Will Mr. Market present a new all-time high? Should we join the party? We maintain the TSX as the mo...
What Really Counts in Investing
05/10/2007 12:00 am EST
Kelley Wright, managing editor of Investment Quality Trends, recalls a conversation from more than 20 years ago that revealed to him certain eternal truths about investing.
In 1985 I sat down with an elderly couple to discuss their investment portfolio. Like all investors they owned assets that I found questionable considering their age and their need for safety and income, but most of the portfolio was invested in what we would call Select Blue Chips. Most of their positions were between 20 to 30 years old and had been held through myriad challenges for the companies, the country and the economy.
This was a defining moment for me as an advisor as I began to associate the lessons from my grandfather about value in my youth and my own experiences in the stock market. More specifically, what caught my attention was the cost basis for their stocks and the dividends those companies were now paying.
On the surface the current yield on those blue chips were representative of the market at that time. Drilling down a bit further though, I found that the yield based on their original purchase prices were off the charts. For illustration purposes they owned one stock that was paying about $3 a share in annual dividends for a current yield of about 2%. The cost of those shares, adjusted for splits, however, was also about $3 per share!
As you have probably guessed, their original capital investment had appreciated almost 40 times over the years. The point I really want to hammer home, though, is that their return from the dividend income alone, based on their original cost basis, was well over 100%. In simpler terms, they were earning a 100% return each year on their original investment in dividend income, every year.
I relate this story to you because there is a multitude of distractions for investors today: the housing market, the dollar, commodity prices, inflation/stagflation, the current rally on Wall Street and how long it will last, ad infinitum. What is really important, though, is accumulating capital and income for that time when it is needed to support your cash needs. The things we purchase-food, clothing, housing, medical care, transportation, entertainment-are all purchased with cash.
The cash required to secure these items increases each year because of inflation, so our capital and income must grow to keep pace with inflation. It is imperative, then, that you plan for your future cash needs now by consistently stocking your portfolio with shares of select blue chips that are undervalued and will weather the ups and downs of the marketplace and economy. If you will be diligent in this endeavor now, your latter years will be peaceful and worry-free. In the end, this is what investing is all about.
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