The $100 decision that turned into $150,000
Einstein called compounding the eighth wonder of the world. This true story shows why.
In 1991, the Federal Government decided to privatise the Commonwealth Bank of Australia (CBA) and float the company on the ASX. Thousands of everyday Australians applied (including me). One couple I work with (I will call them John and Emma, and they were happy for me to share this story) each put in an application and ended up with 500 CBA shares apiece at $5.40. That is $2,700 each or $5,400 combined.
Same household.
Same company.
Same starting point.
And then they made one small, different decision.
Emma heard on the radio that Dividend Reinvestment Plans (DRP) were a good thing. Instead of taking a dividend as cash, you reinvested it into more shares in the company. Emma ticked the DRP box for her CBA shares. John didn’t.
For the first CBA dividend in 1992, John received a cheque for $100. Emma received 16 extra CBA shares instead of cash. After this first dividend, John thought the DRP sounded like a good idea too, so he ticked the DRP box for subsequent CBA dividends.
That’s it. That’s the whole “strategy difference”.
Fast-forward three decades and many, many DRPs later.
Emma now holds 7,427 CBA shares, worth around $1,116,000.
John holds 6,407 CBA shares, worth around $963,000.
One little decision 34 years ago has compounded into a gap of about 1,000 shares and $150,000 in value. This is a big price to pay for a $100 cheque.
How did his happen?
Three simple forces did the heavy lifting:
Reinvestment – Emma’s dividends bought more shares, which then earned their own dividends, which bought more shares, and so on.
Time – CBA has now been compounding away since the early 1990s. This is not a five-year story; it’s a three-decade one.
Staying put – They didn’t trade in and out. They turned the DRP on and left it alone. They didn’t sell when CBA lost half its value during the 2008 GFC. They didn’t sell in 2015 when headlines warned of a housing crash and a bank-led market meltdown (an episode almost no one remembers now).
Now I do caution that with the benefit of hindsight, holding CBA shares over the past 34 years was a very good investment.
CBA’s share price alone (ignoring dividends) has grown at around 10% per year since the early 1990s. Add fully franked dividends on top and the total return has been ahead of the overall market. (Note the ASX300 Index has returned 10.9% per annum plus franking credits over the same period, so investing in the Australian stockmarket would have delivered similar returns to CBA over the period).
The CBA share price alone is up 28 times since 1991. In contrast, the NAB and ANZ share prices are up between 6 and 8 times over the same period (again, excluding dividends).
The moral of this story is not that you need to be good at picking stocks – that is impossible to do consistently as this article reminds you - https://www.loricapartners.com.au/insights/how-to-manage-stockmarket-risk
The moral is real magic happens when a decent investment, held for a long time, is combined with disciplined reinvestment.
Why small decisions matter so much
For younger investors, including the adult children of many of our clients, this story is less about choosing the “perfect” share and more about the tiny, boring decisions that quietly compound:
Do I reinvest or spend my first dividends?
Do I increase my super contributions by 1% this year, or say “I’ll do it later”?
Do I stay invested through a scary headline, or sell and “wait for things to settle down”?
At the time, these feel trivial. Thirty years later, they might be the difference between “comfortable” and “financially independent”.
Behaviour beats brilliance
Most people overestimate the importance of stock-picking brilliance and underestimate the importance of simple behaviours to build wealth:
Starting early
Letting time work
Not interrupting compounding with constant tinkering
Keeping fees and taxes low
Automating good decisions (like DRPs and regular savings plans)
In this CBA example, no fancy trading strategy was involved. No market timing. No “insider” insights.
Emma just happened to be on DRP from day one. John wasn’t – for one dividend.
Small, sensible decisions, made early and repeated consistently, are worth far more than clever moves made late.
Let the market do the rest.
Author: Rick Walker