Buffett's wisdom- why you should be happy to see your stock price go down

Every year, the master living investor, Buffett, always issues an annual letter to the investors, in which he has a lot of wisdom to show. The following are just a few points he made this year:

Tumbling markets can be helpful to the true investor if he has cash available when prices  get far out of line with values.

A climate of fear is your friend when investing; a euphoric world is your enemy.

Don't feel bad when stocks go down.

Don't go for the quick profit.

As Buffett has said many times, to value investors with long-term investment in solid companies, lower stock prices are a good thing for them. It seems counterintuitive but actually it has great wisdom involved. Let me show you in a real example with Microsoft. Let's say you buy 1000 shares of MSFT and hold it for 20 years with dividend reinvested. MSFT's current price is $40 with annual dividend of $1.12 (2.8%). Assuming the dividend will grow annually at 15% (the average growth rate in the past 10 years for MSFT) and the stock will stay the same at $40. In 20 years, your MSFT position will grow to over $700,000 from the initial $40,000 investment.  By the way, in one more year in the year of 21st, your position will be over $1 million. That's the power of compounding!!

Now let's assume everything stays the same except that the stock price will also increase annually at 5%. You would think that when both the stock price and dividend are increasing, you will be much richer by year 20, right? Wrong! See below. You will only get over $500,000, or $200,000 less than if without the stock price increasing.

 

 

Now let's say the stock price not only does not increase, it actually decreases annually at 0.5% with everything else staying the same. Believe or not, you position size becomes even larger 20 years later to over $800,000.

 

 

You must be puzzled how this can happen? Well, for long-term dividend reinvestment, your ultimate goal is to accumulate as many stock shares as possible so that you will get more dividend  income. When the stock price stays low, your dividend can buy more shares, which over time will allow you amass a huge number of shares. Eventually, with increasing dividend payment from the company, your total value of the position will explode. The longer you hold, the bigger and faster it will expand. As you can see from the first scenario, just by one more year after year 20,  you will be more than $200,000 richer from your position, if everything is kept the same. Believe or not, in Year 25, you will be a $10 million millionaire.

 

So what can you learn from this? Long-term investment in great business with dividend reinvestment is the most effective way to create your wealth. As long as the underlying business is growing and doing fine, you should be happy to see the declining stock price, especially if the dividend keeps growing. Hope this small essay can make you sleep soundly at night during the market crash if you see your stock prices go down with the market. No panic and no anxiety. Isn't it the highest ideal in investment that you don't need to worry about the prices of your holding stocks?