Warren Buffett once said: “If you’re making a good investment in a security, it shouldn’t bother you if they closed down the stock market for five years.”
With the US stock market in a bear market, these words ring louder than ever. But, I would go even further and suggest that the truly long-term investor shouldn’t bother even if the stock market closed forever. Yes, you heard that right- forever.
Even if we are never able to sell our shares, a truly good investment (bought at the right price) should still pay off over time as companies pay their shareholders dividends.
For example, let’s say you bought shares of the Singapore-listed hospitals owner Parkway Life REIT (SGX: C2PU) back in 2007 at its offering price of S$1.28 per share. After you made your investment, the Singapore stock market completely closed down and you were left holding on to your shares with no way to sell them. Since then, you would have collected a total of $1.46 per unit in dividends (technically, a REIT’s dividends are called distributions, but let’s not split hairs here).
Today, even if you are not able to sell your shares, you would still have more than made up for your investment and continue to be entitled to future dividends.
This is the goal of the long-term investor. I do not hope to simply sell off an asset at a higher price to a higher bidder; instead, I’m comfortable holding the asset for its cash flow.
But what if your stock doesn’t pay a dividend now? The same concept should still apply. This is because companies may be in different phases of their life cycle. A growing company may not pay a dividend when it’s growing rapidly. But after some time when excess cash builds up in its coffers over time, it can start paying that cash to patient shareholders.
If the stock market closed down forever, patient shareholders of these “non-dividend-paying” companies will still ultimately start receiving dividends, which ideally should eventually exceed what they paid for the shares.
However, not all investments pay off. Some investors may have paid too much for a stake in a company. And some high-growth companies that may look promising may never generate enough cash to reward shareholders.
In times like these, I think of another quote from Buffett: “It’s only when the tide goes out that you learn who has been swimming naked.”
In today’s market, investors who only bought a stock hoping to sell it to a “greater fool” at a higher price with no actual cash flow fundamentals behind the stock are unlikely to make back their capital.
Whenever I invest in a stock, I always think about how much cash flow it can potentially generate and whether I can make back what I paid for it simply by collecting the cash flow that I am entitled to over the years. This way, I will never be bothered about dips in share prices as I know I will eventually get more than paid off even if no one offers to buy the shares in the future.
So do you own productive assets you are happy to own forever?
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.
Disclosure: Jeremy Chia does not own shares in any of the companies mentioned.