Buy everything and hold it forever – Jack Bogle
I like this tidbit from the legendary Jack Bogle where he talks about the blessing of low prices (market corrections):
… We all know everyone and their mother is always hoping for their stocks to go up today, tomorrow and the day after until eternity. I never really understood that sentiment because it means that starting today one would never again see such a good buying opportunity as yesterday. As long as I have a meaningful income stream I would like to buy stuff as cheap as possible for a long time…
But it is very human to not have the discipline for delayed gratification since everyone wants to get rich tomorrow. Even a year often feels like an eternity when “dabbling” in the market…
Just consider what long term impact it would have if one were able to invest half of ones salary every month for the coming 12 month period before any of the stocks moved higher versus investing that amount in a steadily rising market over the same period. Lets say every buy was 15% higher on average in this example. In other words a stock valued at $1/share would have been bought at $1.15 instead. If the stock goes to $2 then the profit is 73.9%. If the stock hadn’t moved for a year and one could buy all shares at $1 it would result in a 100% return when the stock hit $2/share…
One year of “waiting” would produce 26.4% higher return on ones investment…
That is a more than worth the “cost of boredom” in terms of not seeing ones stock move higher over a 12 month period…
You REAP what you SOW…
When fundamentals haven’t changed and the price of the business is unchanged or even lower that is in fact fertile soil for future over-performance.
In short:
- If you are an investor and are complaining about price staying cheap or getting cheaper over a given period of time then you don’t know what you are doing because an investor would see that as a gift.
- If you are a trader then price/value is not even a factor.
An even easier representation of this is if you play with the thought that Company X will dividend out $1 per share in two years and then increase said dividend stream for the same amount every two years after that…
Would you want to pay $3, $6, $10 or $20 per share for that cash flow?…
Is it rational to be mad if said stock went from lets say $10/share to $6/share if nothing has happened that would change the coming dividend stream?…
Is it rational to hope for the share price to appreciate?…
If you pay $10/share you will get a 10%, and rising, dividend yield in two years. If you pay $6/share you get a 16.7%, and rising, dividend yield…
In the long term this difference will be enormous in terms of wealth generation:
If we disregard the increase in dividends and only assume a fixed yield on invested capital and re-investment of dividends with an unchanged stock price, a $10,000 investment with an annual compound rate of 10% becomes $62,275 after 20 years.
If the annual compounding rate is instead 16.7% then the final amount will instead be $219,491 after 20 years.
… Quite a difference at the end of the day from “only” a 6.7% difference in annual compound rate.
Best regards,
The Hedgeless Horseman
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