Warren Buffett is perhaps the greatest investor of all time, and he has a simple solution that could help an individual turn $40 into $10 million. A few years ago, Berkshire Hathaway CEO and Chairman Warren Buffett spoke about one of his favorite companies, fizzy drinks maker Coca-Cola, and how after dividends, stock splits, and patient reinvestment, someone who bought just US$40 worth of the company’s shares when it went public in 1919 would now have more than US$5 million. Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer,…
Warren Buffett is perhaps the greatest investor of all time, and he has a simple solution that could help an individual turn $40 into $10 million.
A few years ago, Berkshire Hathaway CEO and Chairman Warren Buffett spoke about one of his favorite companies, fizzy drinks maker Coca-Cola, and how after dividends, stock splits, and patient reinvestment, someone who bought just US$40 worth of the company’s shares when it went public in 1919 would now have more than US$5 million.
Yet in April 2012, when the board of directors proposed a stock split of the beloved soft-drink manufacturer, that figure was updated and the company noted that original US$40 would now be worth some US$9.8 million. A little back-of-the-envelope math of the total return of Coke since May 2012 would mean that US$9.8 million is now worth about US$10.8 million.
The power of patience
Of course, US$40 in 1919 is very different from US$40 today. However, even after factoring for inflation, it turns out to be US$540 in today’s money. Put differently, would you rather have a subsidised smartphone or almost $11 million?
But the thing is, it isn’t even as though an investment in Coca-Cola was a no-brainer at that point, or in the near century since then. Sugar prices were rising. World War I had just ended a year prior. The Great Depression happened a few years later. World War II resulted in sugar rationing. And there have been countless other things over the past 100 years that would cause someone to question whether their money should be in stocks, much less one of a consumer-goods company like Coca-Cola.
The dangers of timing
Yet as Buffett has noted continually, it’s terribly dangerous to attempt to time the market:
“With a wonderful business, you can figure out what will happen; you can’t figure out when it will happen. You don’t want to focus on when, you want to focus on what. If you’re right about what, you don’t have to worry about when.”
So often investors are told they must attempt to time the market, and begin investing when the market is on the rise, and sell when the market is falling.
This type of technical analysis of watching stock movements and buying based on how the prices fluctuate over 200-day moving averages or other seemingly arbitrary fluctuations often receives a lot of media attention, but it has been proved to simply be no better than random chance.
To bring home the point of the dangers of timing the market for the broader market in general, an investor who missed the 10 best days in the S&P 500 (a widely-followed American stock market index) in the 20 year period ended 31 Dec 2011 would have seen a drastic fall in returns from 7.8% per year to 4.14% per year.
Ditto that for the benchmark index in Singapore, the Straits Times Index (SGX: ^STI). The STI had annualised returns of 3.48% from 1 May 1992 to 20 Dec 2013. Take the 10 best days away, and the index’s annual returns becomes 0.12% a year, or basically nothing.
With such statistics, it seems a lot safer to stay invested for the long-term as compared to trying to time the market.
Investing for the long term
Individuals need to see that investing is not like placing a wager on the tables at the casino in Marina Bay Sands, but instead it’s buying a tangible piece of a business. Even an investment into index funds like the SPDR Straits Times Index ETF (SGX: ES3) or Nikko AM Singapore STI ETF (SGX: G3B) gives its investors ownership of real, living, breathing businesses; in this case, the 30 companies that make up the Straits Times Index.
It is absolutely important to understand the relative price you are paying for that business (or group of businesses in the case of an index fund), but what isn’t important is attempting to understand whether you’re buying in at the “right time,” as that is so often just an arbitrary imagination.
In Buffett’s own words, “if you’re right about the business, you’ll make a lot of money,” so don’t bother about attempting to buy stocks based on how their stock charts have looked over the past 200 days. Instead always remember that “it’s far better to buy a wonderful company at a fair price.”
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Patrick Morris and first published on fool.com. It has been edited for fool.sg.