Without the element of time, 99.9% of investors would fail in the market. Already, I hear the rebuttals: Beginning in 2000 and for more than 10 years, time has done nothing but produce a flat return for the S&P 500. Yet, time is invaluable to investment professionals who select securities. But, it needs the benefit of a good starting point. You can't expect to buy at lofty valuations and earn above-average rates of return. Those who bought the Nifty Fifty stocks in the 1960s and 1970s did so at peak valuations and experienced losses for many years. Internet stock buyers in 2000 are still underwater if they continue to hold those positions. Those who bought financials in 2006 and 2007 when earnings reached unsustainable peaks do not feel that time is on their side.
But when you combine time and pessimism, the returns can be astronomical. Consider the financials in the fall of 1990 after a collapse in the real estate sector led to the savings and loan crisis. In the fall of 1990, Bank of America (BAC) traded for less than $5 a share; five years later, shares were above $15; 10 years later when the Internet bubble burst, shares were higher than $25. Wells Fargo (WFC) is a more dramatic example: in the fall of 1990, WFC shares fell to below $2 a share. If you read what was said about WFC back then, nobody wanted to touch the stock excepted guys named Bruce Berkowitz, Joel Greenblatt and, later, Warren Buffett. Five years later, WFC traded above $6; by 2000 shares were well above $20.
Five or 10 years is not a long period for the vast majority of investors. It's foolish to think that most, if not all, of today's banks will make the kind of money they did four years ago anytime soon, if ever. But you don't need that profit model at today's prices.
The specialty glass company Corning (GLW) is another name to consider in order to appreciate what a few years' time can do. It trades around $13 today, less than 7x earnings, and below book value. Corning, by its very nature is a cyclical business. When flat screen television sales were booming as the population upgraded their TVs, Corning prospered. In fact, when the Internet bubble was in full swing, shares traded above $100; when the bubble burst, shares fell below $5. Soon enough, consumers will once again be buying newer TVs, more iPads and the newest gadgets. In the midst of that cycle shift, Corning will climb higher.
Despite earnings per share (EPS) that is forecast to grow to $0.78 in 2012 from $0.41 in 2011, Southwest Airlines (LUV) trades for around $8. When you operate in a business such as airline transportation, the only competitive advantage is low cost. Southwest is the low-cost airline and its ability to consistently earn profits in an industry mired with losses is no small feat. Yet, the valuation treats Southwest like all other airlines. For a profitable airline with little debt, its shares could easily double from current prices. In this case, time will benefit the investor.
It is often said that 80% of a stock's price move occurs during 20% of the holding period. Not even the best forecaster can time this 20% time window; in fact, doing so almost always leads to loss. Instead, the intelligent approach is to buy in at attractive price points and let time do the rest. It's that simple. As a bonus, Uncle Sam lets you keep more of your well-deserved capital gain.