If you want a financially secure retirement, you'll need to start investing to prepare for it. That's because, over the long term, stocks have appreciated at an annualized rate of about 8%, and over the past 10 years, the market's annualized returns have been even higher -- around 11%.
That's far more than you'd gain if you stuck your nest egg in CDs, T-bills, or any other low-rate, safe-haven asset -- let alone the negligible interest rates you'd earn if you left that money in a bank account. Of course, the trade-off is that stock investors have to endure periods of volatility and declining values, as the market experienced during the Great Recession, or late in 2018, when stocks plummeted 13.5% in a single quarter.
However, as good as the S&P 500's long-term return on investment has been, picking the right individual stocks can lead to much, much greater profits. How much greater? Consider these two tech darlings -- one from the U.S., and one from China -- each of which would have turned just a $2,000 investment in its IPO into a stake worth over $1 million today.
Nearly every investor and consumer is familiar with Apple (NASDAQ:AAPL), the world's second-largest public company by market capitalization, at a whopping $1.4 trillion (topped only by the recently public oil empire of Saudi Aramco).
Yet few would have foreseen it would reach such heights when it went public on Dec. 12, 1980, under the name "Apple Computer." On that day, Apple sold 4.6 million shares to the public at $22 per share, and surged 32% on its first day of trading to a market cap of $1.78 billion -- a far, far cry from current levels.
Apple has endured a lot of ups and downs in the nearly four decades that followed. In 1985, founder Steve Jobs was pushed out as CEO during a period of slow sales for the new Mac. Stripped of its visionary leadership, some might have thought the company was done.
Jobs tried to move on, founding a new company he called NeXT. However, in 1996, Apple acquired NeXT, and brought a humbler Jobs back to the CEO role. The company began to venture more boldly outside of its core computer market, bringing the iPod to market in 2001, and then in 2007, a device that would become central to modern life and take the company to unprecedented heights: the iPhone. Those successes were followed by the iPad in 2010, and the Apple Watch in 2015.
In recent years, CEO Tim Cook, who took over in 2011, has been incubating a slew of new Apple services, many of which have been a hit with the company's 1.5 billion-device installed base and one billion-strong iPhone base. Just in the past year, it unveiled four potentially big new services -- Apple News+, the Apple Card, Apple Arcade, and Apple TV+. Cook has set a goal for reaching a whopping $50 billion in services revenue in 2020, and the company appears poised to do just that.
What's the secret to Apple's success? In my mind, there are several elements. It has a closed system of proprietary hardware, operating systems, and software, as opposed to most other computer brands, which use the Windows operating system, or other smartphone brands, which use Android. Being able to control its own hardware and software together has proven hugely beneficial, as it gives Apple a seamless user experience that makes its product ecosystem very sticky.
In addition, Apple is incredible at brand management, and has been since the landmark "Think Different" campaign, which elevated it to something more than just a gadget company, and later into a cult "mass luxury" brand.
Finally, the company typically makes extremely well-crafted products that are designed with a laser-focus on the user experience, as opposed to merely pursuing better product specs, such as the amount of RAM or storage. The iPod wasn't the first MP3 player on the market, and the iPhone wasn't the first smartphone, but through its eye for design and functionality, Apple bested its rivals and dominated those businesses.
How much money would you have made had you invested in Apple's stock at its IPO? Well, since 1980, Apple has split its stock 2-for-1 three separate times, and 7-for-1 one time in 2014. So a $2,000 investment in 1980 would have purchased about 91 shares, which would have turned into 5,096 shares worth a whopping $1.59 million, nearly 800 times the original investment.
And that number doesn't even include dividends, which currently stand at $3.08 per share -- and which many think will be hiked significantly this year. Still, even at the current payout rate, that initial $2,000 investment would bring a shareholder an additional $15,695 in dividend payments this year alone.
For a shareholder who bought early and held on, Chinese internet superstar Tencent (OTC:TCEHY) could have turned an investment of just $2,000 into more than $1 million in less than 15 years. In fact, the stock first breached that level of return on investment back in late 2017 -- just 13 years after it went public.
In June 2004, Tencent IPOed on the Hong Kong Stock Exchange at HK$3.70 a share, giving it a market capitalization of just about $800 million. (The Honk Kong dollar has traded in the range of 7 to 8 to the U.S. dollar for many years.) Since then, it has split its stock once -- a 5-for-1 split back in 2014 -- yet share price has still risen to an incredible HK$400 as of this writing, up from a split-adjusted IPO price of just HK$0.74.
That means one share of Tencent bought at its IPO has increased in value by 541 times, turning a theoretical $2,000 investment into a $1.08 million fortune in less than two decades! In addition, this gain doesn't even account for dividends. Today, the company's payout stands at HK$1.00 per share, and while that's a paltry 0.25% yield at current values, each share bought at the HK$3.70 IPO price would now be five shares, bringing in HK$5.00 annually -- more than your entire original investment.
How did Tencent do it? With a combination of technological innovation, a sharp focus on customer experience, and incredibly savvy investments in other companies. The massive tailwind from the rise of the Chinese middle class over the past decade also didn't hurt.
Tencent looks quite different than it did back in 2004. Back then, it was mostly known for its QQ instant messaging platform and had 291 million users. Today, Tencent's WeChat "super-app" and social messaging platform, launched in 2011, dominates Chinese life, with 1.15 billion users. Incredibly, the legacy QQ platform still has 731 million users, though its numbers are declining as people shift their online lives to WeChat.
Tencent has also become the largest video game publisher in the world, through a savvy strategy of investing in many other leading video game companies -- including those behind megahits Fortnite, League of Legends, and Call of Duty. Tencent has combined that investment strategy with a formidable position as something of a gatekeeper to the Chinese market. If a foreign game publisher wishes to offer a title there, Tencent takes care of adapting the game to suit the Chinese audience (and Beijing's regulators), and also takes care of distribution in exchange for a cut of the revenues or profits. Even the mighty Nintendo (OTC: NTDOY) has partnered with Tencent in order to sell the Switch in China.
In addition to games, it is making waves as the operator of one of the three largest video streaming services in China, and the majority stakeholder in China's largest music streaming service, Tencent Music (NYSE:TME).
If that weren't enough, Tencent has also been a pioneer in mobile payments with TenPay, which basically enables people to hold cash balances or link their bank account to their WeChat account and make quick and easy payments, either online or offline with QR code. In China, the digital payments market is currently dominated by the duopoly of TenPay and Ant Financial, a division of Alibaba (NYSE: BABA). Between them, they have over 90% market share in the space. For reporting purposes, Tencent groups its payments and fintech division in with its small-but-growing cloud computing platform, and that division grew by a whopping 36% in 2019, putting it nearly on par with the massive online games division.
Finally, Tencent has a huge investment portfolio that includes stakes in large U.S. companies such as Tesla (NASDAQ: TSLA) and Snap (NYSE: SNAP), and Swedish music streaming giant Spotify (NYSE: SPOT). And while Tencent itself doesn't play in the high-growth field of Chinese e-commerce, it owns large minority stakes in several huge companies that do, including JD.com (NASDAQ: JD), Pinduoduo (NASDAQ: PDD), and Meituan Dianping (OTC: MPNGF). Last quarter, Tencent's public investment portfolio totaled $49.9 billion – equivalent to more than 10% of the company's market cap.
What has enabled Tencent's rapid rise? Well, it does help that the company is essentially insulated from foreign competition, due to the way the Chinese government restricts entry to the market there. However, there's more to it than that. Tencent's management team retains a very long-term focus, and isn't afraid to under-monetize its assets in order to focus on the user experience and get customers hooked on its various internet services.
Tencent has also done a masterful job of recognizing what it does well while also identifying top operators in related industries outside its circle of competence. In short, a focus on user experience over immediate monetization, plus the ability to identify other great companies and entrepreneurs, are the key ingredients in the recipe for Tencent's secret sauce.
Top companies in the past, and in the future
Both Tencent and Apple have risen to such heights because they develop technology products that delight customers, so much so that many can't do without them in today's digital age. In addition, both companies' respective cultures are among the strongest in the world. Therefore, even though Apple and Tencent have had huge runs, their long-term futures appear just as bright.