Sunday, November 10, 2013

Happiness In A Bottle

There is probably no better path to wealth than to buy a great stock and enjoy the ride.

That means finding a great company with great products or services that people want and which can innovate and grow with the economy and with changes in population.

When you buy stock in that kind of company it is incredible what compound returns will do to increase your wealth.

Will Twitter be that stock?

Twitter went public last week and by the end of its first day as a public company it was valued at over $31 billion.

That is a lot of people betting on a lot of future promise and profits.  Twitter has yet to make any profit to this point.  They will need a lot to fulfill the promise of the current stock price.

Will Twitter be on a similar path to Google?

It went public in 2004 (has it really been less than 10 years?) with similar promise.

Google's IPO raised $1.6 billion. Most of the shares were held internally putting the total market cap of Google at $23 billion. Today Google is valued at about $340 billion.  I would say that Google has fulfilled the promise that investors had in the stock 10 years ago.  However, 10 years is not a lifetime.

Apple. Google. Facebook. Twitter. Tesla.

Will these stocks stand the test of time like Coca-Cola?  Can these be lifetime investments?

There are very few people in the world that have not sampled one of Coca-Cola's beverage products.

Credit: Wikimedia commons

Eli Inkrot writing in Seeking Alpha provides some perspective on just how much wealth Coca-Cola has produced for its sharedholders over the years.

Coca-Cola went public in 1919 at $40 per share. One year later it was selling for $19. An investor would have lost half their investment in the first year.

However, by 2011, had an investor purchased just one share of Coca-Cola for $40 initially and reinvested all of the dividends paid over the years that $40 stock purcahse would have been worth $5 million according to Warren Buffett.

However, as Inkrot points out, from 1919 until today is not one lifetime, but several lifetimes.  That is probably not the most realistic example for a current investor. What about a timeframe that we can relate to a little better?

Inkrot chose a starting date of January 2, 1970.  That is a date that I can certainly relate to.  I was in college and had been drinking Coca-Cola for a number of years.  I also drank their newer products, Sprite and Tab, over the years.  Sprite was introduced in 1961 to compete with Seven-Up. Tab debuted in 1963 after the success of Diet Rite Cola, which was the first sugarless soda on the market.

On that date in 1970 I could have purchased a share of Coca-Cola stock for $82. $82 was a lot more money in 1970 than it is today.  However, I had much more than $82 in my savings account in January, 1970 from working a summer job for the U.S. Post Office as a Clerk-Carrier the previous summer. As I recall, I made around $5 per hour for the work. $82 was about two days of pay to me. That was big money for a college student when the going wage was less than $2 per hour for most summer jobs.

What would that one share of Coca Cola stock be worth today?

For starters, due to stock splits, that one share of stock costing $82 would provide a claim to 96 shares of Coca-Cola stock in 2013.

Coca-Cola also not only paid a dividend on that stock in each year since 1970, it also increased the dividend ever year year.  A single share of stock purchased for $82 in 1970 would have provided its owner with $1,190 in dividends over the years. That return on dividend payments alone is nearly 15 times the original purchase price.

If those dividends had been reinvested in Coca-Cola stock through the years and you also account for the overall capital appreciation since 1970, the $82 original investment would now be worth approximately $12,000 according to Inkrot.

Bear in mind that this all occurred during my lifetime in which I drank many thousands of dollars of Coca-Cola products and I never owned the stock.

Trust me, it is hurting me to even write this and think about my stupidity. It was right in front of me and I did nothing.  That is why in investing the biggest mistakes are often errors of omission rather than errors of commission.

Why is that?  Why did I do nothing?

When I looked at Coca-Cola as a stock in 1970, or 1990, or 2010 it always seemed expensive and it always seemed like some other stock had more exciting prospects. After all, Coca-Cola had been around forever. It was easy to have doubts about its future. How much more can they grow? What about sugar prices? What is Pepsi going to do to them? How could they make the mistake they did with New Coke?

Inkrot sums it up very nicely.

Some of the best investments are profitable companies that are sitting right in front of you. There's a reason why companies continuously make money. Meanwhile, quibbling over a percent or two here or there - while prudent in theory - might force you to miss out of some of the best companies in the world.

And he provides some advice that any investor should keep in mind.

 By 1970 Coca-Cola had been paying dividends for half a century and was selling for $82 a share. And you might have thought that price was a couple of dollars too high, or the dividend yield was too low or that it had a good run, but it's time to shine in the beverage world was over.  
You can always find a few reasons why it's not the ideal reason to buy. Years later you would have seen presidential scandals, an oil crisis, double digit inflation, various wars, terrorist attacks and a global financial crisis, the whole thing. There's always a reason, but in the end if you bought 1 share for $82 and reinvested the dividends it'd be worth about $12,000 now. And that factor so overrides everything else. 
Considering the companies that you want to own for the very long-term is often just as essential as thinking about the valuations that the market is offering.

What stock is worth owning for your lifetime?

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