One reason I find Peter Lynch’s books enjoyable to read is that they have thoroughly stood the test of time. There’s nothing like diving into stuff written 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. This story featured in his 1993 book Beating The Street and covers a stock portfolio constructed by students at the namesake school in Arlington, Massachusetts.
Now I’ve deliberately chosen this as a reference for two reasons. One, the students who built the portfolio were seventh graders. I guess it is unlikely that they will have been poring over balance sheets and stressing about profitability metrics. In other words it really is just about buying ‘what you know’. Two, the story dates back to 1990, the year I was born. On that basis it offers a pretty neat guide as to what could have been achieved during my life to date.
The actual composition of the portfolio consisted of 14 stocks: Walmart, 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 given readers will be much more familiar with the first half of the group. I’m sure Wal-Mart, Nike, Disney and PepsiCo need absolutely no introductions whatsoever. Mobil is of course now part of Exxon Mobil 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 group of seven stocks is probably less well known. I won’t dwell on it 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 can see why 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 real time 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).
Returns From The St. Agnes Portfolio
I’ll focus specifically on the first five names on the list: Walmart, Nike, Disney, PepsiCo and IBM. Let’s assume as an investor that you decided to mirror the St. Agnes portfolio back in 1990. That would have meant that those five names accounted for just over one-third of your capital assuming equal weighted investments. Call that $10,000 for each stock, or a total portfolio value of $140,000 of which those five make up a $50,000 block. At the time that would have meant that you picked up 1,724 shares of Walmart 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 have returned around $140,350 by way of cash dividends. In other words those dividends would have 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 today. The yield on cost, for those who are interested, would have been around 20% last year.
Remember, that figure covers only 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 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 effect of reinvesting dividends along the way. Needless to say that adds a bit extra to the total return figure.
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. It has ubiquitous products, has been around a long time and would 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). 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.