My analysis of an untouched 37-year-old stock portfolio

In yesterday's email, I outlined the simple investment strategy I would use if I were ever to go back to managing money again.

And today, I'll take things a step further to show the power of staying invested for the long term...

As I explained yesterday, I would likely call this potential strategy "10 for 10" – buying only 10 stocks and have an average holding period of 10 years.

This strategy would mean replacing no more than one stock a year on average and it would involve very little rebalancing – as the key to long-term investment success (as I've written many times before) is letting your winners run.

To be clear, I picked these numbers based on gut feel. One of my readers e-mailed me to say he thinks 12 stocks is the right number. Fair enough...

And why look at holding stocks for an average of 10 years? Why not 20, 30, 40, or even 50 years?

After all, a young person who's starting to put money away in a retirement account this year (like all three of my daughters) has at least a 50-year investment horizon. Such a long-term strategy would result in almost no portfolio turnover...

Wouldn't it be interesting to look at such a portfolio? Maybe one with six blue-chip stocks, untouched for an average of 37 years?

Well, I found one...

For background, 102 years ago, my great-grandfather bought a 55-acre piece of land on Lake Sunapee in New Hampshire. I've spent a meaningful amount of time there every summer of my life – even when I lived in Tanzania, Nicaragua, and California growing up – so it's a very special place for me.

My family has called the property "Timberlost" ever since the 1938 New England Hurricane. The storm did enormous damage, which you can see in these old family photos:

When my great-grandfather passed away in 1958, he left Timberlost to his eight grandchildren, of whom my father is one. Unlike many similar old properties that were long ago broken up and sold off, we've managed to keep Timberlost in the family and dozens of us now share it – mostly amicably, I'm pleased to say!

One reason for this is that my great-grandfather (or one of his children – nobody can remember the details) was wise enough to set up an account long ago and fund it with enough money such that the interest and dividends it earns cover most of the costs of the property (mainly taxes and maintenance).

I'm one of three family members on the "finance committee," which is responsible for managing the account. About 25% is in cash (money-market and short-term bond funds, yielding around 5%) and 40% is in two index funds... but what's most interesting to me is the remaining 35%, which is invested in six stocks.

And here's the cool thing: These were purchased (again, nobody can remember by whom – probably my late grandfather) between 27 and 42 years ago and there hasn't been a single trade since then. In other words, it's the ultimate "sit-on-your-ass investing" (to quote the late Charlie Munger) – not buying or selling a single share for decades.

It's a fascinating case study, so let's take a closer look with my rough analysis...

To start, here's a table of the six stocks with the estimated purchase date and price, and their total and compounded annual performance since then:

Wow, it would be hard to find a better example of the key elements of long-term success that I discussed yesterday: the power of long-term compounding, the importance of letting your winners run, and the way only a few big winners are likely to drive nearly all the performance in a portfolio (JPMorgan accounts for nearly half of the total return).

But I wasn't finished with my analysis...

These stocks were purchased in part because they were steady dividend payers, to provide income to Timberlost, so I had to estimate the average annual dividend each company paid.

First, I looked at the recent dividend yield of the six stocks, which ranged from 2.3% to 6.1%:

Then, I looked at each company's cash flow statement going back as far as Capital IQ data was available. For example, here's JPMorgan:

I then compared these to each company's stock chart going back to the estimated purchase date. For example, here's a price chart of JPMorgan starting in early 1991:

We can see that JPMorgan has paid a steadily growing dividend, so I'm going to estimate (based on eyeballing these two charts, not mathematically) that the dividend yield, recently at 2.3%, has averaged 2.0% over the past 33 years.

When I did the same analysis for the other five stocks, I came up with the following estimates (I think I'm being conservative):

Now let's add the estimated dividend yield to the stock's annual return and re-recalculate the return from that:

This blew my mind: by adding in the modest 3.3% average dividend, taking the average annual return from 5.9% to 9.1%, the average total return soared from 1,290% to 3,566%. Talk about the power of long-term compounding...

Finally, let's consider the most interesting question...

Would we have been better off if my grandfather had purchased the S&P 500 Index fund instead of each of these stocks?

I wasn't able to find any data that allowed me to calculate the S&P 500's returns with dividends (that's key) going back to specific dates or even months in the 1980s, so I used the annual numbers in Warren Buffett's Berkshire Hathaway (BRK-B) annual letter and came up with the following:

As you can see, the S&P 500 edges out the six stocks... but it's not that far off.

So do I wish my grandfather had bought the index instead of these six stocks?

You could make a good argument either way, but I tend to think not because of the need for annual dividends.

Had my family owned the index, we would have had to sell an average of 3.3% of our holdings every year to generate the same income as the stock portfolio. That's easy enough, of course... but this would have introduced the opportunity to do something foolish like panic and sell during a time of turbulence.

Not be a broken record, but the most important lesson here is that a powerful route to long-term wealth is to invest in a portfolio of blue-chip stocks (whether via an index fund or picked individually – that's what we at Stansberry Research are here to help you with) and then hold for the long run.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.