“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
A key lesson we can learn from Warren Buffett, is about how to think about a potential stock investment in the context of a long-term time horizon. Every investor in a stock has a choice: bite our fingernails over the short-term ups and downs that are inevitable with the stock market, or, zero in on stocks we are comfortable to simply buy and hold for the long haul — maybe even a ten year holding period. Heck, investors can even choose to completely ignore the stock market’s short-run quotations and instead go into their initial investment planning to hold on for years and years regardless of the fluctuations in price that might occur next.
Today, we examine what would have happened over a ten year holding period, had you decided back in 2013 to buy shares of Electronic Arts, Inc. (NASD: EA) and simply hold through to today.
|Average annual return:||16.75%|
As shown above, the ten year investment result worked out exceptionally well, with an annualized rate of return of 16.75%. This would have turned a $10K investment made 10 years ago into $47,070.97 today (as of 08/14/2023). On a total return basis, that’s a result of 370.74% (something to think about: how might EA shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Many investors out there refuse to own any stock that lacks a dividend; in the case of Electronic Arts, Inc., investors have received $1.97/share in dividends these past 10 years examined in the exercise above. This means total return was driven not just by share price, but also by the dividends received (and what the investor did with those dividends). For this exercise, what we’ve done with the dividends is to assume they are reinvestted — i.e. used to purchase additional shares (the calculations use closing price on ex-date).
Based upon the most recent annualized dividend rate of .76/share, we calculate that EA has a current yield of approximately 0.62%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of .76 against the original $26.48/share purchase price. This works out to a yield on cost of 2.34%.
One more investment quote to leave you with:
“Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” — Seth Klarman