So what did we learn? Doing this post, I’m afraid I’m just going to use Excel screenshots, rather than copying & pasting all those numbers. There really is too much room for errors!
Picking a basket of reasonable stocks is a sound idea, esp. if you are picking from a quality grouping. It doesn’t protect you from the inevitable fall from grace that occurs from time to time; but perhaps the slack will be picked up by the others in the group. Who knows, you may even pick a star. In 1999, nobody would have predicted GM’s demise; car sales were booming, and profits were increasing.
I chose these four stocks because they were relatively undervalued to their peers at the time, and their dividend rate suggested that the price was undervalued. Because I only owned them for about 12 months, I didn’t manage to get the full benefit of rising dividends, increasing value, I short-changed myself. Remember this is the time of the Dot Com Bubble/Crash, 2 Wars, 9/11… it hasn’t been an easy decade for the stock market. I could have bought some of these stocks at bargain basement prices later on, too.
People say that investing & holding is dead. This doesn’t show that at all. If you’d held all these stocks; and only looked at them once in 10 years, you’d be pinching yourself if it was 2014 or you’d be kicking yourself if it was 2009. The prices that Mr. Market bids year to year can vary widely. It does however, suggest that you need to be careful about your timing. Or at least the excesses of buying and selling that can occur.
Don’t pay too much; Warren Buffett’s real teachings. Just don’t overpay. Your profits are determined by your entry price more than your exit price, so watch what you pay. If’d bought these stocks in 1999, I’d have paid way over the odds. I’d certainly have to consider buying them now VERY carefully. The trouble with consumer-side investing is that we don’t have the advantages that Buffett has to seal inside deals with generous terms. We don’t.
The only way we can control the profit margin is by watching what we pay at the outset. It doesn’t have to be the lowest price possible, but you should avoid those high price days, if you can.
Dividends do matter. A lot. In fact, they can mean the difference between overall profit or loss. And in 3M’s case, they made up 2/3rds of the gain in value. That’s something that you need to consider. Ignoring dividends, like I did in 1998, is a huge mistake, and a costly one.
Bonus Lesson #6
In fact, in 1999, I had to sell these stocks to pay for a house purchase down payment. We were short of cash and I was glad that I could sell the stocks to cover the payment, even at the modest gain I made. I don’t know if I hadn’t sold them how my investments in 1999 would have gone otherwise. But the upside was we got a house to live that we could call (almost) our own.
My horizon wasn’t long enough, however. If I had known that we needed to buy a house so soon, I’d have avoided the currency exchange rate risk, and kept the money in the bank. Many advisors suggest a 3- or 5-year horizon as a reasonable timescale. Of course, that would have ended in the troubled markets of 2001.
And I shouldn’t have re-entered the market at that point. But I did. Silly me.