“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
— Warren Buffett
Investors can learn a lot from Warren Buffett, whose above quote teaches the importance of thinking about investment time horizon, and asking ourselves before buying any given stock: can we envision holding onto it for years — even a decade-long holding period possibly?
Suppose a “buy-and-hold” investor was considering an investment into Morgan Stanley (NYSE: MS) back in 2009: back then, such an investor may have been pondering this very same question. Had they answered “yes” to a full decade-long investment time horizon and then actually held for these past 10 years, here’s how that investment would have turned out.
| Start date: | 12/17/2009 |
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| End date: | 12/16/2019 | ||||
| Start price/share: | $29.12 | ||||
| End price/share: | $50.72 | ||||
| Starting shares: | 343.41 | ||||
| Ending shares: | 401.36 | ||||
| Dividends reinvested/share: | $5.70 | ||||
| Total return: | 103.57% | ||||
| Average annual return: | 7.37% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $20,366.39 | ||||
The above analysis shows the decade-long investment result worked out well, with an annualized rate of return of 7.37%. This would have turned a $10K investment made 10 years ago into $20,366.39 today (as of 12/16/2019). On a total return basis, that’s a result of 103.57% (something to think about: how might MS shares perform over the next 10 years?). [These numbers were computed with the Dividend Channel DRIP Returns Calculator.]
Notice that Morgan Stanley paid investors a total of $5.70/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 1.4/share, we calculate that MS has a current yield of approximately 2.76%. Another interesting datapoint we can examine is ‘yield on cost’ — in other words, we can express the current annualized dividend of 1.4 against the original $29.12/share purchase price. This works out to a yield on cost of 9.48%.
Another great investment quote to think about:
“The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.” — William O’Neil
