Stocks will be Cut in Half!
This headline causes irritation. Clickbait of the worst kind. You know who it comes from; so no need to worry. In Google news, I have blocked all services that bait with such cheap headlines. The rule is, the more lurid the title, the more meaningless the content. However, today this headline shall be the exception to the rule.
How about an open discussion on the topic: Every stock can be cut in half. Or rather, every stock halves at some point. Before every new investment, you should repeat this like a mantra.
With equanimity to success
In October 2009, Charlie Munger - the long-time business partner of successful investor Warren Buffett - was interviewed by the BBC. At the time, he and Warren were witnessing the third decline in the share price of their company, Berkshire Hathaway, by over 50 percent. The interviewer asked how concerned he was about the price drop. His response, “Zero.” He further explained,
“If you're not willing to react with equanimity to a market price decline of 50 percent you’re not fit to be a common shareholder, and you deserve the mediocre result you're going to get.”
I always have to smile when someone says, “Oh, I should have bought Amazon in 1997 when they went public.” This statement also comes in the variant Apple and the year 1980 or Microsoft and 1986, depending on who is the darling of the stock market at the time. Who would still hold the stock today? Almost no one is my bet. In any case no one of those investors who makes such a statement.
Investing with staying power
Amazon would have had to endure a decline of over 90 percent shortly after going public in the late 1990s and with all the accompanying news that put the company's survival in doubt. In December 1999, the shares subscribed at the IPO were worth 50 times as much. By the low point of 2001, most of it was gone again. Could you have stomached that? Would you have continued to believe in the future of the company? No one can honestly answer that question, as it is impossible to leave out the last 20 years. This is called hindsight bias.
By the way, staying with Amazon, that would not have been the last test of your nerves. After that, you would have had to endure a decline of over 50 percent from 2003 to 2006. Only to then accept a drop in the share price of over 60 percent with equanimity in the financial crisis of 2008. The one-third drop at the end of 2018 is not even worth mentioning here. In the case of Microsoft, by the way, it would have taken 16 years before you would have seen the top price of 1999 again. Quite a challenge even for long-term investors.
The truth is reasonable
Over the decades, I have encountered perhaps a handful of clients who faced the prospect of halving with equanimity. Everyone secretly believes: It certainly will not happen to me.
Often, this belief is reinforced by advisors and asset managers. The entire financial industry should trust its customers with more truthfulness. There is a lot of thinking, talking and engineering about avoiding setbacks, only to find out that they are either not avoidable, or if they are, there is a price to pay and answered with a form of lower, long-term returns.
The discussion and question here should be, for the far greater part, how much of a setback and fluctuation you the investor can take.
What does the market want and what do you want?
Be as honest as possible with yourself, because at some point the market will demand proof that you can really take the deep fall. Only if you are prepared, you have the chance to surf all the ups and downs of a moving stock market without falling off the board.
The reward for you are higher returns and the achievement of self-imposed goals. Perhaps at some point you yourself will be one of the few who have managed to hold a darling of the stock market for decades.
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