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Time In The Market

Discussion in 'Business, Investment and Economics' started by Michael Cornips, Jul 6, 2011.

  1. Michael Cornips

    Michael Cornips Formerly known as TradersCircle3

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    I was reflecting on the commodity boom Australia has experienced over the decades and wanted to express this performance in terms of an increase in value of buying a share in the resource sector. Of course, this is all with the benefit of hindsight, and probably unlikely to re-occur in the future.

    What better analysis than to buy 1000 BHP shares in May 1984 for $14.40 each, for an investment of $14,400?

    Over the years the dividends have been re-invested to purchase additional shares, share splits have occurred, and Bluescope Steel was hived off and so was Onesteel Ltd. Cash dividends of $180,000 were paid that were re-invested into buying more BHP shares. Franking tax credits of $77,500 were paid. Depending on your tax rate, the dividends could even be free of additional tax because of the franking tax credits.

    As of 1st July 2011 this is what 1000 BHP shares worth $14,400 have become over the 27 years:

    22,140 BHP shares valued at $969,067

    5,517 Bluescope shares valued at $6,841

    3,488 Onesteel shares valued at $6,417

    Total $982,200 - 68 times the original investment or 16.8% compounded return.

    BHP's performance demonstrates what was right with Australia's economy, and possibly what is now wrong as we face a two speed economy punishing the non-material sectors.

    Michael Cornips
     
  2. skc

    skc Goldmember

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    Something's wrong with your calculations somewhere.

    22,140 BHP shares from 1,000 shares over 27 years?! Assuming 2 divdends each year you need to average 6% increase in share number on each dividend payout. I highly doubt that is the case given BHP is never really a big dividend yielder. On last dividend you can just increase your share number by ~1%.

    Unless there's a share split or big capital raising that you've included somewhere.

    All those dividend numbers also appear to be grossly wrong.
     
  3. So_Cynical

    So_Cynical The Contrarian Averager

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    Perspective.

    $14400 back in 84 was maybe 12% of a nice house, in a nice part of Sydney or 25% of a nice house in South Fremantle or maybe 40% of a nice house in Wagga Wagga....what was a new car worth back then? around 10 or 12K?
     
  4. Michael Cornips

    Michael Cornips Formerly known as TradersCircle3

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    Fair question, and a good example on how Corporate actions affects historical data.

    The data is the result of share splits BHP has done over the years. The data source we use is Iress Market Technology and the Iress Portfolio System which has all Corporate actions such as dividends, share splits, and buy backs etc.

    On the 31st March 1984 the BHP share price was $14.40. The adjusted share price after share splits was $1.32. By 30th June 1984 the adjusted share price fell to $1.04, which would have inflated my results by 30%, if I used that in the example. I preferred to pick the highest monthly share price in 1984 to try and not cherry pick the results.

    Here are the share splits:

    27th April 1984 - 1:5 Bonus Issue

    3rd December 1984 - 2:1 Share Split

    26th April 1985 - 1:8 Bonus Issue

    3rd Feb1986 - 1:5 Bonus Issue

    27th April 1987 - 1:5 Bonus Issue

    21th April 1989 - 1:10 Bonus Issue

    11th May 1995 - 1:10 Bonus Issue

    23rd October 2000 - 1:4 Capital return @.66c by distribution in Onesteel

    29th June 2001 - 1.0651:1 Bonus issue for merger of BHP Ltd and Biliton Plc

    27th May 2002 - 1:5 in Specie Distribution in BHP Steel

    23rd November 2004 - Off market buyback @ $12.57 ($10.77 Fully Franked Dividend) - Not included in example

    24th Feb 2006 - Off market buyback @ $23.45 ($21.35 Fully Franked Dividend) - Not included in example

    12th Feb 2007 - Off market buyback @ $24.81 ($22.31 Fully Franked Dividend) - Not included in example

    25th Feb 2011 - Off market buyback @ $40.85 ($40.57 Fully Franked Dividend) - Not included in example.

    And then we have all the dividend re-investment plans and attached franking credits.

    cheers
     
  5. Tysonboss1

    Tysonboss1

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    Even so, most of us here would have much more than a new car or 12% of a nice house invested.
     
  6. Tysonboss1

    Tysonboss1

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    The thing that I find so fasinating is that such a record is not un common, there is numerous examples of Australian companies returning decent gains over the years.

    One would ask himself how is it possible to lose when investing in such a business, The fact is that alot of money has been lost by people who have danced in and out of companies like BHP, buying in at highs and then selling as the stock corrected, using margin to make speculative short term purchases. etc.
     
  7. wooly1

    wooly1

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    Perhaps there is some merit in buy & hold after all. :)
     
  8. skc

    skc Goldmember

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    Thanks for the clarification I was not aware of all those bonus issues. They don't seem to be nearly as popular these days...
     
  9. ENP

    ENP

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    Shows the benefits of being invested in an "extraordinary" business doesn't it?
     
  10. Tysonboss1

    Tysonboss1

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    I think so,

    Provided the business or asset is a good one, and you purchase it at the right price inactivity will produce better results they hyper active trading.
     
  11. Julia

    Julia In Memoriam

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    It may or it may not. Too many variables to be able to justify such a generalisation.
    Depends very much on the skill of the trader.
     
  12. robusta

    robusta

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    Or the quality of the fundamental analysis:D
     
  13. So_Cynical

    So_Cynical The Contrarian Averager

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    I brought my first block of land in around 84/5 paid $7500 i think...would of done alot better putting the money into BHP but could of just as easily put the money into Bond Corp or Bell Resources...then where would i be?
     
  14. Wysiwyg

    Wysiwyg Everyone wants money

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    Couldn't hurt to have a balance of both long term boring stock investments and exciting speculative stock trading.
     
  15. ROE

    ROE

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    There is always merit in buy and hold of wonderful business ...

    The key is good business not any business ...good business mean different things
    to different people .. I have a set of criteria if passed it's a good business...

    most people think of shares is a piece of paper rarely they think
    they part owner of the business ... if you wrap your mind around this

    you see why buy and hold provide extra-ordinary return.

    Imagine you own a little shop in a mall, it generate you 20% return on your invested capital each year and provide you with ample cash flow for expansion and what ever

    else you need and it been going good for a few years...then some nut jobs burn down the mall and your business have a little set back and earn you 10% on your invested capital that year ....

    Seeing you down this year your not so good friend becomes a little opportunistic and offer you a low ball figure for your business and pain a bleak picture of the business .... you on the other hand know the business and know that it only a temporary set back.

    1. Do you sell your business cheap
    2. You hang on and work your way back to glory.

    I doubt most people would pick 1 but in the stock market that what you get each day ..sometimes you get extra-ordinary business going cheap ....

    when that happen prepare to buy big and hold for a long time.. (as long as the business stack up)

    I have a list of business that I know it well and when the time comes and people
    panic and exit I buy in.

    I still remember the time when fast food got a bit of a bad press because people gone Healthy and so our Dominos pizza friend got punished .. I on the other hand think it's a temporary set back and I come in and hold .... Still I remember CCP debacle from darling to dog but it has one extra-ordinary thing people over look.

    a healthy and large automatic payment plan book that can generate it ample cash flow to sort out its problem ... again come in buy and hold...

    some years from now I will repeat the same story with QBE ..remember the time when the country was ravage with nature disaster and US treasury bond at 1% and you can buy QBE for $16 :D
     
  16. Tysonboss1

    Tysonboss1

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    I am not talking about trading here, Just talking about buying an interest in a business. If you by a wonderful business at a fair price over time you do not have to trade in and out of it to do well, just sit on it.
     
  17. tothemax6

    tothemax6

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    Whats that inflation-adjusted?
     
  18. Tysonboss1

    Tysonboss1

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    I think 16.8% return has got inflation covered :)
     
  19. bob99

    bob99

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    Just an initial thought, the first problem with this, and there are many, is that even if we take the most basic of calculations into account it is not worth $982,200 at all!

    Depending on when you take CPI from, and how you apply it - there are a few ways, you would have in real terms, applying it to your final figure between $645k and $710k.

    However, this should be applied every year, and every qtr, and every month you hold the stock - cant just compound the parts you like, so in fact you are looking at an amount between $518k and $540k.

    The problem with the investment world is this sort of fluff, wipe over the surface and you soon see the real world.

    Not a bad investment all the same, yet there are a number of other problems with your math.

    I'll worry about that when I have the time.
     
  20. Tysonboss1

    Tysonboss1

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    Yes it is worth $982,200. If you sold it today you would have $982,200 in your bank account. If you put the cash under the matteress you would still only have $14,400 ( if the mice had not eaten those old paper dollars).

    Inflation eats away the value of cash, Not the value of real assets, real assets go up because of inflation not lose value due to it.

    So by investing in a company that owned real assets your $14,400 went to $982,200 through a combination of inflation, organic growth of the business and reinvested dividends.

    Offcourse the $982,200 is not worth as much now as it was in the 80's, but in the 80's you only had $14,400.

    So the fact 3% or 4% of the 16.8%pa was caused by inflation is pretty meaning less.
     
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