Can we realistically expect to find the next great stock?
We kick off 2016 with a couple of recent posts from popular financial blogs. Both of these articles focus on the emotional foibles and challenges we investors face. The first article recounts some of the absolute best stocks of the past ten years. Now, AFTER they’ve achieved such glorious returns, it’s very easy to say that we wish we had owned these stocks. However, the reality is that these stocks suffer the very same harsh volatility than most other stocks do. The stocks on this list all saw their value cut in half at some point during the decade (with only one exception). Given that many investors employ some sort of stop-loss concept to their investing, this data suggests that investors would more than likely have sold these stocks during their run, and perhaps would have done so more than once. Whether they would have bought back into the stocks soon enough to capture the next leg up is a good question and really depends on how focused one is on a particular stock. Many investors “rent” a stock for a period of days, weeks, months, but often move on once they’ve sold the stock. In the case of these big winners, moving on would have been costly in terms of missing out on a much larger move. We’d also point out that this large drawdowns likely occurred due to some short-term crisis in the business, or perceived crisis. For example, Netflix was pounded down a few years ago when they introduced a pricing plan that sought to move subscribers away from getting their movies/content mailed to them and toward streaming content online. Of course, Netflix proved prescient in their emphasis on streaming and have gone on to deliver great stock returns. In short, winning at investing is tough and finding the big mega-winners extremely difficult. Once you find it, you probably don’t know you have it, and are highly likely to sell it before realizing the biggest rewards.
Chart 1: It takes a strong stomach to hold on to even the best stocks
The full post can be found here: Looking For a Ten Bagger?
The second article is an interview for a book from Jason Zweig who writes a behavioral finance column for the Wall Street Journal. The interview highlights some of the “tricks” that Wall Street employs in pursuit of client dollars. A common theme in many of the tricks is an air of certainty that is somewhat false in that there’s little or no reason to believe the hype and “certainty” being pitched. As experts and pundits put forth their projections for 2016, this article can remind us that no one has a clue what the market will do in the coming days, weeks, and months. But Wall Street is more than happy to confidently proclaim that they actually DO know.
3 Lessons from selling a stock too early
As a brief companion piece to the article above, we link you to a Motley Fool piece on selling a stock too early:
The period between Christmas and New Year’s often provides a Santa Claus Rally. Would this week deliver that much needed positive week to investors after a bumpy year with little to show for it? Monday’s opening bell did not bode well. A sixth consecutive monthly decline in profits from China’s industrial companies put overnight pressure on oil prices which translated into a weak start for U.S. stocks. Outside of weakness in energy the rest of the market showed little interest in doing anything in a quiet Monday session, finishing -0.2%. Tuesday saw the holiday rally kick into gear with the year’s leading stocks and sectors seeing a new wave of buying.
The so-called FANG stocks (Facebook, Amazon, Netflix, and Google) combined with biotech to push the Nasdaq to a +1.3% gain. The one-day reprieve in the pressure on oil prices vanished Wednesday with oil prices again falling under $37/barrel. Buyers failed to show up to build on Tuesday’s stock advance with shares falling -0.7% Wednesday. The selling was more pronounced in the final trading day of the year Thursday. The leading stocks that had propelled Tuesday’s move higher all suffered in Thursday’s trading with the Nasdaq spilling -1.2% to close the year on a sour note. The S&P 500 was left with a negative 2015. It’s first losing year since 2008.
Warm wishes and until next week.