Beginning in 2000, the bursting of the dot-com and telecom bubble led to a 58% loss for the DAX index. Yet over the 30-year period ending in 2013 — a stretch that included not only the crash of the tech-heavy Neuer Markt but also the fall of the Berlin Wall, the introduction of the Euro, and the global financial crisis — DAX investors pocketed a total return of more than 1,200%, which comes out a 9% annual return.
Think about that for a moment. For three decades and through several major economic and stock market shocks, the DAX plowed forward, earning investors an excellent long-term rate of return. Recently, the index of Germany’s 30 leading companies surpassed the 10,000 mark for the first time, having enjoyed one of the best stretches in its history.
And yet many Germans and Europeans turn a skeptical eye to the DAX — and to stock investing in general. Many of these investors were burned by the collapse of the Neuer Markt or the more recent financial crisis and have let those experiences permanently sour them to stocks.
They left the stock market and missed out on the DAX’s incredible recent run, including back-to-back gains of more than 25% in 2012 and 2013. Now, with the DAX at record highs, they are even more hesitant to get back in, fearing the next market crash is just around the corner.
To many Germans, the stock market is seen as a casino best left to gamblers. They feel it’s rigged by greedy bankers and shifty traders in Frankfurt or on Wall Street. Is it any wonder that only 7% of Germans actually own individual stocks?
An almost can’t-lose investment?
To be blunt, we think shunning stocks is a terrible mistake.
At The Motley Fool, we view stock investing as not only your best defense against inflation, but quite simply as one of the best wealth-generating vehicles known to man. Not only do we think the DAX is going to go much higher than 10,000, we’re very confident that Germany’s top index will deliver strong positive annual returns for the next 30 years as well.
How can we be so confident?
For starters, take a look at the following chart from the Deutsches Aktieninstitut, visualizing the DAX’s annual returns going back to 1963. Each individual box in the triangle shows the annual return for an investor who bought the DAX at the end of one year (Y-axis) and held through the end of another year (X-axis). Green boxes show gains, boxes closer to white show flat returns, and red boxes show losses.
Source: Deutsches Aktieninstitut. Click here for the full PDF.
First, take a moment to admire all the green in that chart. In the vast majority of years and time periods, the DAX has had a positive annual return.
Now look what happens as you move down and toward the right of the triangle. The red squares disappear completely. In plain language: The longer the holding period, the higher the chance of a positive annual return. In fact, you won’t find a single 15-year holding period in the entire 50-year span of the chart that doesn’t result in a positive annual return.
Even using 10 years as a holding period, there are only two instances (out of 41 possibilities) where your returns would have ended up negative. That means that if you bought the DAX any time over the last 50 years, and held for at least 10 years, you had a95% chance of a positive annual return.
But it’s not just the historical returns that have us convinced that the future is bright for stock investors – it’s also the reason for those returns. Quite simply, the DAX has thrived because the German businesses that make up the DAX have thrived. BMW (ETR: BMW) nearly tripled its net profit for the decade ending in 2013, while operating profit at Adidas (ETR: ADS) has expanded nearly 11 times over the past 20 years.
German businesses not only serve their growing home market, but they increasingly serve the growing world market. In the 2013 global rankings from brand expert Interbrand, BMW, SAP (ETR: SAP), Volkswagen (ETR: VOW), Siemens (ETR: SIE), Audi (ETR: NSU), Adidas, and Allianz (ETR: ALV) were all among the top 70. This from a country whose population makes up just 1% of the world’s population.
Over the long term, the world economy will continue growing and expanding. Germany will continue growing and expanding. And that gives us confidence that stocks, both in and outside of Germany, will earn investors significant returns as they follow the growth of the businesses they represent.
The Magic of Compounding
Taking advantage of this growth doesn’t have to be complex. In fact, it can be quite easy.
All you have to do is invest in the DAX, an index of 30 of Germany’s leading companies. We’re talking about companies like Siemens, the industrial conglomerate, Allianz, the financial giant, and BMW, one of the world’s leading luxury automotive brands. These companies are industry powerhouses and are known by people all over the globe. By making just a simple, low-cost investment in a DAX index or exchange-traded fund, such as the DAX UCITS ETF (ETR: DBXD), you’re instantly making a diversified investment in 30 large, stalwart German companies – companies with very little chance of going bankrupt – and stand a good chance of earning solid returns on your investment from now into the distant future.
Let’s get back to that 9% figure — again, what investors in the DAX would have earned over the 30 years from 1984 to 2014.
What can 9% per year do for you? Look at what happens to 10,000 Euros invested at our 9% historical DAX rate versus what happens to 10,000 Euros invested at the current rates of other instruments, such as your bank account or long-term German-government bonds.
|Savings Account (0.5%)||FestzinsSparen (1.5%)||Government Bonds (2.5%)||Stock Market (9%)|
That’s quite a difference, right? In 30 years, a 10,000 Euro investment in the DAX could be worth more than six times what you might expect to get by investing in 30-year government bonds today, and more than 10 times the paltry interest you may be getting from your bank.
Now let’s use the same table, but pretend that, instead of investing 10,000 Euros only at the beginning, we invest 10,000 Euros every year for the next 30 years. Ready for some magic?
|Savings Account (0.5%)||FestzinsSparen (1.5%)||Government Bonds (2.5%)||Stock Market (9%)|
Pretty impressive, no? Investing 10,000 Euros today and 10,000 more every year (or roughly 833 Euros per month), just in the DAX, could make you a millionaire in less than 25 years at the DAX’s historical rate of return.
You Can Do Even Better
Compared to most rates of return you can find today, 9% is pretty darn good. But why stop there? We think most investors can do even better. As an example, take a look at the 10-year returns of five current DAX components:
|DAX Company||Total Return, 2003-2013||Annualized|
|Bayer (ETR: BAYN)||457%||18.7%|
|BASF (ETR: BAS)||411.4%||17.7%|
|Deutsche Boerse (ETR: DB1)||274.5%||14.1%|
Source: S&P Capital IQ. Dates between 1/1/2004 and 1/1/2014. Includes dividends.
Imagine if you’d been able to pick and choose some of the DAX’s best performers over the past decade. You would have crushed the DAX’s long-term average return!
That isn’t to say there aren’t plenty of bad examples from the last 10 years as well. If you’d been unlucky and purchased shares in Deutsche Bank (ETR: DBK) or Commerzbank (ETR: CBK), for example — two companies hit hard by the recent financial crisis — you may have underperformed the DAX. Through the beginning of 2014, Deutsche Bank’s annual “return” was -2.8%. Commerzbank’s has been by far the worst DAX performer of the past decade. It’s about 90% of its value, or -22.9% on an annualized basis.
But these kinds of bad outcomes come with the territory. You can’t always expect you’ll pick the winners; you’re going to have your share of losers as well. At The Motley Fool, we’ve been recommending and purchasing individual stocks for more than 20 years. We’ve made plenty of losing investment recommendations, but our overall track record of picking stocks is pretty good.
For the Love of Great Businesses
Why have we been so successful? Just like making regular investments in the DAX, our approach is simple: We buy and hold great businesses. It’s the very same approach that turned Warren Buffett into one of the richest people in the world.
Take, for example, one of Warren Buffett’s most famous investments: Coca-Cola (ETR: CCC3). In 1988, when Buffett first invested in the beverage giant, it was already a well-known global brand. Many critics called its stock price “expensive” at the time and thought Buffett was making a mistake.
But in Coca-Cola, Buffett saw a brand that was far from reaching its full potential, particularly outside its home market, the U.S. He recognized the company’s strong competitive advantages and the affinity so many consumers around the world had for the company’s products. He felt an investment in Coca-Cola could yield huge returns in the years ahead. And man was he right.
In the 10 years after Buffett’s initial investment, Coca-Cola rose more than 15 times in value – not including dividends! Including his initial investment, Buffett would end up investing a total of about one billion Euros in Coke over the next two decades. As of the end of 2013, his investment was worth more than 12 billion Euros. Moreover, the 400 million Coke shares that Buffett’s company, Berkshire Hathaway (ETR: BRH), owns, pays Berkshire about 350 million Euros annually in dividends.
Now, none of us have the deep pockets that Warren Buffett has and most of us probably fall well short of Buffett’s investment acumen (raising our hands very high). But that doesn’t mean we can’t attempt to emulate his business-minded approach to investing and his willingness to buy and hold a strong companies like Coca-Cola for many, many years.
At the Fool, we think every investment should be treated as owning a piece of a real business, not a piece of paper that’s meant to be traded around. To echo the great investor Peter Lynch: “A share is not a lottery ticket, but part-ownership of a business.” That’s something you won’t find coming from the mouths of most Frankfurt or Wall Street traders, who are usually always in it to make a short-term profit trading in and out of stocks on a daily basis.
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Bis zu 130 Mrd. US-Dollar investiert Investorenlegende Warren Buffett in nur ein einziges Unternehmen. Das zeugt von riesigem Vertrauen in das Zukunftspotential.
Buffett hat so einige Mega-Milliardeninvestments in seinem Portfolio. Wir haben sie näher analysiert, und angesehen, inwieweit sie sich zum Nachahmen eignen.
Matthew Argersinger owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway, BMW, and Coca-Cola. The Motley Fool owns shares of Berkshire Hathaway and the following options positions: long January 2016 $37 calls of Coca-Cola and short January 2016 $37 puts of Coca-Cola.