The Hardest Part In Investing In Order To Achieve Superior Returns
No, it is not about buying the right company.
Buying the right company when investing is of course the most important thing in order to achieve superior returns.
But it is not the hardest thing to do. So, what is?
Let me give you a hint using a quote by Charlie Munger:
The first rule of compounding: Never interrupt it unnecessarily.
You know where this is going…
Holding a winning stock is as important as buying it, but it is far more difficult to hold a stock than to buy one.
Why? Human psychology. Investors always think that action beats inaction. So when their stock doubles in a year, their hands get itchy and they sell, thinking it is too expensive. And when their stock drops by half? They sell, because they want to cut their losses. Whether their stock increases or decreases in price, they take action.
Let me tell you this:
When it comes to achieving superior returns in investing, inaction beats action.
Some might refer this idea as the Coffee Can approach, or the “buy and forget” method.
Of course, nothing is as convincing as providing you evidence that holding a good stock pays off. Take note, the keyword here is holding, not buying.
I will be listing down 3 stocks that had achieved the much sought after 100-bagger status, and show you how these companies also suffered major drawdowns while on its way to 100x and beyond.
1. Apple (NASDAQ : AAPL)
Over the last 2 decades, Apple had suffered around 30–40% drop in stock price on 4 different occasions, including a 60% drop in 2008 while on its way to 100x.
2. Netflix (NASDAQ : NFLX)
Netflix has been a 100-bagger since 2002, but over the course of the period, its stock price had lost 25% of its value in a day 4 times. Also, since October 2021 till 18 February 2022 (at the time of writing this article), Netflix’s stock price had fallen by more than 40% (and it may not even be the end yet).
3. Monster Beverage Corp (NASDAQ : MNST)
Monster Beverage Corp managed to achieve a 100-bagger status in a 10-year run (impressive!). However, in that 10-year run, its stock price had experienced a drop of more than 40% and 30% in value. It also experienced multiple 20% drops.
As you can see from the 3 examples that I have given, even good companies face periods of drawdowns, seeing their stock price fall by 20% or more at some point. In such situation, investors are being tested psychologically on whether they can hold on during difficult times.
In case you have yet to understand the main point that I am driving across till now, let me put it clearly out here:
The best investors think long term and ignore short term “noises”, knowing that they have invested in the right company.
You better have a very good reason to sell a wonderful business just because its stock price had doubled within a short period of time and looks “expensive”. Otherwise, you will seek to incur a very huge opportunity cost in the future and you will regret your decision.
Conversely, you better have a very good reason to sell a wonderful business just because its stock price had fell tremendously from its 52-weeks high and looks “risky” to hold.
Remember, when the stock price drops, it becomes less risky, not more.
Perfect Timing
I think that it is apt that I am writing this piece of article at this time. Since late 2021 till now, many growth stocks have been experiencing serious decline in their prices.
So, now that you have read what I had written, ask yourself: Are you going to stomach the current volatility and hold your existing stock, or are you going to get scared and sell off your position?
The decision is yours to make.
Market volatility is a feature, not a bug.
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