This article is the fourth of six pieces, published between October 2 and 7, in support of the Bermuda Stock Exchange World Investor Week Quiz Challenge. Each article has a question embedded. Find the question and send your answer to wiwqc@bsx.com. Those with six correct answers will be entered into a draw to win a grand prize of a $2,500 Bermuda securities portfolio.

How was a modestly paid gas station attendant and janitor able to amass a fortune of nearly $8 million?

The answer involves patient investing and the power of compounding.

When Ronald Read, a lifelong resident of Windham County, Vermont, died at the age of 92 in 2015, those who had known him were astonished to hear of his near $8 million estate. His bequest was to leave most of it to the Brattleboro Memorial Hospital and Brooks Memorial ­Library.

Mr Read’s story is a wonderful illustration of how even someone of modest means can amass a fortune through smart, patient investing. He started early and accumulated steadily. Time was his friend.

According to Barry Ritholtz in The Washington Post, Mr Read typically bought shares of companies that paid out regular dividends. He owned railroads, utility companies, banks, healthcare, telecom and consumer products. Those dividend cheques were then reinvested back into more shares of the same companies.

“The reinvested dividends allowed him to keep making regular purchases over time,” Mr Ritholtz wrote. “Mr Read was not an active trader — he was an active buyer. There is a very big difference.

“He owned 95 stocks, with many blue chips among them: Procter & Gamble, JPMorgan Chase, General Electric, Johnson & Johnson, Dow Chemical. He also owned consumer names such as JM Smucker and CVS Health. Like Warren Buffett, he avoided technology stocks and the hot stocks of the moment.

“He did not own a concentrated portfolio; instead, he had a diversified portfolio with lots of companies in many sectors. This diversification allowed him to spread the risk broadly. Even owning failures such as Lehman Brothers had only a modest impact on his returns.”

So many lessons for investors: start early, reinvest dividends, diversify, be patient and keep investing consistently regardless of market conditions.

Mr Read’s longevity certainly helped him to show the remarkable impact of compounding, which occurs when an investor earns not only interest, or growth, but also interest on interest.

Over time this can produce impressive results. For example, using an online compound interest calculator, you can see how investing $100 per month at a 7 per cent annualised rate of return — compounded annually — would grow.

After ten years, having put in $12,000, you would have an investment worth $16,580.

After 20 years, having put in a total of $24,000, your investment would be worth $49,195.

After 30 years, having put in $36,000, you would have $113,353.

After 40 years, having put in $48,000, you would have $239,562.

Not bad for a $100-a-month investment.

As time goes by, the benefits of compound interest accelerate. So at 20 years, you would have just about double the money you invested. But at 40 years you have five times your investment.

Of course, in reality stocks don’t grow at a steady 7 per cent per year. In 2008, the year of the global financial crisis, the S&P 500 index plunged 37 per cent. In the eight complete calendar years since then, the index has consistently finished in the green achieving average annualised growth of almost 15 per cent.

Name the man claimed to have said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Continuing to consistently invest through down markets allows investors to pick up securities at relatively low prices, driving gains later on. Most investment professionals will tell you that trying to time the market is a mug’s game.

Dividend reinvestment can reinforce compound interest gains, especially when applied to stocks whose dividend payouts grow over time.

Many companies listed on the BSX pay out dividends. BF&M, for example, whose share price yesterday closed at $19.50, pays out a dividend of 22 cents per quarter, representing an annualised yield of about 4.5 per cent.

If the price of the stock and the dividend remained constant, then after ten years a $1,950 investment in 100 BF&M shares would grow into a $3,050 holding of 156 shares — a return of 56.4 per cent or an annual gain of 5.64 per cent.

After 20 years, you would have nearly 245 shares worth $4,772.19, for an annualised gain of 7.24 per cent.

Without reinvesting the dividends, you would have the 100 shares you originally invested in, plus $1,760 in cash from the quarterly payouts over the years — a total value of $3,710 — an annualised gain of 4.5 per cent, a marked underperformance against the dividend reinvestment strategy.

This is an unrealistic scenario, of course, as in reality, one would hope that BF&M’s share price and dividend payout would increase over time, creating more attractive returns.

Mr Read was reportedly an extremely frugal man, who never saw the need to dip into his investments. While his example is one that few people of modest means could mimic, it is a real-life example of what good investing habits can achieve.

For more information about the BSX WIW Quiz Challenge, see the PDF attached to this story online at www.royalgazette.com or go to www.bsx.com