“I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett
The wisdom of Warren Buffett reflects a value-based philosophy about investing that says investors are buying shares in a business, and encourages strategic thinking about investment time horizon. Before placing a buy order for a stock, a great question we can ask is whether we would still be comfortable making the investment if we couldn’t sell it for many years?
A “buy-and-hold” approach may call for a time horizon that spans a long period of time — maybe even lasting for a five year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Cadence Design Systems Inc (NASD: CDNS) back in 2014. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 10/23/2014 |
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| End date: | 10/22/2019 | ||||
| Start price/share: | $16.72 | ||||
| End price/share: | $62.94 | ||||
| Starting shares: | 598.09 | ||||
| Ending shares: | 598.09 | ||||
| Dividends reinvested/share: | $0.00 | ||||
| Total return: | 276.44% | ||||
| Average annual return: | 30.36% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $37,646.25 | ||||
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 30.36%. This would have turned a $10K investment made 5 years ago into $37,646.25 today (as of 10/22/2019). On a total return basis, that’s a result of 276.44% (something to think about: how might CDNS shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
More investment wisdom to ponder:
“Sometimes buying early on the way down looks like being wrong, but it isn’t.” — Seth Klarman
