You would think that about half of the shares in the S&P500 do better than average in a given year. You would expect a balanced distribution between superior and inferior market players.
The reality is that the exact percentage moves up and down in real time. And overall, only about 20% of S&P 500 stocks outperform the market average. That’s why it’s so important to find a winner.
According to MacroTrends, these are the five best stocks of the past decade Nvidia(NASDAQ: NVDA), AMD(NASDAQ: AMD), Camtek(NASDAQ: CAMT), Honest Isaac(NYSE: FICO)And Tesla(NASDAQ: TSLA). These stocks have compound annual growth rates between 40% and 75%. On the low end, a $10,000 investment in Tesla ten years ago is worth $290,000 today. On the high end, a $10,000 investment in Nvidia is worth almost $2.7 million at the time.
A key part of The Motley Fool’s investing philosophy is to “let your portfolio winners win.” There are relatively few winners, and if you have a winner in your portfolio and sell it prematurely, you have about an 80% chance of replacing it with a loser.
Sounds simple, right? Just buy good stocks and hold on to the big winners. But in reality, Nvidia, AMD, Camtek, Fair Isaac, and Tesla all share one surprising thing that has made it extremely difficult to hold onto them over the past decade.
Over the past decade, these five stocks have all fallen in value by 50% or more at least once. Tesla retreated more than 70% from its 10-year high. And even the mighty Nvidia fell 66% in 2022.
Nvidia has fallen 50% or more twice in the last decade. Tesla has done this three times. That includes AMD, if we round the numbers slightly, and it is currently down 40% from the highs it hit earlier this year.
NVDA data by YCharts.
When a stock falls this far, there will always be negative headlines fueling long-term fear. And these bearish cases will scare investors into believing that the time to sell has come.
On the one hand, it’s easy to empathize with someone who has sold. Imagine you have a position worth hundreds of thousands of dollars that drops by 50%. It would make you sick to see so much profit disappear. But on the other hand, selling any of these five stocks after a 50% pullback was ultimately the wrong move, causing sellers to miss out on huge gains.
Investor Charlie Munger said: ‘If you are not prepared to respond with equanimity to a 50% market price drop two to three times a century, you are not fit to be an ordinary shareholder, and you deserve the mediocre outcome you get . will be compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
Munger was never one to mince his words. He may sound harsh here, but his advice is nevertheless sensible, for several reasons.
First, investors must accept that a drop of 50% or more will happen, and that it will happen often. If you want to make money investing, this is part of the deal.
Second, a decline of 50% or more tells investors nothing something about when to sell or when to buy. As we’ve seen, the five best stocks you could have bought ten years ago have all fallen by at least 50% at least once. Those declines offered no opportunities.
Likewise, there are countless other stocks not mentioned here that fell 50% or more and never recovered. Munger talked about equanimity, and that’s what you need when you realize that stocks can recover or fall further after a 50% drop. The bottom line is that investors should react indifferently to price, which brings me to my third point: Investors should have an investment thesis when they buy stocks.
Your thesis must articulate the necessary conditions for generating sustainable shareholder value. Then compare a company’s results with the thesis. If everything goes as hoped, it’s often a good idea to hold on, as you’ll have a solid foundation for when the stock market becomes turbulent.
In summary, investors may see their portfolio halved even if they picked the best possible stocks. But volatility is part of the deal. As fear begins to surface, investors should dust off their investment thesis to see whether they should continue to hold the stocks in their portfolio.
Have you ever felt like you missed the boat on buying the most successful stocks? Then you would like to hear this.
On rare occasions, our expert team of analysts provides a “Double Down” Stocks recommendation for companies they think are about to pop. If you’re worried that you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
Nvidia:If you had invested $1,000 when we doubled in 2009,you would have $363,593!*
Apple: If you had invested $1,000 when we doubled in 2008, you would have $48,899!*
Netflix: If you had invested $1,000 when we doubled in 2004, you would have $502,684!*
We’re currently issuing ‘Double Down’ warnings for three incredible companies, and another opportunity like this may not happen anytime soon.
See 3 “Double Down” Stocks »
*Stock Advisor returns December 23, 2024
Jon Quast has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Tesla. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
The Surprising Thing The Five Best Stocks of the Last Decade All Have in Common was originally published by The Motley Fool
