By WallStreetDaily.com

Editor’s note: We’re breaking from our regular Wall Street Daily broadcast today to bring you the remarkable story of a simple man from humble beginnings with an incredible investment story. And show you how you can replicate his success.

Dear Reader,

Rankin Hodgins started investing in the stock market in 1978.

He began with $200,000. He borrowed another $18,000 from the bank.

By 2012, without ever adding to his account, Rankin’s account was worth $6.6 million. That’s an 11.8% compounded return.

Rankin had modest beginnings. He was born in 1921 on a farm in Saskatchewan, Canada. He eventually went on to work in insurance and never made more than $65,000 per year.

So how did he amass such a fortune?

His son, Douglas, answers this question in a self-published book, Millionaire Down the Road: Secrets of the Ultimate Tax-Efficient Investor (2013).

A Simple System… and a Magic Ingredient

Rankin was an ordinary, hardworking fellow. He wasn’t a professional investor. But he made a few crucial moves just right.

And he did one big thing that was controversial. I’ll get to that below, though I’ve hinted at it already.

First, he had a very simple way of picking stocks.

He looked for companies that were consistently profitable and growing all the time. He liked dividend payers – especially for a particular reason that I’ll get to in a minute.

He liked Canadian banks, for example, and had a large portion of his portfolio devoted to those stocks.

He then left his investments alone and let a silent yet powerful force go to work: compounding.

If you want to make really big gains, you have to understand how compound interest works.

If you earn 20% per year, then $1 becomes:

• $2.50 after 5 years.
• $6.20 after 10 years.
• $38 after 20 years.
• $95 after 25 years.

Note how the gains are back-end loaded. That’s because you earn “interest on the interest” of your principal investment as time passes.

After 10 years, you’ve made six times your money. But wait another 10 years and you’ve made 38 times your money.

Compound interest is truly a force of nature. Doug quotes a maxim attributed to Einstein: “He who understands it earns it… and he who doesn’t pays it.”

To leave your stocks alone, though, you need to tolerate all kinds of economic tides.

Surviving the Highs and Lows

Rankin’s portfolio began when 6% interest rates were standard. Just four years later, rates were more than 20%. But by 2012, they had fallen so low they’d almost disappeared.

There were also the gut-wrenching ups and downs of the stock market itself.

Rankin lost 20% of his portfolio in the 1987 crash. He lost $750,000 in 2001 as the tech bubble deflated. And he was down millions of dollars in the financial crisis of 2008–09.

But he stood pat. And his stocks eventually recovered.

As his son Doug notes: “How well we manage our emotional response in negative market conditions will go a long way in determining how successful we are as stock market investors, especially as leveraged investors.”

Leveraged what?

Here we get to Rankin’s big controversial secret: He borrowed money to invest.

Sometimes, he borrowed a lot of money. He was leveraged generally from 30–50%.

Consider an example:

Let’s say you have $100,000 to invest but borrowed half of it. That’s 50% leverage.

Now, some very interesting things happen when you have 50% leverage. It magnifies your gains. But it also magnifies your losses.

A 10% gain on that $100,000 means you’ve made $10,000 on your $50,000. The leverage turns a 10% gain into a 20% gain for you.

But note what happens if you have a 10% decline. Then your 10% loss is a 20% loss on your capital.

Of course, this is before interest expense. Which is one reason why Rankin likes those dividend payers.

He used the dividends to pay the interest on his loans.

To Leverage or Not to Leverage?

I can’t recommend Rankin’s use of leverage to you. If you’re not careful, you could be wiped out. Investing in stocks is tricky enough without having to worry about that.

Then again, if you have a mortgage and a stock portfolio, you’re already effectively leveraged.

Doug goes to some lengths to defend the use of debt. There is, he says, good debt and problematic debt. An example of the latter would be credit card debt, which carries high interest rates.

“Good debt, on the other hand,” Doug writes, “is used to purchase long-term assets – things like a family home or investments that compound to create wealth. As with many things in life, when it comes to debt, moderation is key.”

He also recognizes this strategy isn’t for everybody. It takes a certain calm to stomach the downturns.

The debt has another advantage, too. Rankin could deduct the interest expense from his taxes. And since he held on to his stocks, he deferred paying capital gains taxes. This is a very tax-efficient way to invest. It’s like having a boat with minimal drag, cutting through the water.

Over time, the advantages of Rankin’s approach are remarkable. See this snapshot comparison of his portfolio from 1978 (when he began) to 2012 (where the book ends):

Rankin’s Strategy Pays Him Back Many Times Over

He had over $1 million in deferred taxes. And he had over $5 million in accumulated profits after taxes. Starting with just $200,000. That’s incredible.

I love stories like this, because they show how everyday people can make a lot of money in stocks by doing some relatively ordinary things. Simple stock selection mixed with patience goes a long way.

Rankin added a kicker – he added debt.

In finance, there’s a phrase called “other people’s money,” or OPM.

It’s a well-known fact that many rich people use OPM to build their wealth. Warren Buffett is one of them, for example. I mean, what do you think all that insurance money was that he collected upfront and invested? It was OPM.

Debt is OPM.

And Rankin’s experience as an investor is a case study in why you might think about using some OPM yourself — if you aren’t using it already.

There’s a lot more in the book, which is a fun read and easy to understand. Check it out.

Sincerely,

Chris Mayer
Chief Investment Strategist, Bonner Private Portfolio

P.S. I’ve found a much safer way to use OPM than taking on debt – and starting today, I’m hosting a brand-new investment masterclass to show you what it is.

In a series of short training videos, I’ll teach you the breakthrough investment method that I use to find stocks with “Starbucks” or “Apple” potential… long before Wall Street has even heard of them.

And to prove to you how well it works, I’ll share six stocks from my watchlist with those who participate.

The masterclass starts today – Monday, September 19. To make sure you don’t miss a minute, click here.

It’s all FREE, too. So you’ve got nothing to lose – sign up today.

The post How to Become a Millionaire… Using Other People’s Money appeared first on Wall Street Daily.