The secret to building wealth in the stock market is simple: Invest in great companies at good prices, and let time work for you. As Warren Buffett once said: "Time is your friend; impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market."
With that said, I still find it surprising how a little patience can turn a modest investment into serious cash. For example, an investment in Blackstone (BX 1.17%) 10 years ago would have multiplied your initial investment several times. Read on to see just how much a $5,000 in the asset manager a decade ago would be worth today.
Blackstone is in the business of managing money
When pension funds and other institutional investors want to spread their money across different investments, they turn to Blackstone for its alternative investment options.
The firm, along with limited partners, invests clients' money in an array of assets, including real estate, private equity, hedge funds, and credit products like collateralized loan obligations. In return, it earns fees that are a percentage of its total assets under management. The fee is earned quarterly and is a stable, consistent source of income for the firm.
Blackstone also generates income based on how its investments perform. It invests in companies or other assets with its partners and earns a pro-rata share of the investment returns.
It can earn additional income through performance allocations. These are disproportionately skewed in Blackstone's favor and are a way to reward the firm if it achieves certain investment returns. This source of revenue is less stable because it relies on market conditions and the fair value of its assets at the time.
If you invested $5,000 a decade ago, here's how much you'd have today
Investors in Blackstone have enjoyed stellar growth over the last decade. Since 2012, its stock has gained 528%. When looking at your total return, you must consider the company's dividends -- and Blackstone's average dividend yield is 5.3% over the last decade. Assuming these dividends are reinvested, your total return is nearly twice as much at 1,040%.
Put another way, if you invested $5,000 in Blackstone in 2012, it would've turned into $56,700. That same investment in the S&P 500 index would've produced $17,700.
How has Blackstone managed such impressive growth?
The firm has enjoyed tailwinds from large institutional investors turning to private equity and other alternative investments in the past decade. These investors seek market-beating returns along with diversification in their portfolios. From 2015 to 2021, this market has grown by nearly 15%, compounded annually, according to the research and analytics firm Preqin.
Blackstone has capitalized on this trend, seeing its management and advisory fees grow 11% annually over the past decade. I focus on these fees instead of total revenue because they are recurring and more predictable. Performance fees can fluctuate, which is apparent when you look at its annual investment income (which includes performance allocations) of $3.5 billion, $2 billion, and $16.8 billion from 2019 to 2021, respectively.
Demand for alternative assets could double in the next five years
This year, the firm's total revenue has dropped 46%, mainly due to a drop in performance allocations, which were astonishing last year. On the other hand, its management and advisory fees have grown 27%, showing that its service is in high demand by investors.
According to a report by Preqin, demand for private capital continues to show resilience. The report says that more investors are turning to alternative assets, including high-net-worth individuals and family offices. Preqin projects the global alternative asset market will grow from $9.3 trillion this year to $18.2 trillion over the next five years.
Blackstone has done a stellar job of capitalizing on investors' demand for alternative investments and should continue seeing strong tailwinds.