The civic virtue that Benjamin Franklin brought to his entrepreneurship and invention has overshadowed the remarkable wisdom of this investment sage. Perhaps because it is so simple that it seems unremarkable, this wisdom goes virtually unheralded among his other grand accomplishments. With his simple precepts, he would have realized that in this new age of investing, we have ignored the crucial lesson: Simplicity trumps complexity. All of that shuffling of paper shares of stock that we read about in the press—in the United States, nearly 4 billion shares of stock are traded each day, some 1 trillion shares a year—is engaged in by speculators attempting to garner competitive advantage, even as it inevitably slashes the returns earned by investors as a community.
While investing in stocks and bonds as we know it today hardly existed in Franklin's era, his sensible advice about savings sets a high standard for today's investment books, most of which provide complex programs that promise to "beat the market" yet inevitably fail to deliver on that promise. In my own books, however, I did my best to focus on the simple principles that define investment success. These investment ideas, it turns out, are eerily similar to Franklin's ideas about savings, set forth largely in his classic, "The Way to Wealth," first published in 1757. A comparison of the two philosophies suggests that wisdom about sound financial principles goes back at least as far as Franklin's homespun formulations about savings, echoed in Vanguard's founding investment precepts.
Perhaps the best place to begin is with Franklin's acute understanding of the miracle of compound interest. According to Philadelphia Inquirer journalist Clark DeLeon, "In 1785, a French mathematician wrote a parody of Franklin's Poor Richard called Fortunate Richard, in which he mocked the (to him) unbearable spirit of American optimism represented by Franklin. The Frenchman wrote a piece about Fortunate Richard leaving a small sum of money in his will to be used only after it had collected interest for 500 years."
"Franklin," DeLeon continued, "wrote back to the Frenchman, thanking him for a great idea and telling him that he had decided to leave a bequest to his native Boston and his adopted Philadelphia of 1,000 pounds to each on the condition that it be placed in a fund that would gather interest over a period of 200 years." Franklin assumed that the funds would accrue interest at the annual rate of 5 percent, bringing each original 1,000 pounds to 131,000 pounds ($232,000 at today's exchange rate) after 100 years, and 17,300,000 pounds ($31,000,000) in 200 years.