How To Become Rich With Long-Term Stock Investing

122555908I came across an interesting article in Forbes Magazine recently called Turning $1,000 Into $42 Million.

The article talked about how many years ago Forbes had a columnist named Lucien O. Hooper who recommended quite a few big stock winners over the years.

Here are a few examples:

Dec 15, 1974:  
Hooper recommended Royal Dutch Shell.  $1,000 invested would be worth more than $452,000 today.

Feb 1, 1953:  
Hooper recommended Motorola.   $1,000 invested would be worth more than $735,000 today.

Hooper’s best recommendation?

Aug 15, 1949:  
Hooper recommended Kansas City Southern.  $1,000 invested would be worth more than $42 million today!

How did $1,000 grow so much? Well, read on to learn how….

The fact is that big money can only be made by holding quality stocks for the long term.  By long term I mean years and decades.

Too many stock investors move in and out of their stock positions on a monthly or even weekly basis, missing out on the big moves while catching the small moves.

Here is an example:  Many investors would have been happy to make a 150% return on their money with Wal-Mart’s stock.  It rose from $4.09 to $10.27 from February 1990 to August 1991.  See the chart below:

Chart courtesy of Stockcharts.com
(Click to enlarge)

WMT - 1990-1991

But…. the investor who sold Wal-Mart early would have missed on the biggest part of the move…..

The stock rose from $4.09 to almost $86 a share by January 2015.  That’s an almost 2,100% return!

Chart courtesy of Stockcharts.com
(Click to enlarge)

 

WMT - 1990-2015

2,100% Was Only The Beginning!

That 2,100% return was only one small part of the stock’s total return over the years.  Long-term stockholders get to take advantage of three important factors: dividends, compounding, and stock splits.

Dividends

A dividend is a cash payment made by a company to its shareholders. Dividends are paid out of the company’s earnings each quarter.

Over time, many companies increase their dividends as the company grows and makes more money.  Wal-Mart started with an annual dividend of $0.05 in 1974.  Today it pays an annual dividend of $1.88 a share.  This means that for every 100 shares you own today, you receive $188 in cash dividends each year.  As the company has grown over the years, so has the dividend it pays.

Compounding

Compounding is one of the secrets to long-term wealth.  Compounding is simply the process of reinvesting the dividends you receive into more shares of the company’s stock.

The result with compounding is that you slowly but surely increase the number of shares that you own.  Done over a long period of time, you can end up with many multiples of the number of shares you started with.

Stock Splits

Occasionally a company will announce a stock split.  The most common split is a 2-for-1 stock split. This means that the company issues two shares for every share outstanding, and the price of the shares gets cut in half.

For investors, the net effect is that you end up with twice as many shares worth half as much as they were before the split.

But when a company splits its stock numerous time over the years, the investors’ number of shares greatly increases.  And importantly, the value of the shares usually increases slowly but surely over the years, making each one of those shares worth more and more.

Wal-Mart’s stock split quite a few times (as you’ll see below).  Even with these stock splits, the share price still rose dramatically over the years.

Why would a company do a stock split?  One of the main reasons is that the stock’s price has risen to a high level, usually over $70-$80 a share or more.  Many small investors shy away from high-priced stocks, so a 2-for-1 stock split lowers the price by half, making the stock affordable to more investors.

Wal-Mart’s Stock Splits

In 1970 Wal-Mart went public with its stock priced at $16.50 a share.  Over the years they did eleven 2-for-1 stock splits.  Below is a chart showing how 100 shares grew to 204,800 shares by March 1999!

WMT stock split chart

Dividends + Compounding + Stock Splits + TIME = Lots of $$$

If you combine dividends + compounding + stock splits with the final part of the equation – TIME – you can create some serious wealth….

  • The number of shares you own increases due to compounding the dividends into more shares of the stock
  • The dividends paid to you each quarter rises as the company makes more money over the years
  • The number of shares you own increases over the years due to stock splits
  • The value of all your shares greatly increases over the years as the company grows and makes more money over the years.

You need to use TIME to make this happen: Allow your investment to grow over a period of 20 to 30 years or more for maximum results….

Let’s go back now to our (now very sad) investor who sold his shares in 1991.  If the same investor who bought in 1990 had reinvested his dividends into more shares and not sold any of them, he would be quite wealthy today.

Wal-Mart Wealth Since 1980

I couldn’t find the data for Wal-Mart’s stock from 1990 to present, but I found it from 1980 to present.

Accounting for dividends reinvested and for the 8 stock splits since 1980:

$10,000 invested in Wal-Mart in 1980 would
have grown to over 75,000 shares

worth more than $6.4 million today. 

The annual dividend check today would be $141,000!
That comes out to $11,750 a month!

How To Find The Next Wal-Mart

Let’s talk about how to find those top stocks that outperform the market like Wal-Mart did.  Let’s start with how billionaire investor Warren Buffett finds them.

Economic Moat Stocks

Buffett likes to talk about investing in companies that have an economic moat around them.

What does this mean? It means that he looks for a company that has a business model that is just about impervious to new competitors entering the market.  Here are a few examples:

Types Of Moats

The moat could be a high barrier to entry, like phone and cable companies spending tens of billions setting up their voice and data networks.  It is just too expensive today to try to become a major player in these markets.

It can be a toll road-type business like Visa or MasterCard, who take a tiny piece of millions of transactions each day.

It can be a brand that is widely known and trusted like Starbucks or Coke.  It is very difficult for a new company to compete with them in their businesses.

It can be a company like Google who has taken over search by doing it better and faster than its competitors.

It can also be a company that is extremely well run and uses the latest technology to improve its business.  Most retailers cannot compete with Wal-Mart, Home Depot, or Costco who have extremely well-honed supply chains that enable them to offer the lowest prices.

Berkshire Hathaway

Buffett’s own stock, Berkshire Hathaway, is an economic moat stock.  As well as owning stocks like Coke and American Express for many years, Berkshire Hathaway owns a diverse assortment of companies outright, including leaders like Geico Insurance, See’s Candies, and Burlington Northern Railroads.

An investment in Berkshire over the years would have made you very wealthy.  In 1980, ten shares would have cost you $3,400.  Today those 10 shares are worth over $226,000 a share, for a total value of $2.26 million!

How Do You Find These Big Winners?

For a company to become a powerhouse in business, it must provide a popular product or service, or a better product or service than its competitors.  Think about Amazon, Unilever, Jarden, Kimberly-Clarke, UPS, Fedex, Google, Proctor & Gamble, or Hershey’s.  They lead the field in their respective businesses.

Established Companies

A good place to start to finding leading companies is with the 30 companies in the Dow Jones Industrial Index.  This index contains 30 powerhouse companies in a variety of fields.  Just know that many of these companies have already made huge moves over the years.

Up-And-Coming Companies

Even better, you can start to look for companies that are not yet household names, but are bubbling under the radar.  Start to look for products and services that are just becoming well known to the masses.

A great example is Apple back in 2004 when the iPod and iTunes became popular. They were just starting their tremendous growth back then. Apple followed up with the iPhone and iPad, and its stock rose dramatically for the next 8 years.

Think of companies like Facebook, Twitter, or Zillow. They are all young companies, and although their stocks have already made big moves in recent years, these moves may just be the beginning.

Think of new companies with popular products or services like Dropbox, Fitbit, Jawbone, and Pinterest. These companies are not yet public companies, so keep an eye out for them to announce an IPO.

Look for companies that are becoming well known in new and growing areas like the Internet, data security, biotech, solar, and nanotechnology, 3D printing, social media, etc.

Behind The Scenes

Many of these future big winners will provide products and services behind the scenes.  An example would be Intel providing the computer chips inside computers and tablets, or Akamai who powers the content delivery networks for Internet sites.  Software providers, cloud computing companies, “big data” analytics companies like Splunk or Tableau Software, companies providing parts like gyroscopes in smartphones, and more are worth looking for.

Be A Stock Detective

So now, as you go about your daily routine, make a mental note when something new and different seems to be emerging with a company, product, or service.  Check out the company’s website and if public, its stock chart and fundamental info.

You are looking for companies that are:

  1. Growing fast, with earnings that are growing at more than 30% or so each year.
  2. Doing something new or different than their competitors.
  3. Regarded as an emerging leader in their field.

These three things are almost always present before a company’s stock takes off on its big moves.

The next Wal-Mart, Google, Berkshire Hathaway, or Apple is out there.  Will you find it?


Want Some Help?

For a fast-track way to finding the next new long-term stock winners, please check out my Ultimate Stock Investing System.  You’ll learn how to invest both in dividend stocks and growth stocks so you can maximize your investing returns over the long term.

You can check it out here:

Ultimate Stock Investing System


About Michael

mb 368x384Michael Benghiat is a successful independent investor, investing coach, and the founder of Lifetime Investor.

He started out in the music business as a composer for film and TV, and gradually grew his investment portfolio of stocks, bonds, real estate, tax liens, and gold and silver into a six-figure income.

You can learn more about Michael here.

 

 

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