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To those who read our remarkable revelation on Saturday that Shakespeare's body had been exhumed and his portfolio discovered, proving that he'd been a savvy investor, I'm here to say... it was a joke. (What!? You knew!?)
A glance at the calendar would have revealed that the big news was delivered on April 1, the official intergalactic Fool holiday when we, and many others, try to pull the wool over the eyes of our friends.
I've been charged with reviewing this year's prank and offering up some thoughts on what we might learn from it. Since I can't really speak for you, let me review some lessons that stood out for me.
First, I have to pause to give thanks for Mr. Shakespeare. Without him, the world would be a much poorer place. And The Motley Fool, which takes its name from his play As You Like It, would be poorer, too. We'd probably be called "The Hiccupy Clown" or "The Fantasmaglorious Mime" or "The Multicolored Nitwit." Or maybe something even yuckier, like "Investment Education Associates."
Shifting gears back toward our joke, I think the most important lesson is that buying and holding stock in great companies for the long term is a very effective way to build wealth. To see exactly how this works, let's crunch a few numbers.
We should probably deal with inflation here, as an investment period of 415 years is a long time. Oddly enough, there's actually a website that tracks inflation in England over the centuries. Let's assume that our bard didn't start with much money -- perhaps just a sum that would be equal to about $100 today. Such a sum would be around 59 or 60 cents back in 1585. (I'm using American dollars here because I'm a crude and provincial American.) For 59 cents to grow to $18.7 billion in 415 years, it would have to grow at an average annual rate of 6%. (If you subtract the effect of inflation over that period, the "real" annual return becomes about 4.7%.)
Now we were touting Shakespeare as a great investor, but even 6% per year doesn't look that good, does it? A quick flip through the terrific book Stocks for the Long Run by Jeremy Siegel reveals that over the last 200 years or so, stocks on average have returned roughly 8% per year. In the last few decades, it's more like 11% or 12% per year. Bear in mind, though, that Will's investments might have been very sluggish for the first few centuries, before picking up later.
The same principle works for us. Using Siegel's numbers, imagine that you invested a lump sum of $1,000 in 1966. By 1981, 15 years later, it will have grown only 6.6% per year, on average. It will total $2,608. Yawn. But check out what happens from 1982 to 1997: The stock market grows about 16.7% per year, turning your $2,608 into $26,447. There's a useful lesson here, too, from our bard. These average annual growth rates shouldn't be taken too much at face value -- because few discrete time periods are actually average. Invest for any particular period of time and your portfolio is likely to do better or worse than average.
Another important lesson in the joke was the raw, blistering power of compounding. Start with less than a dollar and earn billions! With compounding, if you wait long enough and earn a high enough rate of return, you can turn any amount of money into a much larger amount. Kind of astounding, isn't it? Just think -- if all those alchemists through the ages hadn't been so impatient, they could have produced gold simply through investing. Here's a quick example of how money grows, at different rates, over up to 50 years. (I'm assuming that few of you are interested in building an astonishing portfolio over 415 years.)
An initial $100 investment, growing at:
year 5% 10% 15% 20%
0 $100 $100 $100 $100
5 $128 $161 $201 $249
10 $163 $259 $405 $619
15 $208 $418 $814 $1,541
25 $339 $1,083 $3,292 $9,540
35 $552 $2,810 $13,318 $59,067
45 $899 $7,289 $53,877 $365,726
50 $1,147 $11,739 $108,366 $910,044
The information above should show you that even the poorest person can build considerable wealth through investing. And that it doesn't have to take 415 years, either! As another example, read the remarkable story of washerwoman-turned-philanthropist Oseola McCarty. Or that of IRS auditor Anne Scheiber (click on her name, then scroll down a bit). They turned pennies into big bundles of wealth.
Chances are, you earn considerably more than either of these women ever did. Chances are, you can invest a heck of a lot more than they ever did. Chances are, you can build an even bigger nest egg than they did. It's a wonderful life, isn't it?
We're not done learning yet. Another lesson from this joke is that a few winners in your portfolio can make up for many losers. Will was said to have begun with around 50 different stocks in his portfolio, yet only nine amounted to anything. For a more reality-based example of this, just check out our Rule Breaker Portfolio, which has advanced more than 1,500% in five years largely due to two of many stocks: Amazon.com and America Online. These two companies have more than made up for some regrettable investments. (Of course, even without these two companies, the portfolio would still be doing OK.) To a lesser degree, the Rule Maker portfolio reflects the same phenomenon: Best-performer Cisco is up more than 300%, while worst-performer Coca-Cola is down around 30%. The big winners more than make up for the big losers. (After all, a stock can only lose 100% of its value, while it can appreciate by 200% or 500% or more.)
I'm starting to run out of room, so let us now commence the Lightning Round of Lessons. More things I learned from the joke:
Of course, this prank still left some questions unanswered. Foremost in my mind is this one:
Just how much beef is represented by "a month of beef"? How is it even calculated? Does it assume that the prize winner would have beef for breakfast, lunch, dinner, and snacks? Or that the average person enjoys beef thrice a week?
The best way to learn the answer to this perplexing question is to enter our contest for yourself. In case you wondered, yes, it's for real. Simply submit a poem (in sonnet form or any other form) on our message board that addresses any aspect of the incredible story of William Shakespeare the great investor.
A few last exhortations for you:
Fool on!
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