“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— 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 twenty year holding period. Suppose such a “buy-and-hold” investor had looked into buying shares of eBay Inc. (NASD: EBAY) back in 2000. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 11/10/2000 |
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| End date: | 11/09/2020 | ||||
| Start price/share: | $4.85 | ||||
| End price/share: | $48.32 | ||||
| Starting shares: | 2,061.86 | ||||
| Ending shares: | 2,116.24 | ||||
| Dividends reinvested/share: | $1.04 | ||||
| Total return: | 922.57% | ||||
| Average annual return: | 12.32% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $102,257.42 | ||||
The above analysis shows the twenty year investment result worked out quite well, with an annualized rate of return of 12.32%. This would have turned a $10K investment made 20 years ago into $102,257.42 today (as of 11/09/2020). On a total return basis, that’s a result of 922.57% (something to think about: how might EBAY shares perform over the next 20 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that eBay Inc. paid investors a total of $1.04/share in dividends over the 20 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 .64/share, we calculate that EBAY has a current yield of approximately 1.32%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .64 against the original $4.85/share purchase price. This works out to a yield on cost of 27.22%.
Another great investment quote to think about:
“You can’t be a good value investor without being an independent thinker; you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value you do.” — Joel Greenblatt
