One of the reasons I find Peter Lynch’s books to be so enjoyable to read is that they have been thoroughly backed up by the test of time. There’s nothing like diving into stuff written twenty or thirty years ago and finding many of the principles apply just as well today as they did back then. Take the St. Agnes portfolio for example, which was featured in his 1993 book Beating The Street and was constructed by students at the namesake school in Arlington, Massachusetts.
Now I’ve deliberately chosen this as a reference for two reasons. One is that the portfolio was constructed by seventh graders, which a quick Google search tells me will be comprised of students who are around thirteen years old. I guess its unlikely that they will have been poring over balance sheets and stressing about profitability metrics. In other words it really is just about buying stocks of well known companies (or well known products to be precise). The second reason is that the portfolio was constructed in 1990, the year I was born, and so offers a pretty neat guide as to what could’ve been achieved during my life to date.
The actual composition of the portfolio consisted of 14 stocks: Wal-Mart, Nike, Walt Disney, PepsiCo, IBM, Mobil, Gap, NYNEX, Topps, L.A. Gear, Food Lion, Savannah Foods, Pentech International and Limited. I deliberately ordered them like that as in all probability readers will be much more familiar with the first half of the group than the second. I’m sure Wal-Mart, Nike, Disney and PepsiCo need absolutely no introductions whatsoever. Mobil is of course now part of ExxonMobil and traces its history all the way back to John D. Rockefeller’s original Standard Oil. IBM has been a blue chip for decades and Gap is a well known apparel chain.
The second seven group of stocks will probably be less well known. I won’t dwell on them too much but among the businesses are manufacturers of sneakers (L.A. Gear), pens & markers (Pentech International) and trading cards (Topps). In other words you could see why a class of seventh graders might choose them on the “buy what you know” principle. Oh, and neither can it be said that it suffers from any survivorship bias. This was realtime stock picking back in 1990 and the fact that the portfolio contains its share of duff investments is proof of that (L.A. Gear for example filed for Chapter 11 bankruptcy in 1998).
I’ll focus specifically on the first five names on the list: Wal-Mart, Nike, Disney, PepsiCo and IBM. Let’s assume as an investor that you decided to mirror the St. Agnes portfolio back in 1990. At the start of the period that would’ve meant that those five names accounted for just over one-third of your capital assuming equal weighted investments in dollar terms. Let’s call it $10,000 for each stock; so a total portfolio value of $140,000 of which those five stocks make up a $50,000 block. At the time that would’ve meant that you picked up 1,724 shares of Wal-Mart stock, 11,534 shares of Nike stock, 1,036 shares of Disney stock, 967 shares of PepsiCo stock and 408 shares of IBM stock. All figures have been adjusted for subsequent stock splits.
Over the following twenty-seven years those five stocks between them would’ve returned around $140,350 by way of cash dividends. In other words those dividends would’ve pretty much returned the starting capital outlay. In addition, the 1,724 shares of Walmart stock would currently be worth $119,980; the 11,534 shares worth of Nike stock would be worth around $601,365; the 1,036 shares of The Walt Disney Company would be worth $109,245; the 967 shares of PepsiCo would currently be worth $101,885; and the 408 shares of IBM stock would currently have a value of $68,165. The total value of capital and cash dividends would be around $1.4 million as of this point. The yield on cost, for those who are interested, would have been around 20% last year (i.e. around $28,000 in 2015 dividend income from these five alone).
Remember that figure is purely for the five stocks mentioned above. It doesn’t take into consideration the returns from any of the other nine. It doesn’t take into account all the cash dividends and current value of what would now be a chunk of Exxon Mobil stock for example. Nor does it include shares in Gap Inc. stock – which would currently be worth around eleven times what they were at the start of 1990 (plus a nice pile of dividend cash). It doesn’t take into account any spin-offs, such as Yum! Brands which was spun-off from PepsiCo back in 1997. Finally, it says nothing about the extra returns that would’ve been generated by reinvesting dividends along the way. Even if you just take the $1.4 million in total returns afforded by Walmart, Nike, Disney, PepsiCo and IBM you would’ve seen annual compounded returns of around 8.4% on the entire original portfolio.
Often when you read comments sections on Seeking Alpha articles you get the impression that far too many folks are trading these blue chips over the short-term. If we were talking exclusively about stocks in cyclical industries that would be perfectly understandable. Take General Motors and the car industry for example. Now General Motors is a company that probably everybody has heard of. They have a ubiquitous product, have been around for a heck of a long time and would surely qualify for a “buy what you know” portfolio. Despite that if you held the stock over the past five decades you’d have barely seen real (after inflation) wealth creation because the of the nature of automobile manufacturing. It’s one of the few examples where if someone said they only planned to hold it over the short-term you’d nod your head in complete agreement.
You can’t really say that about the likes of PepsiCo. This is why it’s strange to see comments of folks who’ve held, very often for rather short periods of time, saying that they’ve sold up because of fears of healthy eating (to use a common reason right now). Will that secular trend prove to be a headwind to organic growth? Probably. Is it going to derail the underlying compounding machine? Probably not. Once a stock like that is bought it stays bought for a long time. As the St. Agnes portfolio aptly demonstrates, even a small number of “winners” will more than make up for the losers over the long-run.