The Power of Time in Investing: A Half-Century Story

Strategic Insights -

As I recently shared with a group of teens at an inner-city summer program, my grandfather's small investment of $30 in Ford Motor Co. grew to $827, an annual return of 90 percent on his original investment. However, this success was not solely due to my grandfather's wisdom, but rather the power of time and compounding. If we had reinvested the dividends over the years, my grandfather's original $30 would have grown to a staggering $2,940. This remarkable story highlights the importance of time in investing and the benefits of long-term compounding.

Key Takeaways:

  • The power of time and compounding can lead to significant returns in investing, as seen in the example of the $30 investment in Ford Motor Co. growing to $827.
  • Reinvesting dividends over the years can lead to a substantial increase in investment value, as demonstrated in the example of the $30 investment growing to $2,940.
  • Even with a mediocre portfolio, such as the Lexington Corporate Leaders fund, which has trailed the Standard & Poor's 500 stock index, a long-term investment strategy can lead to impressive returns, with the original $10,000 investment growing to $4,861,304.
  • A diversified portfolio with a mix of 20-30 stocks can provide a stable and long-term investment strategy, as seen in the example of the Wired Index, a list of 40 bellwether stocks for the new economy.
  • The key to successful investing is not stock-picking or market timing, but rather the ability to hold onto investments for the long-term and ride out market fluctuations.

Statistics:

  • The average large-cap stock increased in price by a factor of 25 between 1956 and 1998.
  • By reinvesting dividends, investors could have seen their stakes rise by a factor of 98, making the original $30 grow to $2,940.
  • The Lexington Corporate Leaders fund has returned only 6.3 percent over the past year, compared to 10.1 percent for the Dow Jones industrial average and 20.0 percent for the broader S&P index.
  • The top 25 percent of funds over the past 10 and 15 years have trailed the Standard & Poor's 500 stock index by only one percentage point, according to Morningstar Inc.
  • Over the past 50 years, an investment of $1,000 in Ford in 1956 would now be worth more than $98,000, or $20,000 in 1956 dollars.

Sources:

  • "A story" as Damon Runyon once wrote.
  • Fords took 20 percent of their family auto company public, raising $641 million in 1956.
  • Ibbotson Associates in Chicago provided data on large-company stocks.
  • Lexington Corporate Leaders fund prospectus.
  • Morningstar Inc. data on funds over the past 10 and 15 years.
  • Wired magazine and their editors.
  • James Glassman's column in The Washington Post.
  • Microcap Stock Digest.
  • Merrill Lynch & Co. small-cap analyst, Satya Pradhuman.