A bit of reality....

[SaulR80683]

Mascke said,

Apple is an 11 bagger for me. Amazon is a 5 bagger.

B&W replied.

That is impressive. And I am glad for you. Have you given any thought as to what would remain if you were to have to liquidate those stocks from a taxable account?

And for a bit of reality testing

An 11 bagger is a 1000% profit. That’s 140 YEARS of 7% dividends (which are hard to find). That’s 140 YEARS. It’s 100 YEARS of 10% dividends. And you want him to worry about taxes and think how he missed out on dividends? Really???

Long term capital gains are roughly 20% even in the highest bracket, and if he did it in an IRA, when he sells it and reinvests it it’s no taxes at all until he takes the money out.

Granted part of those 7% dividends survive after taxes and get reinvested, so you might get to 1000% in 70 years instead of 140 years. Whoopie!!! I’ll go for the capital gains thanks. Sorry to be amazed, but saying that was amazing.

[XMFmazske]

An 11 bagger is a 1000% profit. That’s 140 YEARS of 7% dividends (which are hard to find). That’s 140 YEARS. It’s 100 YEARS of 10% dividends. And you want him to worry about taxes and think how he missed out on dividends? Really???

Saul, you helped me to better understand this, and I’m the one with that gain. I’m actually a bit better than the 1020% gain My Scorecard shows as it doesn’t account for the dividends. I have reinvested those dividends into more shares of Apple for a few years now.

My best investment so far has been Netflix. I bought the first of those shares in 2005. I sold in 2014. That was a 15 bagger. I live in an older house that needed a lot of work.

That sale of Netflix gave me enough to gut out my dingy, old basement. We added a nice bathroom down there where none had been, created a nice laundry room, added drywall, ceiling, tile and nice laminate flooring, new doors and windows. We had had perpetual problems with the sewer lines and they were all replaced.

It made a tremendous difference in our quality of life many times over.

These shares were in a taxable account. Yep, I paid capital gains tax. I didn’t like paying it, but all I have to do is to walk downstairs and I get over it real quick.

My boys are now 19 and 24. Both of them are investors. I think that basement helps them to appreciate how all it takes is a few dollars saved and it can turn into this.

I mentioned to my wife the other day that if I hadn’t of sold my shares in Netflix when I did, they would be worth $X now. She replied, yeah, but we wouldn’t have had this for the past 3 years.

She used to put a coat on previously when doing the laundry as their was no heat down there.

Now, it’s not by any means the prettiest basement in the world, but it’s a huge improvement over what it used to be.

I really need to make two signs down there. One will say something like, “Paid for by Netflix” and the other one, " Thank You, The Motley Fool"!

Fool on,

mazske

All positions are listed in my profile

[drillerjim101]

Wow, Mazske,

You have supurbably articulated the fruits of steady years of patient stock investing.

Congratulations to you! And I hope you truly enjoy your home for years to come.

Jim

[HeartMD]

Mazske,

I have a similar Netflix story, over 20 bagger for me now and all tax deferred. Just shows you only need to find those one or two stocks to destroy income investing returns when compared with growth investing (Luckily I have found four, NFLX, AMZN, ATVI and AAPL… and damn you Nokia for buying Navteq). Netflix remains around 40% of my overall portfolio despite not having bought a single share in over 5 years. It just keeps going up. I am beating the S&P by 11% per year because of these four stocks.

However, my hope isn’t for a new basement, it’s for a house in Turks and Caicos at retirement! Cheers…

MC,
Continually looking for the next Netflix to add to his portfolio which is why I love this board.

[anthonyms]

Continually looking for the next Netflix to add to his portfolio which is why I love this board.
I thought folks would eventually move on from searching for the next Microsoft but I never thought the quest would be replaced by a search for the next Netflix - I guess if I had I’d be a billionaire with a new basement like you guys now.
A

[Gclever88]

Man I love stories like these. I was wondering if there is a board on the Fool that is dedicated to how Netflix, or a company like it changed the life of a normal investor besides this board of course (which I read everyday for inspiration.) Love this stuff.

[LongNShort]

Quick remark on this, pls:

An 11 bagger is a 1000% profit. That’s 140 YEARS of 7% dividends (which are hard to find). That’s 140 YEARS. It’s 100 YEARS of 10% dividends.

That is, of course, unless you re-invest the dividends and leverage the power of compounding.

At a 7% dividend (or rather total return incl. stock price appreciation) it takes 35 years to deliver an 11-bagger
At a 10% dividend it takes 25 years.

I still prefer my stocks to yield 25% per year but I wouldn’t discard the power of dividends entirely. Every %point XIRR counts a lot in the long term.

LNS

[captainccs]

That is, of course, unless you re-invest the dividends and leverage the power of compounding.

Reinvesting dividend in the SAME stock is highly touted but it assumes that it’s the best use of capital all the time. It does have the same kind of benefit that dollar cost averaging has but if the investor is a capital allocator it might not be his best strategy.

Take my situation, selling covered calls is an important part of my strategy. An option contract is for a round lot of 100 shares. If I were to use a 1% dividend to get up to 101 shares, that one extra share could not participate in the option program. For me it makes more sense to pool all the cash income and to apply it as opportunity presents itself.

Another consideration is the actual CAGR of the investment in a stock. If you reinvest the dividend you must count the dividend as new money. Just because you have a larger lump sum at the end does not mean you gave a higher CAGR. You might have done better putting the dividend in something better than the dividend payer. To prove it have a look at the spreadsheet I made:

Buy 1000 shares at $10 of a stock that grows the share price at 10% per year and pays a dividend of 2%. At the end of 5 years you sell the stock. If you just harvest the dividend you earn net $7,689.15. If you reinvest the dividend you earn net $8,098.19, an extra $409.04 and in both cases the internal rate of return is exactly the same, 12.6%. Had you invested the dividend in something paying more than the stock you would have done better.

Sorry but this is a financial myth perpetuated by Wharton Professors.

Excel: http://softwaretimes.com/pics/reinvest.xlsx
LibreOffice: http://softwaretimes.com/pics/reinvest.ods

Denny Schlesinger

[buyandwin]

Reinvesting dividend in the SAME stock is highly touted but it assumes that it’s the best use of capital all the time. It does have the same kind of benefit that dollar cost averaging has but if the investor is a capital allocator it might not be his best strategy.

Many people might not be successful with the results in their capital allocating and might do better by putting their portfolio on “auto pilot” by reinvesting dividends in the SAME stock and growing the position with its own money.

Another benefit of this–IMHO it will keep people from constantly seeking new investments to buy without truly understanding what they are buying and also not understanding what they are selling.

The biggest mistake I hear people say is—“You will never go broke taking a profit”–I say—YOU WILL NEVER MAKE A MILLION DOLLARS OR MORE ON A STOCK IF YOU SELL IT FOR A $1000 or $5000 PROFIT.

Do you have a potential $1 Million Dollar stock in your portfolio today? Or did you have one that you sold last week because “You will never go broke taking a profit”?

b&w

[captainccs]

b&w, how does any of that change mathematics?

Denny Schlesinger

[buyandwin]

Hi Denny:

b&w, how does any of that change mathematics?

It doesn’t change mathematics—It changes the numbers you are looking at and accessing the opportunities that can be sitting in your portfolio without you knowing it.

For example–Back in 1960 my future father-in-law used to dabble in the market-He never made anything and usually lost money. We used to talk about the market and he always was losing. Then one day he told me he had bought 50 shares of a young company that had recently went public by the name of Disney. He paid $28 a share and in one month it had risen to $35. He was very nervous because he had a $350 profit and he was afraid of losing it. We talked about it and I suggested he hold but he was really scared and then he sold and got his $350 profit in hand. He promptly invested all the money including the $350 profit in something else and promptly lost all his money. He was calm and relieved he didn’t have to worry about losing his money anymore because it was gone.

The real question is—Does anyone know what value of 50 1960 Disney shares are worth today?

Look it up–With all the Disney splits since 1960 those 50 shares today are worth about $2.5 Million Dollars or more.

How many people in 1960 that owned 50 Disney shares or more really knew what they owned and the future value of it. Very very very few. And it’s the same with every survivor stock that today the pundits look back and talk about the 10Baggers-20baggers that they missed. I’m saying the mathematics might not change, but the results do change by not selling a winner and instead letting it grow up and prosper over time.
Metrics I look for to give me clues to the future of a security in my portfolio–

1. A slowly rising price (Plenty of opportunity to get the feel of the company and chances to add shares)
2. Paying a regularly growing growing dividend (As long as the dividend is being paid and periodically increased) IMHO it is reasonably safe to be adding and if possible, dripping the dividends into additional shares.

Using the above two metrics will lead me to up grade my portfolio by selling poor performers and reinvesting in the above two categories. Most important it will put the cash I have to work adding to growing stocks and keep it out of my hands where I might screw it up by buying something that is the current big deal, that might turn out to be not such a big deal.

My Mathematics for my portfolio is as follows–

1. I own 8 securities (Easy to keep track of)
2. Right now they are all doing well (Price wise)
3. All are paying dividends/distributions (Mostly growing)
4. Most IMHO have the potential to grow substantially in share price which will cause the dividends/distributions to dramatically increase.
5. Most of the dividends/distributions are in one way or another tax deferred.
6. As long as #2-#3-#4 above happen I see no reason to be looking to make changes

b&w

[captainccs]

It doesn’t change mathematics—It changes the numbers you are looking at and accessing the opportunities that can be sitting in your portfolio without you knowing it.

The point I’m making is that mathematically reinvesting dividends is exactly the same as investing the dividends elsewhere. Some professors tried to show that reinvesting dividends was a superior strategy. It is not. At every point in time some investments are better than others (stock picking?) and you’ll only find out in hindsight.

You make a lot of points that are entirely unrelated. I’m not saying they are good or bad, just unrelated to what I’m posting.

Denny Schlesinger

[Smorgasbord1]

If you just harvest the dividend you earn net $7,689.15. If you reinvest the dividend you earn net $8,098.19, an extra $409.04 and in both cases the internal rate of return is exactly the same, 12.6%.

Maybe I’m math challenged, but:

Case 1:
Starting Value: $10,000
Ending Value: $17,689.15
Period: 5 years:
CAGR: 12.08%

Case 2:
Starting Value: $10,000
Ending Value: $18,098.19
Period: 5 years:
CAGR: 12.60%

The question is in Case #1 to what use do you put the dividend money? If it’s better to invest the dividend elsewhere, then it’s better to sell the stock outright and invest that whole almost elsewhere.

[mauser96]

Outperforming investment styles come and go

One example, the Mechanical Investing method of screens to pick stocks. It worked great until it became popular, and that popularity plus the big bull market tide lifting all ships (stocks) , it mostly stopped out performing…
Saul recently has had a great run. But as has been posted, a few ETF using not dissimilar styles have done nearly as well. Saul will probably adjust ,but at some point these ETF will under- perform

Market stock picking styles like a roulette wheel, the winning ball winds up in this pocket (style) one time another pocket the next. Chasing the styles is like betting on 12 coming up next because it came up last time.

There is evidence that some strategies, given enough time, tend to beat the market. Momentum based schemes for instance. But now that anybody can access momentum data with a click of the mouse will it keep working? I wouldn’t bet on it.
B&H outperforms. If you can stick with it, don’t do all your buying near a bubble top like the Japanese stock market , and no catastrophe like Communism takes over your country.
And then there is blind luck, but nothing you can do will give you this.

However we do have some investors on MF whose ancestors were probably making money in Roman grain markets or in Dutch tulip markets. They have the “gift” ,the talent. As some have pointed out , successful investing is not a craft like carpentry or even surgery. With investing your worst enemy is yourself.

[buyandwin]

However we do have some investors on MF whose ancestors were probably making money in Roman grain markets or in Dutch tulip markets. They have the “gift” ,the talent.

You are kidding with that statement, aren’t you? I truly hope so.

b&w

[mauser96]

No I am not kidding. Do you really think anybody can just absorb a bit from books and boards and make a good living from the stock market? Do you really think somebody copying Saul in the midst of a huge bull market will find it enough to make big money consistently for 30 or 40 years or a lifetime replete with a lot of bear markets and unpleasant events? I wonder how many are doing well in the Syrian stock market
But simple B&H , harder than it sounds, will do well enough for most and not require brilliance or talent.

I do not put myself in that gifted class. Few are.

Not sure whether you are referring to the gifts or the ancestors but Roman grain dealers have lots descendants, and most talents are at least partly hereditary. The Mannings in football etc.

And yes I do think investing past a certain limit is not a craft ,it can not be learned. For instance I would love to sing opera but one listen to my voice would convince anyone that a hundred years of intensive study would not get me even to the chorus.

In the relatively short time span of most , when there is enough money to count, it can be very difficult to distinguish blind luck from ability

[buyandwin]

Hi Mauser:

Do you really think anybody can just absorb a bit from books and boards and make a good living from the stock market?

No-and-Yes

I don’t believe books will help much. Too many people out there selling things. But yes to the boards and personal DD-Reading transcripts. If possible making time to get to investor conferences of stocks you have large positions with. One company, I called ahead and asked them to reserve seats in the front because I needed to see the presentation slides and didn’t have good vision. My wife and I had front row seats in front of the slide projector at the Board of Directors Table with 6 of the Board. So for 4 to 5 hours I chatted with the board and the CEO and other top management making the presentation and how it affected the investors and their plans for the future I must have asked management about 15 to 20 questions. Everybody was on a first name basis and it all was published the next day in the official transcript of the investor conference. I attended 3 more investor conferences with the same company after that with my reserved front seats. Years before I went to a meeting in Kansas City -Took 2 planes to get there and 2 to get home. They had an investor relations person meet our plane get us to the meeting and then back.
If possible I like to meet person to person when I’m entrusting my money to them

Do you really think somebody copying Saul in the midst of a huge bull market will find it enough to make big money consistently for 30 or 40 years or a lifetime replete with a lot of bear markets and unpleasant events?

I can’t and won’t speak for Saul, But I believe he is the first one to tell you not to copy what he does. Saul had a need when he started. I had a need when I started.—The big difference is It appears you are looking for a written guaranty to support you for the next 30 or 40 years- I can tell you–If you want a written guaranty you should buy a washing machine. In addition you don’t get to pick the starting point of your investing and you don’t pick the ending point either. That’s why you just have to jump in the water and start swimming and if you are smart you will make money.
Yes there are a lot of bear markets and a lot of unpleasant events—Sometimes life sucks and that’s just too bad. Stop feeling sorry for yourself

The facts are The typical working years are 20 to 65 -A span of 45 years Then comes the typical retirement years 65 to 90 (+ or-) 25 more years–So you will need to save, invest and accumulate in the first 45 years enough money to carry you the next 25 years. And don’t forget while you are going through these years, inflation will be running along right next to you pushing the total needed dollars to a higher level.

I would respectfully suggest you forget about the Syrian Market-The Football Games-The Opera singing and whether you have blind luck or ability–Stop being concerned with brilliance or talent

What you really need is COURAGE

b&w

[drillerjim101]

Well said, b&w,

A good sensible mind is helpful, but the most important ingredient is definitely courage. Few possess the courage and perseverance to take the calculated risks with their money that is needed to be successful over the long haul of their 30 or 40 years of investment opportunities.

As I look back at almost 40 years of stock investing, I am filled with gratitude for those who have influenced my investment outlook: Peter Lynch, Louis Rukeyser, Motley Fool, and certainly Saul and those that contribute regularly to this board.

Stock investing has enabled me to retire without depending on SS or any other pension. This means having the freedom to live the life my wife and I choose. For that, I feel very grateful

Jim

[captainccs]

Maybe I’m math challenged…:

No, I was “explanation” challenged.

There are three of four ways of calculating and showing growth rates. The one you used uses the start and end amounts and the time in-between them. With a stock paying dividends you are omitting a lot of detail, the payments. To take them into account you use the Internal Rate of Return (IRR) formula.*

Saul has a section of the FAQs dedicated to the calculation of adding and taking out cash from the account to give a fair view of the results. In my models one reinvests the cash from dividends while the other holds the cash. I’m using Internal Rate of Return (XIRR) to calculate the yield. This takes into account the individual cash flows while the start-end CAGR calculation does not or put another way, all the intermediate cash flows are included in the end.

Think of it this way, the cash sitting idle in the account is opportunity lost hence the start-end CAGR will be less then the IRR. The IRR of both models is the same, 12.6%. In the reinvestment model IRR and start-end CAGR are the same. The cash sitting idle in the other model is opportunity lost hence the start-end CARG is lower.

My argument is not that reinvestment is bad but that the stock generating the dividend might not be the best current investment opportunity.

---

Another way to calculate the growth rate is to use the best fit line in a semi-log chart which is the Average CAGR (red line) in a Klein chart – top chart:

http://invest.kleinnet.com/bmw1/stats40/XOM.html

If your aim is to scare the bejesus out of your audience then you use a linear chart to show growth which invariably has a hockey stick curve in it if there is any growth in it – second XOM chart above. Then scream at the top of your voice: "UNSUSTAINABLE! The semi-log cart is not scary. LOL

Denny Schlesinger

• The Internal Rate of Return functions in Excel are IRR and XIRR

[mauser96]

the proof of the pudding is in the eating

Once you have supported yourself comfortably for 30 or 40 years solely from equity markets , then you are in a position to discuss the best methodology. Real world.
No I don’t need a guarantee to support me for 30 I have actually done it. Sans a pension. As have Saul and others.

. Courage helps, but there is a fine line between Courage, Over-confidence, and Foolhardiness. Courage in the markets did’t help those Cubans when Castro took over. And more recently it didn’t help those Japanese who bought at the top of their bubble. And I suspect it won’t help much over the next decade from today’s high Fed supported price levels.

The cousin of Courage,Self Discipline may be more useful . And in any intellectual based field I will always bet on Smarts over Courage. Of course one does not exclude the other.