This article originally published in The Northern Daily Leader on 13 September 2014.
We recently had a meeting with a potential new client who was interested in our firm’s services. During the discussion Steve (not his real name of course) related a story of how he invested some money many years previously through a local stock broker. It was around $50,000 in a number of ‘blue-chip’ shares. Soon after the money was invested, and unbeknown to the broker, Steve started buying and selling the shares that had originally been purchased. The stockbroking firm on the other hand, would regularly send Steve a quarterly report theoretically showing what the shares were now worth and how they had performed. Of course the report bore little resemblance to reality, as Steve had bought and sold the shares many times over. Over the course of the years, Steve managed to turn his $50,000 into a healthy portfolio of around $500,000, mostly through jumping in and out of somewhat speculative shares. And all the while the quarterly reports from the stockbroker kept arriving, showing how the now fictional portfolio had performed.
Eventually Steve made a few bad investment choices and ended up losing all the money that had been invested. From $50,000 to $500,000 and then to $0. And in the background the stockbroker was still sending the quarterly reports showing what the initial investments were now worth. By the time someone at the broking firm realised that they had been sending out reports for a portfolio which didn’t exist, it was nearly fifteen years later. The money had well and truly been lost, but guess what the value of the fictional portfolio was showing? Based on reinvestment of any dividends, the portfolio was supposedly worth around $1.5 million. So if Steve had simply forgotten about his initial investment and had rung his broker up fifteen years later, he would have found out he was a millionaire.
I tried to replicate this myself, using an imaginary $10,000 investment in each of Woolworths, BHP, Wesfarmers and CBA at the start of 1994, twenty odd years ago. If you had reinvested any dividends since then, your $40,000 would now be worth around $770,000. That’s an annual average return of just under 16% for twenty years. So while everybody else worries about wars, recessions, global financial crises, market collapses, bank failures, mining and housing booms and busts, you could have simply and happily collected your average annual return of 16%. No stress, no fuss. Of course, if those four shares had been more like ABC Learning and HIH and less like CBA and Woolworths, the outcome would have been very different. But still, it makes you think, doesn’t it?