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A Fabulous Company Whose Stock Went Nowhere for Seventeen Years
May 12, 2017


Talking about good companies being bad stocks, how about a company with such a record: Not even close to a loss in the last twenty-six years, and some outstanding return on equity (ROE) numbers.

If you were co-owner in such a company at the turn of the century in the year 2000, you could have barely hoped for a better performance from it over the next seventeen years.

Moreover, let me tell you, this is no small company. There are few people in the world that don't use its products.

So here's the question for you. How do you think this company's stock has performed over these last seventeen years? Good? Great? Fabulous?

Today's chart of the day has the answer.

Yup, that's right. The stock of this company has gone pretty much nowhere over the last seventeen long years. In fact, only late last year did its stock finally crossed the level it had touched way back in 1999. Phew!

I'm talking about none other than the third-largest company in the world by market cap - Microsoft Corporation.

So, what explains the strange saga of the Microsoft stock?

The world's greatest investor, Warren Buffett, offers us a clue:

    Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.

And yes indeed. In the overexcited markets of 1999, the stock of Microsoft was in seventh-heaven. It had touched a high price to earnings (PE) of almost 80 times.

The result is that it has taken the company seventeen long years to work out the hangover of that stock market party, despite a great performance in terms of sheer profitability.

What do I make of this? It is ironic, yes. But surprising? Not at all. Buffett is right. Time and again, over optimism about a company or sector takes stock prices to ludicrous levels. And in most cases, even if the company turns in a very respectable performance over the next many years, it could have a hard time living up to such hyped-up stock prices.

The only defense investors have to avoid getting stuck in such situations is to be intensely price-focused while buying stocks. Frugality is always the best policy.

Data Source: Yahoo Finance

This Chart Of The Day was published in The 5 Minute WrapUp - Read This Before Throwing Out the 'Bad' IT Stocks

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