When Coca-Cola announced a two-for-one stock split a year ago, the company disclosed this information:
“The Coca-Cola Company’s common stock began trading in 1919. Since its original listing, the stock has split 10 times – first in 1927 and most recently in 1996. With all dividends reinvested annually, one share of common stock purchased for $40 in 1919 would be worth approximately $9.8 million today.”
As a mental note, the single share of $40 would have been the equivalent of shelling out $500-$600 today. Of course, most of us aren’t going to make an investment that sits undisturbed for 91+ years to grow quietly, and ninety years of dividend taxes would have also taken a not-so-friendly bite out of the total returns that you experiences. But the overarching theme is true: there are very few things in life where you can set aside $500, do absolutely nothing thereafter, and see your wealth increase in spurts of 7% and 12% quite like Coca-Cola stock (imagine what someone who spent a couple years stuffing their Roth IRAs with Coca-Cola and then leaving it untouched for 30-40 years would be able to do).
But you already know all that stuff.
Today, I want to discuss with you one of the lessons that might be a little less obvious: to reap these excellent 10%+ annual returns will blue-chip stocks, you need to be prepared to endure years of stagnating share price. The worst way to prepare for a life of long-term investing is to pretend that the stock market operates in these neat little columns of 10% annual growth, year after year.
Let’s think about one period in which Coca-Cola investors had to be extraordinarily patient. The time sequence was the early 1970s. Let’s say it is 1972, and you had spent the past fifteen years seeing your Coca-Cola stake compound at rates between 11% and 14%, depending on your particular purchase points.
And then, from 1972 to 1980 the total return of Coca-Cola stock was actually quite negative. From June of 1972 to December of 1980, Coca-Cola actually returned NEGATIVE 4% each year. Every $100 worth of Coca-Cola stock in 1972 sitting there in your brokerage account would have been worth only $67 in December of 1980. It takes a particular kind of patience to be able to see your net worth decline 33% over eight years—if you are philosophical about it, you might be able to recognize that the 1973-1974 bear market was an especially tough time in American history and be able to shrug it off—but not everyone is well equipped to see their net worth decline by 30% over an eight-year stretch and still stick with their strategy.
Of course, if you managed to stick with your Coca-Cola stock, you would have been awarded quite handsomely. By 1990, that $100 would have turned into $904, as Coca-Cola grew at 28.2% annually from 1980 to 1990, giving investors total returns of over 12% from the 1972 to 1990 period. And naturally, if you held those shares through today, you would be quite rich, as every $100 in 1972 would have turned into over $9,530 today (for a compounded rate of a little over 11.5%).
But to see that $100 turn into $9,500 over a forty-two year stretch, or to see your $100 turn into $904 by 1990, you first had to endure eight years in which your $100 turned into $67. That is an important thing to keep in mind when putting together a long-term strategy.
And this story is not unique to Coca-Cola. In the 1990s and early 2000s, there were periods when McDonalds and Disney investors would have had years and years of stagnating returns. For the 2000s and early part of the 2010s, Johnson & Johnson shareholders had to see a share price hang out in the $50s and $60s for a very extended period of time. And ExxonMobil shareholders are just now reaching their 2007 highs, six years later.
To me, this is why it is important to maintain a large stable of blue-chip stocks, so you can be patient with the slow growers while the other companies in your portfolio do the heavy lifting. Imagine if you had both Exxon, the largest oil company, and Coca-Cola, the largest soft drink company, in your portfolio at the same time. From 1972 to 1980, while Coca-Cola turned $100 into $67, Exxon Mobil turned $100 until $385, as the company compounded at 17.16% each year during that time frame. From 2007 through 2013, while Exxon returned 4.56% annually (and as of October, it was only 2.62% annually before the recent run up), Coca-Cola returned 9.75% each year. That’s why it’s useful to have a diversified portfolio of the best companies in the world. While some companies have years and years of stagnating growth or prices, you can enjoy your dividend, and rely on the growth elsewhere in your portfolio to see you through.
Originally posted 2013-12-24 19:08:35.