An investment in time maximizes wealth

I was spending some time thinking about the reasons behind why some of my investments have been more successful than others. Much as I’d like to pin the reason on some superior stroke of wisdom or exceptional diligence on my part, the real reason for success in my view is I’ve made an investment in time and a conscious decision to just leave these investments alone.

 

What is an “investment in time”?

While I agree that an investment in time sounds like a rather bizzarre concept, in my mind its actually a proactive decision that I have made to let my investments sit , grow and compound. One could also look at this in a similar way to buy, hold and monitor. You do the hard work and due diligence up front in the investment selection process. After that, you let time and compounding do the rest. Who would have thought that doing nothing could lead to investment success?

Doing nothing generates some nice returns and big dividends!

If you’ve picked the right business and are happy to just let it ride then an investment in time will do a lot of the heavy lifting for you.

I have held a select few of my Australian stocks greater than 5 years. In this period of time, some of these stocks have more than doubled in price. In fact some stocks such as Commonwealth Bank are almost are on the verge of almost tripling since I acquired them.  Dividends have also more than doubled  since acquisition. My annual dividend from Commonwealth Bank stock is now close to $1700, up from approximately $800 when I first invested.

The bigger the investment in time the better

I have held Mastercard stock on and off since it had its initial public offering in 2006. While I didn’t get stock in the initial offering itself, I was able to pick up some stock shortly after listing at around $50/ share.  I flipped a substantial portion of my holding in Mastercard a few years later in 2008 for almost $200 a share. I was feeling pretty proud of myself for having realized close to a 4x return.

Of couse hindsight is a beautiful thing. Had I held on to all of my Mastercard stock, instead of the small parcel that i was left with, my $5k initial investment would have been worth more than $50k!. I got greedy and settled for 4x upside, when I should have let time do the work and just ride the returns.

My lesson from that misstep was that if you happen to be sitting on a phenonmenal business which is part of an entrenched duopoly with substantial barriers to entry and experiencing strong growth, its best just to make your investment and check in every few years to assess progress and any business changes. Over thinking investment returns can short change you out of a potential 10 bagger.

The same holds true for some of the classic dividend growth investment stocks that are part of investment portfolios.

Consider the example of McDonald’s stock. An investor who invested $10k in McDonald’s stock in 2003 would have almost $80k worth of stock today. Along the way, with the spikes in Mcdonald’s stock, an investor would have had numerous opportunities to cash out and reinvest those proceeds into the S&P 500.

However, looking back an investor who did so would probably be kicking themselves for the loss in potential returns that they would have experienced from following such a strategy. While a $10k investment in McDonald’s 10 years ago would have turned into almost $80k today, a similar $10k investment into the broader S&P 500 basket would be worth approximately $22k today.

To really see the effects of an investment in time, we should consider even longer time periods than just 10 years. Lets go back to 1970. Consider an investment of $10k in Coca Cola. That investment would be worth almost $1.67M. 10 bagger? 20 bagger? Think 167 bagger!!.

An investor who invested $10,000 in the S&P 500 basket of stocks in 1970 would have almost $190,000 today. Certainly not a bad return, but an investor in Coca Cola would have absolutely smashed that. Their investment would have a value almost 9 times what a comparable investment in the S&P would have delivered.

Having the courage to invest in time

While people talk about investing in time as an easy thing to do, its really not. Trust me. Over a 10 year period I’ve been scared  into selling my stocks a bunch or times and been too greedy to be unable to resist selling my stocks on other occasions.

Of course in both situations, that was exactly the wrong thing to be doing. It meant that i sold too low in the first instance, and short changed myself out of a huge multiple return in other instances.

So what can you do to make sure you don’t over think an investment and just leave it alone? In my opinion, if you pick the right type of businesses, you can have a great deal of confidence that they will continue to grow in value over time.

Strong sustainable business models:  Look for companies with rock solid business models and strong competitive positions, The credit card oligopolies of Visa and Mastercard are one such example. Huge barriers to entry, strong cash generation, high returns on invested capital.

Get paid to hold: To me this is actually the most important. Its why I love dividend stocks so much. Not only do they help encourage me not to sell to cheap. They also help me maximize my returns by helping to ensure that I don’t sell too early. Getting paid to keep holding helps gets my finger off the sell button.

While the rise of low cost brokerage has been a great thing for an individual investor in terms of cost effective trades, its frankly made it far too easy for us to sell. The process is so easy, you just log into your account and execute a trade. I don’t have to speak to anyone, the trade just goes through all for just a few dollars in commission. Low cost trading has helped turn us all into a generation of frequent traders than investors.

The one thing that really causes me to pause from hitting that sell button is the big fat dividend cheque that I’ll be getting from that company during the course of the year, and every year that follows. That helps me hold on to a stock and let time do its work.

My take:

Investing is far more psychological than it is intellectual. In many cases, we may have made the right investment decision only to be talked out it by friends, a spouse, or the talking heads on TV. With the ease of trading most of us are always looking to take action and to just do something. We can’t just sit still.

Sometimes that leads to us overthinking investing and trying to take quick, immediate actions. At times its best just to do your dilligence, make your investment and then sit around and let an investment in time do the rest. Getting paid to do this via dividend paying stocks can certainly help you let time do its thing.

Comments

  1. I vastly prefer investing for the long run over trying to enter and exit positions to make short term gains. Of course I still have to monitor my investments. But I think some people go neurotic trying to time the market and base their investing moves on that. The market will do whatever it’s going to do, I’m going to keep investing for the long haul.

    • Integrator says:

      I often chuckle at the sell in May and go and away philosophy, but whatever works for people I guess. I expect and hope to hold the majority of my positions in another 20+ years time, and I’m investing accordingly. Lot less stress of you ask me.

  2. I had exactly these same reservations when I sold my Apple stock last year. I bought around $300 and watched it climb to almost $600 before I made the call. It was tough to do, and it was especially tough even after the stock climbed higher.

    Although you have an excellent point about passing up a good thing, I do think it is also important to strongly consider the fact that none of us really knows what a stock is going to do. In your example with Mastercard, the stock could have fallen all the way back down to $50 for any number of reasons. When you have a 4 or 10 bagger, or even a 2 bagger, you should keep in perspective that you vastly exceeded the market average and consider taking your earnings based on whether or not the company / stock has anywhere left to go.

    • Integrator says:

      Fair point. My view is more pivoted toward how the business is performing. If the fundamentals are still good for a stock, and the investment thesis that i first had when I invested in the business still holds, then I am happy to remain invested, irrespective of price performance. My thinking over the long term is that price will reflect underlying performance, so I’m more interested in the business drivers of a company and how they are holding up. If all is good with the company, then I am happy to continue to hold even if there are ups and downs along the way.

      Whether you choose to sell is also partially dictated by what other opportunities you can identify for your money. In there is no better value to be had elsewhere, then that will more than likely mean I also continue to remain invested.

  3. Great post. I just did a post on the mistakes I’ve made for the past 6 months and I totally realized the need to define what kind of an investor you are. For me, value investing is the way I wanna head towards.

    • Integrator says:

      Thanks for swinging by Janice. Realizing what kind of an investor you are is an important step toward investing success because it helps you put together the basis for a plan. If you have realized you are a value investor, then it becomes much easier to let yourself buy well up front and then look to hold on rather than multiple entry and exit points to take profits

  4. Nathan says:

    there’s the rub…hindsight versus foresight. I’d like to see the analysis of the stocks who performed like KO for 60 years, then fell apart. There are a few notable examples, but they get recycled a lot in the arguments against too concentrated a portfolio. One is Eastman Kodak, who failed to respond adequately to technological changes and got swept away.
    KO seems like a no-brainer, unless the world switches off of cola drinks for some unforeseeable reason. If it produced cancer, we’d know now, I think. I maintain a much broader portfolio than most recommend due to my lack of confidence in my ability to spot a deteriorating situation fast enough to exit before being punished. Perhaps as I get more experience under my belt, I’ll feel good about resting my confidence in as little as 10 superior companies that have done as you described over decades. Nice thing is, with today’s tools, It’s easy to screen larger numbers of companies for changes in their business performance.

    • Integrator says:

      The longevity of track records of companies like Coca-Cola, McDonalds, Proctor & Gamble and Clorox gives me great confidence that they will continue to be around for many years . While past performance doesn’t equal future performance from an investing perspective, brand equity that has been built up over decades tends to endure for long periods of time.

      That’s why I am comfortable having a slightly more concentrated portfolio of higher quality names who have built up significant competitive positions. While they still need to be monitored periodically, that becomes a less frequent exercise compared to some of the higher performing, more flashy names.

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  1. [...] Financially Integrated – An investment in time maximizes wealth [...]

  2. [...] An Investment in Time Maximizes Wealth – Financially Integrated writes about the benefits of buying and holding long term.  Over time the stock market goes up.  I believe if we can pick out some of the greatest companies, companies we all know like Coca-Cola or Wal-Mart, and buy for the long term we will do quite alright. [...]

  3. […] who invested roughly the same amount into Mastercard as me shortly after the IPO. While I have made partial disposals of Mastercard along the way, my friend has faithfully held onto the Mastercard shares since shortly after the […]

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