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SKARBECK: Finding one last lesson in Grace's amazing tale

April 17, 2010

Ken Skarbeck InvestingThis week, we conclude our look at Grace Groner, whose $180 investment in Abbott Laboratories stock in 1934 eventually grew into an estate of $7 million.

We pick up the time line near the end of the 1980s, assuming that Grace was jarred by the 50-percent decline in the value of her stock following the 1987 stock market crash. We had previously speculated that this episode may have led her to evaluate a program to diversify her holdings, but that she had opted not to sell her stock and reinvest into mutual funds due to the taxes and fees she would incur.

The final two decades of Grace’s investment would be marked by two vastly different periods. The 1990s were a modern-day gilded era for investors. During that 10-year stretch, the stock market (as measured by the Standard & Poor’s 500 index with dividends reinvested) advanced 18.2 percent annually, with Abbott’s stock mirroring the market. For investors it was bliss, resulting in a 433-percent cumulative return for the decade.

However, as always, over-exuberance in the stock market eventually has its consequences. The following decade, 2000-2009, was a loser for investors, as the market lost nearly 1 percent annually. Likewise, Abbott stock peaked in April 1999 at about $53 per share, which is essentially where it trades today. According to the new reports, Grace did reinvest her dividends back into Abbott stock, which would have approximated a cumulative $1.8 million over the past 10 years, yielding a 3-percent annualized total return.

It is worth noting that, although mathematically the annual total return on her 74-year investment is 15.3 percent, the actual year-to-year returns did not progress as a linear constant. She held her investment through many ups and downs in the stock market. But most important to her was that Abbott as a business continued to thrive, despite the swings in its stock price. This demonstrates a mistake many investment advisers make—equating stock-price volatility with risk.

Market returns the past decade also reveal the lasting damage caused by the overvalued tech and blue-chip stocks of 1999. Today, more than 10 years later, the stock prices of many of those companies are still well below their end-of-the-century highs. “Irrational exuberance” pushed their stock prices well above intrinsic business values, and investors have been paying the price since. This is a prime example of risky behavior—substantially overpaying for stocks in an overheated market.

Last, some readers will conclude that Grace Groner was just plain lucky. If she had owned, say, General Motors, or any number of other companies for 74 years, she would have had far worse results. True, although there were companies besides Abbott that performed even better, just as there will be stocks in this generation that deliver excellent long-term results.

The key lesson from Grace’s story is that she had the proper “temperament” to hold onto a good business even through nerve-wracking stock market fluctuations. She realized she was the owner of a well-managed and growing business, so why sell? She understood the benefits of saving for the long term and the value of compounding money at attractive rates over a long period.

By all accounts, Grace lived frugally, but happily and for a long time. We all should be so lucky.•

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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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