Buying shares in quality companies and holding them for years, if not decades, has proven to be the clearest path to wealth generation — but it’s easier said than done. Most investors buy with the intention of persevering through the usual ups and downs that are part of stock ownership. But the real test comes when a stock plummets, which is inevitable, and well-off investors head for the exits.
To take Nvidia (NASDAQ: NVDA) For example, the maker of graphics processing units (GPUs) is a life-changing investment for long-term shareholders. The stock has risen more than 27,000% over the past decade. In other words, investors who bought $1,000 worth of Nvidia stock 10 years ago are now sitting on more than $274,000 — but that path wasn’t easy.
Just two years ago, Nvidia stock fell 66% from its all-time high.
Two important lessons from history
In theory At least, holding on to stocks during a downturn is relatively easy. Most investors talk a good game and fully intend to hold on to winning stocks when the going gets tough. In practice, however, it is much harder because there are emotions involved. An illustration can help to provide some perspective.
In November 2021, Nvidia was riding high. The onset of the global pandemic in early 2020 and subsequent stay-at-home orders boosted demand for Nvidia processors.
Gaming experienced a resurgence as both casual and serious gamers spent more time playing computer games. As the leading supplier of high-end graphics cards used by gamers, Nvidia has been one of the biggest beneficiaries of this trend.
Sales of personal computers (PCs) also rose as people outfitted their home offices to weather lockdowns and work from home. This upgrade cycle also worked in Nvidia’s favor. During that two-year period, Nvidia’s revenue increased 129%, while net income increased 159%. This drove a 525% increase in its stock price.
Then the ground collapsed. Consumers changed their spending habits in light of slowing economic growth and rising inflation. Difficult choices on the supermarket shelf and at the gas pump left people with less money to spend — and sales of gaming chips fell. Sales of cloud computing processors also collapsed as companies drastically reduced spending, expecting the worst.
Between November 2021 and October 2022, Nvidia stock lost 66% of its value, the downward spiral fueled by spooked investors trying to lock in gains or avoid losses. Many investors who sold Nvidia decided they would buy back the shares at a lower price, but it rarely works that way. Doubts remain, the bottom is missed, money is invested in other, more attractive stocks, or time gets away from us. Before you know it, Nvidia stock costs much more than what investors sold it for, and thanks to price anchoring, many are reluctant to buy at this new, higher price.
This wasn’t the first time Nvidia shareholders had their mettle tested. Between September and December 2018, Nvidia’s stock price was halved. A cryptocurrency crash late that year caused demand for Nvidia GPUs to dry up. Used processors, once part of the cryptocurrency mining process, were being sold second-hand at dirt-cheap prices, and Nvidia’s sales plummeted.
This illustrates that Nvidia is and will continue to be a volatile stock and that trying to predict the market’s fluctuations is a fool’s errand.
It’s easy to say afterwards
As investors, we typically don’t have hindsight, but history can be incredibly helpful in making investment decisions.
For example, as a young investor living through the Great Recession in 2008 and 2009, I saw my entire portfolio lose a whopping 41% of its value. This taught me that downturns are a natural part of the investing experience. These market downturns also present an attractive opportunity to acquire quality stocks at discounted prices.
More importantly, I have learned that when the inevitable recovery occurs, my stocks will recover and even reach new highs. There have been countless investors who have learned this lesson in the aftermath of the recent bear market.
To be clear, it was painful to look at my portfolio tank, but I came to understand that this massive sell-off is just part of the price of admission. So when Nvidia stock fell 66% a few years ago, I was ready. I added the stock to my portfolio several times and got Nvidia for a song.
The same was true of Nvidia’s crypto pullback in 2018, when its shares lost 52%. Sure, inventory levels were inflated and sales plummeted. At the time, I reasoned that once the stock disappeared – as it undoubtedly would – demand would return and Nvidia stock would rebound – and that’s exactly what happened.
The ability to use history as a guide is one of the most valuable tools we have as investors.
A precious lesson
Investors who sold Nvidia during previous recessions have paid a high price for that decision. Getting scared of one of the best-performing stocks in a generation would certainly hurt your results. What’s more, Nvidia stock has fallen more than 50% on multiple occasions on its way to gains of 27,000%.
Investors should be prepared for another Nvidia stock price decline of 50% or more. I have no doubt it’s coming. It may not be this week or even this year, but it’s coming. Furthermore, investors should avoid the temptation to try to time the market and simply persevere through the inevitable downturn that is sure to come. The most important lesson is to know it’s coming and plan to respond accordingly.
Volatility is part of the price of admission for a successful investor, and those who master it reap the rewards.
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Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
What would you do if Nvidia plummeted 66%? History suggests that a massive decline is coming. was originally published by The Motley Fool
