“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 Ulta Beauty Inc (NASD: ULTA) 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: | 02/17/2016 |
|
|||
| End date: | 02/16/2021 | ||||
| Start price/share: | $158.92 | ||||
| End price/share: | $327.77 | ||||
| Starting shares: | 62.92 | ||||
| Ending shares: | 62.92 | ||||
| Dividends reinvested/share: | $0.00 | ||||
| Total return: | 106.25% | ||||
| Average annual return: | 15.57% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $20,625.18 | ||||
As we can see, the five year investment result worked out exceptionally well, with an annualized rate of return of 15.57%. This would have turned a $10K investment made 5 years ago into $20,625.18 today (as of 02/16/2021). On a total return basis, that’s a result of 106.25% (something to think about: how might ULTA shares perform over the next 5 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
One more investment quote to leave you with:
“I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.” — Peter Lynch
