Warren Buffett is perhaps the greatest investor of all time,
and he has a simple solution that could help an individual turn $40 into $10
million.
A few years ago, Berkshire Hathaway CEO and Chairman Warren
Buffett spoke about one of his favorite companies, Coca-Cola, and how after
dividends, stock splits, and patient reinvestment, someone who bought just $40
worth of the company's stock when it went public in 1919 would now have more
than $5 million.
Yet in April 2012, when the board of directors proposed a
stock split of the beloved soft-drink manufacturer, that figure was updated and
the company noted that original $40 would now be worth $9.8 million. A little
back-of-the-envelope math of the total return of Coke since May 2012 would mean
that $9.8 million is now worth about $10.8 million.
The power of patience
I know that $40 in 1919 is very different from $40 today.
However, even after factoring for inflation, it turns out to be $540 in today's
money. Put differently, would you rather have an Xbox One, or almost $11
million?
But the thing is, it isn't even as though an investment in
Coca-Cola was a no-brainer at that point, or in the near century since then.
Sugar prices were rising. World War I had just ended a year prior. The Great
Depression happened a few years later. World War II resulted in sugar
rationing. And there have been countless other things over the past 100 years
that would cause someone to question whether their money should be in stocks,
much less one of a consumer-goods company like Coca-Cola.
The dangers of timing
Yet as Buffett has noted continually, it's terribly
dangerous to attempt to time the market:
"With a wonderful business, you can figure out what
will happen; you can't figure out when it will happen. You don't want to focus
on when, you want to focus on what. If you're right about what, you don't have
to worry about when"
So often investors are told they must attempt to time the
market, and begin investing when the market is on the rise, and sell when the
market is falling.
This type of technical analysis of watching stock movements
and buying based on how the prices fluctuate over 200-day moving averages or
other seemingly arbitrary fluctuations often receives a lot of media attention,
but it has been proved to simply be no better than random chance.
Investing for the long term
Individuals need to see that investing is not like placing a
wager on the 49ers to cover the spread against the Cowboys, but instead it's
buying a tangible piece of a business.
It is absolutely important to understand the relative price
you are paying for that business, but what isn't important is attempting to
understand whether you're buying in at the "right time," as that is
so often just an arbitrary imagination.
In Buffett's own words, "if you're right about the
business, you'll make a lot of money," so don't bother about attempting to
buy stocks based on how their stock charts have looked over the past 200 days.
Instead always remember that "it's far better to buy a wonderful company
at a fair price."
To your wealth,
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