Growth without limits
Gutmann Viewpoint

Growth without limits

Trees have a natural growth limit. Scientists assume this to be 150 meters. The tallest of their kind are found in California; they are redwoods that almost scratch the clouds at up to 120 meters. The challenge for these giants is to transport the nutrients they absorb through their roots to all their branches and leaves. At some point, the end comes and the system perfected by evolution reaches its limit. That is why trees really do not grow to the sky.

After the rising stock prices of the last 12 months, a customer asked me the other day, “Are the trees growing into the sky?” What was probably meant by him was, “How much further can share prices go up?” Unfortunately, I do not have a concrete answer to this question, but I do have a philosophical one: individual corporate plants do indeed grow infinitely higher.

 Amazing developments

Within the stock market, the value of a share can actually go above and beyond. To prevent this from happening in purely visual terms, shares are split. After a 2:1 split, a stock price of 100 is only 50. Nothing has changed in terms of value; instead of one share at 100, you now hold two at 50 each. There is neither an advantage nor a disadvantage for existing shareholders. The only decisive factor is how much was invested and what the current value of the share is. However, for new investors, this makes the security easier to trade, since it is usually easier to get in at a lower price. At least that is the psychological argumentation of the proponents.

What happens if you never split the stock of a successful company is a pattern shown by Berkshire Hathaway. From less than USD 10 per share in the 1960s, it has risen to USD 400,000 today. Now that is an argument against the economically irrelevant stock split.

Already the joy of a tenfold increase of a share within our shareholder life is rare. However, it is not only Berkshire that shows that amazing developments are possible. Amazon went public on May 15, 1997. The split-adjusted price of a share was USD 1.5.[1] Today, a share trades at USD 3,160. Those who subscribed then have 2,100 times as much today. Imagine if you had sold after one of those rare “10x” and missed out on most of the wealth growth as a result. Now it is clearer why Warren Buffett almost never exits the stock of a successful company. Great companies can just grow sky-high.

No growth without setback

Unlike the giant sequoia “President” in California's Sequoia National Park, which steadily climbed for over 3,000 years, shareholders have to endure enormous setbacks. Amazon, for example, fell more than 90 percent after the tech bubble burst in 2000. That is hard to sustain for investors. Warren Buffett and his partner Charlie Munger also saw their own Berkshire stock more than halve several times. Not as a result of a stock split, however, but because of price losses. Yet, they always made up for it, and the stock continued to grow skyward. Since 1965, the share has risen by more than 2.8 million percent.

The investment return is particularly easy to calculate for Amazon and Berkshire because both companies have never paid a dividend and the profits have always been reinvested.[2]

The great Berkshire and Amazon billionaires are mostly people who never had much to do with the stock market. Maybe they met Warren Buffett or Jeff Bezos a long time ago and were impressed by them; maybe they were employees or business partners. They wanted a stake in the company and did not care about the crazy ups and downs of the stock market.

In German-speaking countries, we too sometimes meet people with such a success story. Perhaps the grandfather sold his company to the Knorr company and as a result the family holds the now more valuable Unilever shares. There are similar stories with large positions in BASF, Bayer or Novartis. Often, the share packages are now so large in relation to the family income that the annual dividends make a difference even to the extended circle of relatives of the former generation of entrepreneurs.

Eyes closed and get through

Important for this cross-generational success is to have the eyes focused on the company and the blinkers in the direction of stock market prices. The stock market expert André Kostolany, who died in 1999, got it right: “You shouldn't follow events with your eyes, but with your head. Often, even on the stock market, it's better to close your eyes."

Of course, we do not want to cloud your vision. However, we can help you focus on the essentials.

[1] Amazon went public on May 15, 1997 at a price of USD 18.00. USD 1.50 is if you include the 2:1 split in 1998, 3:1 in early 1999 and 2:1 in September 1999. So 18 divided by (2*3*2). https://ir.aboutamazon.com/faqs/default.aspx

[2] Almost right. Berkshire Hathaway paid out USD 0.10 in dividends per share in 1967. At the time, a small dividend yield of about 0.5 percent and USD 100,000. Today, the amount paid out would be worth over USD 3 billion had Buffett continued to invest it. Would have, would be, ...

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