Identifying a great company, buying it at a reasonable price and then owning it for the long term is a great way to build wealth. As investor Warren Buffett would say – it's simple but it's not easy!
There are lots of reasons for that, including one of the most difficult factors investors face, human nature. Owning the same business through thick and thin is tough! Owning a business for many years — decades even – requires fortitude as an investor rides the ups and downs of the market, deals with the inevitable bad news at some point from the company and considers the opportunity cost of selling out to buy something else.
However for those few investors who successfully master these psychological tendencies, as a chart provided in the recent Annual General Meeting presentation from Ramsay Health Care (ASX: RHC) showed, the results can be outstanding.
Ramsay Health Care listed on the ASX on 23 September 1997; since then the share price appreciation, assuming the reinvestment of dividends, has produced a total shareholder return of 3,742%. On a yearly basis this equated to a compound annual growth rate (CAGR) of 25.2%.
In comparison, had investors instead been invested in the S&P/ASX 100 Index (Index: ^AXTO) (ASX: XTO) and assuming the reinvestment of dividends, they would have seen their wealth increase by 394% over the same period, or at a CAGR of 8.9%.
Foolish takeaway
Many investors often invest with a theme in mind – for example the "aging or healthcare theme." There is nothing wrong with using this approach, however simply picking the health care theme and investing in a company with exposure to the sector could have led investors to purchase Primary Health Care (ASX: PRY) or Sonic Healthcare (ASX: SHL) instead of Ramsay.
Over the past 16 years it's obvious where investors would have preferred to have been invested and it's a reminder of why stock-picking is so important.
