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mYCharts - December 1, 2021

Turning a $10K Investment into $39M with Austin Lieberman


​​A $10,000 Investment in Microsoft in 1986 is Worth $39 Million Today! I hate these headlines. But let’s play along..

A $10,000 investment in Microsoft on November 3, 1986 held through November 29, 2021 is worth $38.9 million today. That’s a 389,000% return compared to a measly 4,270% return by the Nasdaq over the same period. I started on November 3, 1986 because that’s when Microsoft broke $1 billion in market capitalization and would have surfaced on many investors’ (or advisors’) radars.

Microsoft Vs. Nasdaq from 1986 to 2021

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The problem with these headlines is that investors and advisors are human. Humans have emotions driven by what’s going on with their families, their jobs, their investments, and more.

So let’s zoom in to four pivotal periods during Microsoft’s legendary 35 year run, then we’ll cover some important takeaways for investors and advisors. 

In the nine years from November 3, 1986 to June 27, 1995, the market capitalization grew from $1 billion to $50 billion and investors earned a total return of 3,900%. Growing that $10,000 initial investment to $390,000.

Over the next four years from June 28, 1995 to December 14, 1999, the market cap grew from $50 billion to $500 billion and the share price increased by 800%. We’re now at a total return of 36,000% from our starting point in 1986. That $10,000 investment has now grown to $3.6 million.

Microsoft Total Return since 1986

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The next fourteen years aren’t quite as enjoyable. From December 15, 1999 to March 18, 2014, Microsoft’s market cap shrank 41% from $500 billion to $328 billion but shareholders saw a total return of 0.28% because of Microsoft’s dividends from 2004 to 2014.

Microsoft Market Cap compared to Total Return Price from 1999 to 2014

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The next seven years are a thing of beauty. From March 19, 2014 – November 29, 2021, the market cap grew from $328 billion to $2.5 trillion, providing a total return of 892% and making Microsoft the second largest company in the world. Second only to a very large fruit company named Apple.

Microsoft Total Return Price from 2014 to 2021

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That initial $10,000 investment in 1986 is now worth roughly $39 million and the savvy advisor who recommended it or investors who bought it and sat on their hands are legends.

The Problem With These Stories

As I wrote above, my issue with these types of stories is they don’t cover the emotions investors and advisors experience along the way. 

If you’re an advisor, do you recommend your clients sell somewhere between 1986 and 1995 during that initial 3,900% run? Microsoft’s return would have surely far surpassed any investor’s one, three, and five-year goals.

If an investor held through 1999 or was unlucky enough to start a position at the height of the .com excitement, would they have the emotional fortitude to hang on until 2014 with the stock falling 60% below 1999 levels on four separate occasions? 

After such a traumatizing drop would an investor or advisor who experienced it ever be willing to own the “risky” stock that caused all their pain again?

Microsoft Total Return since 1999

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I’m over simplifying these scenarios. Avid investors (or advisors), are more likely to be focused on details like proper allocation according to risk measures, price to earnings multiples, etc. 

But it’s worth pointing out that many less experienced investors and/or clients won’t be paying attention to those details. They’re focused on what their investments are doing for them and how they’re performing against friends, family, and colleagues they’re hearing from. 

My goal with this post isn’t to tell any advisors or investors how to manage risk. I’m not qualified to do that and everyone has their own risk appetite and tools for that. 

What I hope to do is show how to identify (and communicate to others) when things may be getting a little bit crazy. 

During that 1986 – 1999 run when Microsoft’s total return was 7,900%, earnings per share (EPS) and revenue each grew by roughly 1,800%. In other words, over 13 years, the return was more than 4x the increase in EPS and revenue which represent the growth of the underlying business. Microsoft’s PE ratio expanded from a low of 18 to 65 at the end of 1999. Well above its average of 39 over those 13 years. 

Those levels aren’t sustainable. Something had to give.

Microsoft Return Price, EPS Diluted and Revenue from 1990 to 1999

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Now let’s look at these metrics from 1999 through today. Microsoft’s EPS has grown 1,000%, revenue has grown 706% and investors’ total return has been 872% resulting in a PE ratio of 37. I’m not attempting to predict forward returns here, but that’s a much more reasonable scenario than in 1999. 

Microsoft Total Return Price, EPS Diluted (TTM) & Revenue since 1999

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This last chart is pretty remarkable. Microsoft’s PE ratio has contracted from 79 in 1999 to 37 today. Yet the total return has been 872% over the same time period (shown in the chart above).

Microsoft PE Ratio since 1998

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My last take away from the history of Microsoft in charts is that even if an investor bought Microsoft in 1999 on the absolute worst day possible at the height of the .com euphoria with a PE of 79, they still would have grown their investment by 8x if they held through today because Microsoft has produced strong revenue and earnings growth over the last 22 years.

Austin Lieberrman, Social Capital

Austin Lieberman – Proud Dad, Husband, & Veteran. Emerging Manager @socialcapital

The opinions expressed in this publication are those of Austin Lieberman and they do not purport to reflect the opinions or views of Social Capital or any of its partners.

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