“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 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 decade-long holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of Emerson Electric Co. (NYSE: EMR) back in 2009. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 11/16/2009 |
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| End date: | 11/13/2019 | ||||
| Start price/share: | $42.40 | ||||
| End price/share: | $73.58 | ||||
| Starting shares: | 235.85 | ||||
| Ending shares: | 317.14 | ||||
| Dividends reinvested/share: | $16.94 | ||||
| Total return: | 133.36% | ||||
| Average annual return: | 8.85% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,344.44 | ||||
The above analysis shows the decade-long investment result worked out well, with an annualized rate of return of 8.85%. This would have turned a $10K investment made 10 years ago into $23,344.44 today (as of 11/13/2019). On a total return basis, that’s a result of 133.36% (something to think about: how might EMR shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Emerson Electric Co. paid investors a total of $16.94/share in dividends over the 10 holding period, marking a second component of the total return beyond share price change alone. Much like watering a tree, reinvesting dividends can help an investment to grow over time — for the above calculations we assume dividend reinvestment (and for this exercise the closing price on ex-date is used for the reinvestment of a given dividend).
Based upon the most recent annualized dividend rate of 2/share, we calculate that EMR has a current yield of approximately 2.72%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 2 against the original $42.40/share purchase price. This works out to a yield on cost of 6.42%.
One more investment quote to leave you with:
“The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.” — Bruce Kovner
