

Much of the bank’s operations are conducted through the division known as Marcus by Goldman Sachs. Marcus personal loans and online savings accounts help people find ways to be smarter with their money.

The company explained the mission of Marcus:

We listened to 10,000 people tell us about their experiences with debt. When people tried paying off their expenses using credit cards, they often got stuck in an endless cycle of high interest rates and fees. Debt happens—and it can happen to anyone. A loan from Marcus can help you better manage it.

We understand that people want to make the most out of their money. It’s why we’ve designed our savings products to truly be on our customers’ side. Whether your savings goals are Short term investment tips or long-term, we have a savings product that fits your need.

Growth for Goldman and an Investment Opportunity for Individuals

Marcus has grown rapidly. In a recent presentation to analysts, the company’s CEO Lloyd Blankfein explained that deposits have increased by 90% since April 2016.

Source: Goldman Sachs

Those deposits allow the company to fund loans and for now, Marcus has more than enough assets to cover billions in additional loans.

Loans are priced with interest rates between about 7% and 24%. The precise rate depends on a variety of factors including the applicant’s credit score and the length of the loan. But, according to Bankrate.com, an independent source of information, these rates are competitive with other lenders.

What could be most appealing about Marcus is the company’s potential as a source of passive income for smaller investors. Marcus pays above average rates of interest on its deposits.

Passive Income for Savers Remains Low

The Federal Reserve began raising short term interest rates in 2015.

Source: Federal Reserve

Since then, the Fed has boosted the target for the Federal Funds rate from a range of 0% to 0.25% to the current level of 1.25% to 1.50%.

The federal funds rate is the interest rate at which banks lend to each other overnight. Technically, the rate that the borrowing institution pays to the lending institution is determined between the two banks. The weighted average rate for all of these types of negotiations is called the effective federal funds rate.

This means that the effective federal funds rate is essentially determined by the market. However, it is influenced by the Federal Reserve through open market operations to reach the federal funds rate target.

The Fed notes that, “The federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence.”

Analysts expect the Fed to push the rate higher, towards at least 2% by the end of the year. Despite the Fed’s actions, individuals are still not benefiting from higher rates. Fed data shows that banks are paying depositors an average of just 0.07% on their money.

Source: Federal Reserve

The Federal Deposit Insurance Corporation, or FDIC, confirms that individuals are securing low rates even when they are willing to commit to a five year lockup of their money in a certificate of deposit (CD).

Source: FDIC

Marcus Offers More Than 1%

Goldman’s bank is offering savers a substantial premium to the average with a savings account that pays 1.5%. In what many analysts find surprising, the accounts are targeting small investors. Goldman has traditionally focused on high net worth clients with assets of millions of dollars.

Marcus allows individuals to earn above average interest rates with a minimum deposit of just $1. There are limitations on this account that restrict the number of withdrawals per month to just six transactions.

This account would not be suitable as a substitute for a checking account but it could be useful as a source of passive income for investors looking to hold cash as an emergency reserve.

Marcus also offers CDs. Interest rates on CDs that mature in six months pay an interest rate of 0.6% while a 5 year CD pays investors 2.5%. A 3 year certificate offers investors 2%.

These are not high levels of passive income, but Marcus marks an aggressive entry into consumer finance by Goldman. The company obviously sees an opportunity to enjoy a low cost source of capital and has already obtained more than $17 billion in deposits.

Overall, the benefits to Goldman are obvious. The company is able to increase income by borrowing at low rates and lending the money at substantially higher rates. This is a proven formula for profits by banks.

This money can be used by any division of the company. Goldman’s investment bankers now have access to cheap capital for deals and its traders have access to the capital to generate profits for the parent company.

There are also obvious benefits for individual investors. The high level of passive income is important to consider. Access to Goldman is also a possible consideration. Creating an account, for as little as $1, could make the individual a client of one of the world’s largest investment banks.

For now, there is no link between the company’s research with the consumer arm of the business but if that were to change, Marcus could become a gateway to valuable information for individual investors.

It happened in 2008 with big banks and many large companies. The stock price fell, and the dividend yield soared. Learn about Finding best safe dividend high paying stocks. Income investors saw high yields and bought the stocks, only to see the dividend get cut or eliminated.

But, that’s not the only time that happened. Investors in General Electric saw their dividends cut just last year. In November, General Electric cut its dividend for only the second time since the 1930s.

To compound the paid of a dividend cut, the stock price of the company often falls sharply on the news that management has decided to reduce the payout. In the case of GE, the stock price fell more than 10% in the week after the cut was announced.

Investing in stocks carries risks and the risks can never be completely eliminated. But, prudent investors can reduce risks. If you hold dividend paying stocks, or are considering buying one, it could be worth checking just how safe that dividend is.

A Dividend Safety Checkup

While this process will not eliminate risks, it can help you. Every quarter for stocks you own, or before making a new purchase, if income is a priority, consider reviewing some more obscure fundamental indicators.

First, check for how well the dividend is covered. Coverage means how much of a company’s earnings or cash flow are dedicated to dividends. A high ratio is often unsustainable and a sign that a cut is near.

The dividend payout ratio is found by dividing the dividend per share by a company’s reported earnings per share. A ratio above 50% could be a warning sign that the company is dedicating too much of its earnings to dividends.

In addition to paying for dividends, earnings are also used by companies to reinvest in their business or to fund acquisitions that help them grow.

While a ratio of 50% is a warnings sign, a ratio above 100% is an outright red flag that cannot be ignored. If the dividend exceeds earnings, especially for a few years in a row, the situation is unsustainable, and the payout is likely to be cut.

The dividend coverage ratio is found by dividing the company’s reported cash flow per share by the amount of the dividend per share. Conservative investors would want to see a coverage ratio of at least 120% to demonstrate the dividend is safe.

Check for Growth

Many companies increase their dividend every year. This is positive signal for investors since an increased dividend shows that management is confident the company is positioned for growth.

However, investors tend to expect predictability from a company. They could become concerned if a company fails to increase its dividend for a year or if the pace of the increases slows compared to the recent past.

To check for the sustainability of dividend increases, look at the dividend growth rate over the past five years. Compare that to the earnings growth rate over the same time. Obviously, earnings should be faster than dividends.

It can be helpful to compare the ratio of dividend growth to earnings growth for a company to its peer group. This will take a little extra work but a company with a ratio that is below its industry average could be set up for a future dividend cut in the next economic downturn.

Avoid High Levels of Debt

Debt can be especially problematic when interest rates are rising as they are now. Companies often refinance debt as it comes due or borrow at variable rates. One of those options can prove to be expensive in a rising rate environment. A detailed review of debt can require extensive effort but income investors can focus on just a few warning signs.

One is the debt to equity ratio. The amount of total debt a company has can be found on its balance sheet. Its equity is also reported on the balance sheet. Here, again, a comparison to the industry average will be helpful because debt loads vary by industry.

Debt to equity shows a company’s solvency. That is important to consider but liquidity is also important to consider when evaluating the safety of a company. Solvency focuses on the company’s ability to prosper in the long run. Liquidity measures its ability to survive in the short run.

It is possible for a company to be solvent but illiquid. Some large financial firms that went bankrupt in 2008 claim they were solvent but simply needed a liquidity injection to survive.

To gauge solvency, focus on short term debt. The short-term debt coverage ratio is found by dividing income from operations by current liabilities. Current liabilities will be found on the balance sheet. Conservative investors should limit buys to companies with a ratio above 2.

Another liquidity indicator is the quick ratio, or the ratio of cash and cash equivalents (excluding inventory) divided by current liabilities which are debts that must be paid over the next twelve months. A quick ratio of 1.0 is a sign of short run financial strength.

Putting It All Together

No one indicator can deliver all of the information an investor needs. That’s to be expected because successful investing is hard work. Combining indicators will show an investor more information. The indicators defined above look at a company’s income statement, balance sheet and statement of cash flows.

Each financial statement includes important information and is worth reviewing for investors who are seeking to minimize risks. If an investor is seeking to maximize income, safety needs to be the first priority and income traps must be avoided. These traps are easy to spot when considering whether to buy or sell.

To avoid income traps, simply avoid excessively high dividend yields. That itself could be a sign of trouble. In 2009, GE offered a yield of 23%.

It is obvious in hindsight that was not sustainable. But, in real time, the question to ask is whether or not an investment opportunity looks too good to be true. In this case, 23% a year from a leading company was too good to be true.

That question, combined with the checklist above, should help you avoid dividend cutters and avoid the pain of lower income and a falling stock price.