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The Only Thing Between You and 1,000% Returns

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The only thing between you and 1,000% returns is time.

I don't mean to oversimplify the issue, but it isn't any more complicated than that.

You don't need to buy the latest and greatest stocks. You don't need to be "in the know" on Wall Street. You don't need to do a lot of research -- or, for that matter, any at all.

To achieve 1,000% returns, all you need to do is invest and wait. The law of compounding returns will do the rest.

You can see how this plays out in the following figure, which charts the median return by holding period of the 25 companies on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) that have traded publicly since at least 1988.

For the first 15 years, the returns are nothing to write home about, fluctuating in and around the 100% mark. But after that, things begin to accelerate, eventually culminating in a nearly 2,500% return by the 25th year.

Given the limited size of this sample and its vulnerability to survivorship bias, I completed a similar analysis of the S&P 500 (SNPINDEX: ^GSPC  ) . While the increased diversification yielded a smoother ascent, the conclusion is the same: Good returns come to investors who wait.

If this is so easy, why doesn't everyone have comparable success?

The short answer is that humans aren't hardwired to wait for a quarter-century to reap what they sow. We crave immediate gratification. As a result, we don't buy stocks with the genuine intent to hold them for the requisite length, nor do we feel committed to such positions when they're down, causing us to cut the investing horizon short.

Beyond this, there's a veritable gauntlet of emotional and behavioral temptations that separate us from the tall columns on the right. We'll get greedy when stocks are high and rotate into the hot issues of the day. We'll then get scared when stocks go down, causing us to liquidate our holdings.

This is bad news for the majority of investors who lack the patience and emotional fortitude to prevail over these obstacles. By the same token, however, it's impossible to deny that this is great news for those that do.

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8/26/2016 4:32 PM
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