“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
— Warren Buffett
A critical pearl of wisdom from Warren Buffett teaches us that with any potential stock investment we may make, as soon as our buy order is filled we will have a choice: to remain a co-owner of that company for the long haul, or to react to the inevitable short-term ups and downs that the stock market is famous for (sometimes sharp ups and downs).
The reality of this choice forces us to challenge our confidence in any given company we might invest into, and keep our eyes on the long-term time horizon. The market may go up and down the interim, but over a twenty year holding period, will the investment succeed?
Back in 2000, investors may have been asking themselves that very question about eBay Inc. (NASD: EBAY). Let’s examine what would have happened over a twenty year holding period, had you invested in EBAY shares back in 2000 and held on.
| Start date: | 09/18/2000 |
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| End date: | 09/17/2020 | ||||
| Start price/share: | $6.95 | ||||
| End price/share: | $48.64 | ||||
| Starting shares: | 1,438.85 | ||||
| Ending shares: | 1,476.80 | ||||
| Dividends reinvested/share: | $1.04 | ||||
| Total return: | 618.32% | ||||
| Average annual return: | 10.36% | ||||
| Starting investment: | $10,000.00 | ||||
| Ending investment: | $71,895.71 | ||||
As we can see, the twenty year investment result worked out quite well, with an annualized rate of return of 10.36%. This would have turned a $10K investment made 20 years ago into $71,895.71 today (as of 09/17/2020). On a total return basis, that’s a result of 618.32% (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.]
Dividends are always an important investment factor to consider, and eBay Inc. has paid $1.04/share in dividends to shareholders over the past 20 years we looked at above. Many an investor will only invest in stocks that pay dividends, so this component of total return is always an important consideration. Automated reinvestment of dividends into additional shares of stock can be a great way for an investor to compound their returns. The above calculations are done with the assuption that dividends received over time are reinvested (the calcuations use the closing price on ex-date).
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 $6.95/share purchase price. This works out to a yield on cost of 18.99%.
Another great investment quote to think about:
“The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.” — Benjamin Graham
