In September, 1988 I made two noteworthy and illustrative investment decisions.
When our first child was born I purchased one share of IBM stock. It was a symbolic action really. I thought it would be fun to hang the certificate on his wall and use it as an object lesson to teach him about things economic. Before I could get the share framed, I misplaced it and so the lesson was, for the most, part lost. But I correctly left the investment alone and each quarter the dividend paid by the company was reinvested in an incremental share of IBM stock. Twenty-four years later, that approximately $100 investment has returned 1020% or 10.6% per year. During that period there have been two colossally devastating bear markets that frightened investors mistakenly into cash all the while our little share of IBM plumped and expanded like bread dough. Though market corrections punched down the dough a few times, fueled by the yeast of earnings (which produce stock price growth and dividend payments) our value has grown at a pace far exceeding the rate of inflation and the return on savings or money market accounts. For all of you stock market skeptics, it is also important to note that the return on the S&P 500 over that same period is a respectable 797% or 9.9% per year. Simply investing in the stock market index produces enviable returns as well. The chart looks equally compelling over ten, twenty and twenty five years. I chose the time period featured below because it represents my actual experience. But, time matters to investors; even if your timing is not perfect and you purchase shares before a market correction or a prolonged period of unimpressive returns (as I did, note IBM’s modest appreciation for the first ten years) over an extended period you will be asking yourself only one question: Why didn’t I buy more? Today, that one hundred dollar share of IBM is worth over $1,300.00.
Contrast that investment to another I made at the same time. Two weeks after my son was born I was scheduled to make a presentation to Federal Express at their offices in Memphis, Tennessee. None of my business suits fit and I was not going to be caught dead in a maternity outfit after the fact. Especially the maternity clothes available to working women in the late 1980’s (but that is a story for a different book). I rushed to the mall and bought almost the first thing I found: a knee-length cashmere sweater that draped discreetly over the extra pounds and looked remarkably professional. I wasn’t looking for cashmere and had no idea of the expense or the impracticality. All I cared about was that it fit. I signed the receipt without looking, dashed back home and packed for the trip. Dressing for the big event the following afternoon, when I removed the tag, I saw the price for the first time: $1099.00. One thousand ninety-nine dollars! I was due in the hotel lobby in fifteen minutes.
I still have the sweater. It is wrinkled and bally as only cashmere can be and sports a few moth holes. I obviously don’t wear it anymore, but I keep it as a reminder. Had I invested that $1,099.00 in, say, IBM stock as I did for my son, my investment would be worth $11,430.00 today. Instead of a ragged and useless old sweater I would have a nice little nest egg set aside.
It is important to understand that there was a real cost a real and an opportunity cost of my perilous sweater purchase. To calculate the true cost of that poor choice I would have to consider the dollar amount spent ($1099.00), plus tax of approximately $80.00 and credit card interest of close to $220.00–I didn’t have the heart nor the means to pay it off at once–and the opportunity cost. Think of opportunity cost in dating parlance as the one who got away. It is the cost of not doing something or at the very least not doing the right thing. When compared to the investment in IBM I might have made, the opportunity cost of my decision to purchase the sweater was $11,430.00 in foregone appreciation, added to the real cost of the sweater for a total cost of $12, 829.00. That foolish and impulsive decision still echos.