How would you like a 10,474% return on your investment dollar? Here is how you could have achieved that seemingly amazing number. If you had invested $1000 in Aluminum Company of America (now Alcoa) in 1917 you would now have $105,743.77 – a return of exactly 10,474%* (please see referenced Forbes article below). Note that the return figures do not include dividends paid out or reinvested – any dividends would increase the stated return numbers. The lesson is clear: buy a quality company and sit on it as long as possible and let the returns pile up.
But wait one minute. Let’s look a little closer at those returns. A 10,474% return over a 100 year holding period comes out to an annualized return of 4.77%. Now that big number does not look so big does it? A 4.77% return is still not bad, but it takes the shine off of the larger 10,474% number. Now let’s really make that 4.77% return look bad – the return on a 10 year maturity US Treasury bond from 1928 to 2016 was 5.17%** (a 90 year holding period – not equal, but comparable).
Out of the top 100 stocks by market capitalization in 1917, only twelve survive today. Some were bought out or merged. Many others simply went bankrupt. What are the odds that you as an investor in 1917 are going to pick even one of the twelve stocks that are going to be around in 2017? I bet companies like US Rubber and Singer Manufacturing looked pretty good in 1917 too. This phenomenon, referring to the handful of stocks that have enormous gains each year versus the majority of stocks that do nothing or lose money each year, is known as “skew”***.
As the Forbes article states, the Dow Jones Industrial Average (30 stocks) returned slightly less than 5.8% annually since 1917 – or about 10% with dividends accounted for. Even if you were lucky enough to purchase Alcoa in 1917, you still would have been better off owning the 30 stocks in the Dow Jones Industrial Average over that time. As shown earlier, a less volatile investment in US Treasury bonds would have landed you in about the same place as Alcoa after 100 years.
Be careful when investing in single stocks. Picking a stock that can beat a major index, or even Treasury bonds, over a long time frame is very hard.
**http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
***http://www.barrons.com/articles/why-stock-market-skew-favors-the-few-1508558545
****The above article is informational in nature only and is not a recommendation to buy or sell securities. All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information. All investments carry a degree of risk. Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.
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