How often have you thought “If only I had bought Google when it hit the market at $80…” or “If only I had known about Amazon when it was $50 a share”? I am sure that everyone who has ever owned a stock has these fantasies, and for good and obvious reasons. Who wouldn’t want to own a stock that has gone up 1,200%? And of course, some people did buy stock in those companies when they were unknown and untested in the market. What we don’t incorporate into our fantasies, of course, is that for every Apple and every Netflix, there are ten (or maybe one hundred) companies which looked just as promising, and which are now worthless, or almost so.
The other problem with the 1,200% stock scenario is that very few people have the nerve, the patience and the long-term outlook to hold a stock over many years as it goes up and up. Even if you had bought Amazon at $50 the chances are very high that you would have sold it at $100 or $150 and thought (at the time) that you were very smart and had done very well. You were smart, and you did well, because almost nobody gets the full 1,200% ride. Our emotions and our aversion to loss make it almost impossible.
When Toronto went all gaga over the Raptors and had an all-day parade that attracted a couple of million people, super-star Kawhi Leonard wore a t-shirt with the words “Board man gets paid”. He was referring to the basketball skill of rebounding, and how important it is. He’s a great board man, and boy, does he get paid. But I looked at his shirt and a totally different thought came to my mind: Bored investors get paid.
Google and Amazon are exciting companies and we own these companies for many of our clients. But the core of our portfolios since inception, now more than twenty years, has been boring companies. Consider the following four firms, all leaders in their fields, and typical of the stocks we love for their stability, earnings growth and compounding value1:
- TC Energy (formerly TransCanada Pipeline)
- TD Bank
One pipeline, one bank, one telecom, and one utility. How boring is that? None of these names is likely to set your pulse racing. Now consider the following. Here are the price changes for these four firms from Dec. 31, 1999 to July 26, 2019, an almost 20 year span:
- TC Energy from $12.50 to $64.50 or a gain of 416%
- TD Bank from $19.38 to $77.24 or a gain of 299%
- Telus from $17.58 to $47.47 or a gain of 170%
- Fortis from $ 7.85 to $51.90 or a gain of 561%
That’s pretty good for boring. But there’s more. Here are the dividends now paid on these four stocks, and the cash on cash yield now enjoyed by somebody who was not looking for excitement, and simply held on to these companies for two decades:
- TC Energy $3.00 per share on cost of $12.50 = 24% cash yield on cost, per year
- TD Bank $2.96 per share on cost of $19.38 = 15.4% cash yield on cost, per year
- Telus $2.25 per share on cost of $17.78 = 12.7% cash yield on cost, per year
- Fortis $1.80 per share on cost of $ 7.85 = 23.3% cash yield on cost, per year
Sometimes our clients ask us why we are not more active traders, and why we are not out chasing the hot new names. I would not say that the facts above explain everything, but they speak very loudly across two decades, two significant stock market crashes, the greatest financial crisis since the 1930s and during a period of pervasive low to negative interest rates.
Bored investors get paid.
|1Value||When you sell a stock at a loss, you’re not able to claim the capital loss if you or a family member re-purchase the same stock within 30 days, which is called a “superficial loss”. Instead, the loss that would have been claimed on the old shares is added to the cost basis of the new shares, resulting in a lower capital gain when (if) the new shares are eventually sold at a profit. Taking advantage of this rule deliberately can allow for moving capital losses from one person to another.|