“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 Vertex Pharmaceuticals, Inc. (NASD: VRTX) back in 2016. Let’s take a look at how such an investment would have worked out for that buy-and-hold investor:
| Start date: | 01/13/2016 |
|
|||
| End date: | 01/12/2021 | ||||
| Start price/share: | $96.37 | ||||
| End price/share: | $229.38 | ||||
| Starting shares: | 103.77 | ||||
| Ending shares: | 103.77 | ||||
| Dividends reinvested/share: | $0.00 | ||||
| Total return: | 138.02% | ||||
| Average annual return: | 18.93% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $23,804.74 | ||||
The above analysis shows the five year investment result worked out exceptionally well, with an annualized rate of return of 18.93%. This would have turned a $10K investment made 5 years ago into $23,804.74 today (as of 01/12/2021). On a total return basis, that’s a result of 138.02% (something to think about: how might VRTX shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
One more piece of investment wisdom to leave you with:
“There’s a virtuous cycle when people have to defend challenges to their ideas. Any gaps in thinking or analysis become clear pretty quickly when smart people ask good, logical questions.” — Joel Greenblatt
