it.
Willyâs shareholders were able to make money in two different ways. They could realize a profit from dividends (cash payments given to shareholders usually four times each year) or they could wait until their stock had increased substantially in value on the stock market and choose to sell some or all of their shares.
Hereâs how an investor could hypothetically make 10 percent a year from owning shares in Willy Wonkaâs business:
Montgomery Burns had his eye on Willy Wonkaâs Chocolate Factory shares, and he decided to buy $1,000 of the chocolate companyâs stock at $10 a share. After one year, if the share price rose to $10.50, this would amount to a five percent increase in the share price ($10.50 is five percent higher than the $10 that Burns paid).
And if Burns was given a $50 dividend, we could say that he had earned an additional five percent because a $50 dividend is five percent of his initial $1,000 investment.
So if his shares gain five percent in value from the share-price increase and he makes an extra five percent from the dividend payment, then after one year Burns potentially would have made a 10 percent profit on his shares. Of course, only the five percent dividend payout would go into his pocket as a ârealizedâ profit. The five percent âprofitâ from the price appreciation (as the stock rose in value) would only be realized if Burns sold his Willy Wonka shares.
Montgomery Burns, however, didnât become the richest man in Springfield by buying and selling Willy Wonka shares when they fluctuated in price. Studies have shown that, on average, investors who buy shares and sell them again quickly donât tend to make profits as high as investors who hold onto their shares over the long term.
Burns held onto those shares for many years. Sometimes the share price rose and sometimes it fell. But the company kept increasing its profits, so the share price increased over time. The annual dividends kept a smile on Montgomery Burnsâ greedy little lips, as his profits from the rising stock price coupled with dividends earned him an average potential return of 10 percent a year.
However, Burns wasnât rubbing his bony hands together as gleefully as you might expect because at the same time he bought Willy Wonka shares, he also bought shares in Homerâs donuts and Louâs bar. Neither business worked out, and Burns lost money.
Driving him really crazy, however, was missing out on shares in the joke-store company, Bartâs Barf Gags. If Burns had bought shares in this business, he would be laughingâall the way to the bank. Share prices quadrupled in just four years.
In the following chapter, I will show you that one of the best ways to invest in the stock market is to own every stock in the market, rather than trying to follow the strategy of Burns and guess which stocks will rise. Though it sounds impossible to buy virtually every stock in a given market, itâs made easy by purchasing a single product that owns every stock within it.
Before getting to that, remember that you can invest half of what your neighbors invest over your lifetime and still end up with twice as much moneyâif you start early enough. For patient investors, the aggregate returns of the worldâs stock markets have dished out phenomenal profits.
For example, the U.S. stock market has averaged 9.96 percent annually from 1920 to 2010. There were periods where it grew faster than that, while it dropped back at other times. But that 9.96 percent average return, as shown in Table 2.1 , has provided some impressive long-term profits. Invest early, and invest frequently. The odds are high that youâll slowly grow very wealthy. Let me show you how.
Table 2.1 How $1,000 Would Grow Over Time If It Made 9.96% Annually
Source: The Value Line Investment Survey; Morningstar
Years of
Willyâs shareholders were able to make money in two different ways. They could realize a profit from dividends (cash payments given to shareholders usually four times each year) or they could wait until their stock had increased substantially in value on the stock market and choose to sell some or all of their shares.
Hereâs how an investor could hypothetically make 10 percent a year from owning shares in Willy Wonkaâs business:
Montgomery Burns had his eye on Willy Wonkaâs Chocolate Factory shares, and he decided to buy $1,000 of the chocolate companyâs stock at $10 a share. After one year, if the share price rose to $10.50, this would amount to a five percent increase in the share price ($10.50 is five percent higher than the $10 that Burns paid).
And if Burns was given a $50 dividend, we could say that he had earned an additional five percent because a $50 dividend is five percent of his initial $1,000 investment.
So if his shares gain five percent in value from the share-price increase and he makes an extra five percent from the dividend payment, then after one year Burns potentially would have made a 10 percent profit on his shares. Of course, only the five percent dividend payout would go into his pocket as a ârealizedâ profit. The five percent âprofitâ from the price appreciation (as the stock rose in value) would only be realized if Burns sold his Willy Wonka shares.
Montgomery Burns, however, didnât become the richest man in Springfield by buying and selling Willy Wonka shares when they fluctuated in price. Studies have shown that, on average, investors who buy shares and sell them again quickly donât tend to make profits as high as investors who hold onto their shares over the long term.
Burns held onto those shares for many years. Sometimes the share price rose and sometimes it fell. But the company kept increasing its profits, so the share price increased over time. The annual dividends kept a smile on Montgomery Burnsâ greedy little lips, as his profits from the rising stock price coupled with dividends earned him an average potential return of 10 percent a year.
However, Burns wasnât rubbing his bony hands together as gleefully as you might expect because at the same time he bought Willy Wonka shares, he also bought shares in Homerâs donuts and Louâs bar. Neither business worked out, and Burns lost money.
Driving him really crazy, however, was missing out on shares in the joke-store company, Bartâs Barf Gags. If Burns had bought shares in this business, he would be laughingâall the way to the bank. Share prices quadrupled in just four years.
In the following chapter, I will show you that one of the best ways to invest in the stock market is to own every stock in the market, rather than trying to follow the strategy of Burns and guess which stocks will rise. Though it sounds impossible to buy virtually every stock in a given market, itâs made easy by purchasing a single product that owns every stock within it.
Before getting to that, remember that you can invest half of what your neighbors invest over your lifetime and still end up with twice as much moneyâif you start early enough. For patient investors, the aggregate returns of the worldâs stock markets have dished out phenomenal profits.
For example, the U.S. stock market has averaged 9.96 percent annually from 1920 to 2010. There were periods where it grew faster than that, while it dropped back at other times. But that 9.96 percent average return, as shown in Table 2.1 , has provided some impressive long-term profits. Invest early, and invest frequently. The odds are high that youâll slowly grow very wealthy. Let me show you how.
Table 2.1 How $1,000 Would Grow Over Time If It Made 9.96% Annually
Source: The Value Line Investment Survey; Morningstar
Years of
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