The Tricky Thing About 8,000% Returns

McDonald's (NYSE: MCD  ) has been on an amazing roll for years; people who invested in Mickey D's shares in 1980 and held on would be enjoying more than an 8,000% return today. It's currently easy to think of the fast-food giant as a bulletproof, unstoppable stock, maybe even one of those picks for "widows and orphans." However, history tells us that when it comes to McDonald's, investors "lovin' it" hasn't always been the case.

Earlier this week, The Wall Street Journal pointed out Mickey D's mind-blowing 30-year return, since it was one of the few Dow components that was exhibiting some small amount of strength on an otherwise downer day. Also impressive: McDonald's long-term performance is described as "exponentially better" than the other amazing long-term Dow performers: General Electric (NYSE: GE  ) (1,396%), Walt Disney (NYSE: DIS  ) (3,480%), IBM (NYSE: IBM  ) (1,093%), and Exxon-Mobil (NYSE: XOM  ) (1,717%).

Of course, 8,640% returns like McDonald's generated aren't so common, are they? What's easily forgotten is how easy it is to lose faith in a business over decades' time (or even less than a year's time, for goodness' sake). McDonald's had some rough riding over the decades' road to riches, even a pivotal point when it was difficult to imagine beaten-down McDonald's could ever turn its fortunes around.

Back when people were hatin' it
In 2003, Whitney Tilson nominated McDonald's then-CEO Jim Cantalupo as CEO of the Year for Fool.com. Why? Because the late Cantalupo saved the company, executing a turnaround many viewed as impossible.

Check out what well-known stock commentator Jim Cramer had to say way back when: "There can be no fixing of McDonald's because there is no McDonald's. ... What can McDonald's do to save itself? Nothing at this point, nothing."

For years, McDonald's sagged under an onerous bureaucracy, angry franchisees, cannibalization amid market saturation, price wars with rivals such as Burger King, and inattention to basics that started tarnishing the brand. Plenty of investors gave up, and bailing would have been viewed as a pretty rational thing to do, given all the troubles and the abject pessimism in the investment community.

The point is, let's never oversimplify how difficult it can be to be a true long-term buy-and-hold investor. I've experienced similar situations with stocks in my portfolio; for example, around 2008, pessimism concerning Starbucks (Nasdaq: SBUX  ) had reached a fevered pitch after so many years of crazy-caffeinated growth.

I held on to my shares even as they touched dismal lows, and at one point realized they were dirt cheap despite the problems. Looking at the 75% appreciation since I bought in 2005, I can't say I regret having consistently held, even during the worst times for the company (and the stock price). (Don't get me wrong; at times this was really, really hard, and a few times I did wonder if I should give up and sell like so many people seemed to believe was the smart thing to do.) Today, I have renewed faith in the company (and its stock).

Of course, sometimes companies really are broken, with truly insurmountable problems. Look at now-defunct companies like Borders and Circuit City. This is why it makes sense to focus on companies with certain strengths: leadership brands, strong balance sheets, solid management teams, competitive edge. Sometimes it really is over for a company; long-term buy-and-hold investors need to be able to identify the occasions when it really is time to sell.

McSupersize your returns
As long as people are marveling over McDonald's massive returns, right now, when it sounds so easy and so obvious, it seems worthwhile to remember the truly difficult points that can crop up over many years' time and try investors' patience and perseverance.

I hope to be able to ride out my stocks' ups and downs again, and maybe one day have some McSupersized massive returns to boast about in my portfolio. Share your long-term buy-and-hold war stories or chat about the mighty McDonald's in the comments box below, or add McDonald's to My Watchlist to track the future of the Golden Arches.

Alyce Lomax owns shares of Starbucks. The Motley Fool owns shares of Starbucks and International Business Machines. Motley Fool newsletter services have recommended buying shares of McDonald's, Walt Disney, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 15, 2011, at 11:11 AM, Merion01 wrote:

    In the early 80s a broker friend suggested MCD because it was his way of owning a franchise. I also bought it for my very young children because it was an investment they could relate to and support.

    It certainly has been a bumpy ride, but they've been able to expand the product line to meet the evolving wants of their customers.

    All in all. Go Ronald.

  • Report this Comment On December 16, 2011, at 5:12 AM, midnightmoney wrote:

    Don't forget this! How to supersize your profits with mcdonalds:

    http://www.youtube.com/watch?v=mQj2u4ap5bo

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