I just hit a big milestone in my personal portfolio: my first 10-bagger.
In other words, for the first time, one of my stocks has appreciated by more than 10x my original purchase price. In percentage terms, we’re talking about 1000%+ gains.
This is truly what dreams are made of in the market.
And yet, I don’t write this article to brag. Actually, the stock in question is also directly connected to one of my biggest regrets in the market. And therefore, I wanted to pen this piece to discuss the importance of long-term ownership of equities and the immense power of compounding over time.
The stock that I’m talking about is Nvidia (NVDA). I bought shares of my current position in January of 2017 at $27.63 (on a split adjusted basis). I’ve since added to this position via selective re-investment and my current cost basis is $30.53. Today, NVDA shares trade for $328.97.
When I first bought NVDA, I acknowledged that it was a speculative bet, with additional dividend growth upside.
Since my first purchase, NVDA has produced earnings-per-share growth of 138% in 2017, 79% in 2018, 44% in 2019, -13% in 2020, and right now, the analyst consensus for the company’s full-year 2021 EPS calls for year-over-year growth of 73%. What’s more, looking ahead, Wall Street remains bullish on NVDA’s growth prospects, expecting to see EPS growth of 74% in 2022 and 18% in 2023. Needless to say, this “speculative” bet has paid off in a big way.
Unfortunately, NVDA has stopped increasing its annual dividend (the company has paid its current $0.04/share payment since late 2018 (once again, on a split adjusted basis). Yet, I’m certainly not going to complain about the lack of dividend growth when NVDA shares are appreciating at such a rapid rate.
Even though Nvidia is no longer a dividend growth stock, my experience with NVDA shares and the lessons that I’ve learned along the way to this 10-bagger experience translate directly to the importance of long-term ownership of blue chips.
With regard to complaints, my only regret when it comes to my NVDA position is that I trimmed shares in the past.
Because of the stock’s lofty valuation, there was a time when I let fear persuade me to reduce my exposure to Nvidia.
At the time, I was pleased to trim shares, locking in profits.
As the common Wall Street phrase goes, “No one ever went broke taking a profit.”
Which is true. However, my goal isn’t to avoid being “broke”. It’s to generate significant wealth and to reach financial freedom.
I thought I was reducing risk within my portfolio; however, with the benefit of hindsight, I’ve learned that I would have been much better off simply holding onto those NVDA shares.
Frankly, if I hadn’t made that sale, I’d be much further along on the path to financial independence than I currently am. And this is why I’m a big proponent of the idea of letting winners run these days.
I often talk about the importance of valuation when accumulating shares.
I think that it’s incredibly important for investors to focus on wide margins of safety when buying stocks. Not only does this practice reduce downside risk, but it increases upside return potential as well.
Simply put, paying attention to fundamentals and value is a win-win for individuals who are disciplined and patient enough to wait for bargains.
But, over the years, I’ve come to the conclusion that once I own shares of wonderful companies like NVDA, it’s in my best interest to focus on my invest thesis, which includes things like growth strategies, on market share, and the overall success of a company’s leadership’s ability to navigate their competitive landscape and execute on operational goals, as opposed to short-term valuation multiples.
Operational success will lead to things like sales growth, higher margins, increased cash flows and earnings-per-share. Operational success will result in increased flexibility and capability when it comes to a company’s ability to acquire assets and to attract top level talent. And ultimately, operational success is what enables companies to return cash to shareholders.
One just has to remain patient.
In the short-term, a wonderful company may seem overvalued (generally speaking, the market’s greed leads to high valuation premiums being placed on stocks with strong growth prospects). And while I’m not willing to cash momentum and put new capital at risk by following the herd and buying into overvalued stocks, I am not perfectly content to hold onto my shares of blue chip companies which have been caught up in momentous rallies because frankly, time in the market, when it comes to owning blue chip stocks, is what is most likely to lead to significant wealth generation.
I’m going to paraphrase one of my investing heroes, Warren Buffett, who likes to think about stock positions, not as ticker symbols, which are easily tradeable, but instead, of small (though often, in Mr. Buffett’s case, significant) pieces of a business.
In other words, he believes that investors should view themselves as owners of the wonderful companies that they accumulate.
In his 1996 letter to Berkshire Hathaway shareholders, Buffett wrote, ‘Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
Let me repeat that: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
That’s powerful. And simple. And easy, right?
Nothing is easier than doing nothing. And to me, once an investor buys shares of a blue chip company, so long as their original investment thesis is not disrupted in a major way, taking this simple and easy route is likely best, in terms of long-term success.
In his 1987 letter to Berkshire Shareholders, Buffett wrote, “Whenever Charlie and I buy common stocks for Berkshire’s insurance companies (leaving aside arbitrage purchases, discussed later) we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay. We do not have in mind any time or price for sale. Indeed, we are willing to hold a stock indefinitely so long as we expect the business to increase in intrinsic value at a satisfactory rate.”
This again, speaks to his belief (which I now wholeheartedly agree with, due in large part to lessons like the one that NVDA has taught me) that the buy and hold strategy, when it comes to wonderful businesses, is the best way to generate wealth.
More recently, in his 2020 letter to shareholders, Mr. Buffett said, “Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees.”
And that’s the message that I think investors should take to heart here. Fear and greed will attempt to influence us all to make irrational decisions (in the stock market and in all other aspects of our lives); however, as Buffett says, those who’re able to overcome these emotional impulses via an “inner calm” and focus on long-term ownership of high quality businesses are likely to succeed.
And with that in mind, I want to circle back to my NVDA stake.
Truth be told, I think shares are expensive today. They trade for more than 75x this year’s earnings. However, the fact is, NVDA’s CEO, Jensen Huang, continues to be a visionary leader, the company continues to execute on its plans, the stock appears to have numerous secular tailwinds propelling it forward, and therefore, barring some sort of unforeseen black swan event, it appears very likely that Nvidia’s fundamentals will continue to improve moving forward.
Have I thought about trimming again recently? Sure, the thought has crossed my mind.
It’s easy to think things like, “I’m up 100%, 200%, 500%, 1000%, etc, on company X and therefore, I should take some profits here.”
But, the fact is, you can’t have 10-baggers if you sell your shares when they’ve doubled.
Eventually, I suspect that these fundamentals will more than justify the current valuation. And therefore, I’m not interested in trying to trade in and out of this stock based upon short-term valuation concerns anymore.
Instead, I’m incredibly pleased to simply sit back and put my trust in NVDA’s leadership’s ability to continue to produce results which lead to significantly long-term wealth generation for me.
Thankfully, this story has a happy ending, because I didn’t sell all of my shares and I still get to benefit from exposure to Nvidia shares. However, the portion of the company that I own isn’t as large as it would be if I had not allowed fear to dictate my decision making several years ago.
My success with NVDA and thoughts of “what could have been” if I had never sold a single share will always serve as a reminder to maintain this long-term focus when it comes to my equity holdings. And I suspect that the lessons I’ve learned throughout my journey towards my first 10-bagger will be useful for others as well.
With all of this being said, I think it’s paramount that investors understand that long-term ownership of wonderful businesses is how true generational wealth is accumulated.
This article is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended. It does not guarantee that securities mentioned in this newsletter will produce profits or that they will equal past performance. Additionally, we are not an investment advisor and do not offer securities or tax advice. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. Nicholas Ward, contributors and staff members of Wide Moat Research may hold positions in some or all of the stocks listed.
Disclosure: Nicholas Ward is long NVDA.
Nicholas Ward is a research analyst who currently writes for Seeking Alpha, The Dividend Kings, iREIT, and Forbes Real Estate Investor. Before that, he was Founder and Editor-in-Chief of The Dividend Growth Club, as well as the Income Minded Millennial. Nicholas has also contributed to Sure Dividend, Investing Daily, and The Street, where he covered stocks in Jim Cramer's Action Alerts PLUS Portfolio.
Nicholas holds a bachelor of arts from The University of Virginia, where he studied English and studio art. Prior to transitioning into the financial industry, he managed a vineyard in the foothills of the Blue Ridge Mountains.
