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.

Speak Your Mind