The Ultimate Superpower in Investing

By Charlie Bilello

10 Jun 2021

Here’s a list of the top 30 stocks in the S&P 500 over the past 30 years…

Data via YCharts

What stands out? The unfathomable returns, a product of time and the magic of compounding.

What’s lost in this graphic, however, are the many periods of excruciating pain that anyone invested in these companies would have experienced.

When thinking about big winners in the stock market, excruciating pain probably isn’t the first thing that comes to mind. We focus instead on the final outcome (eye-popping long-term gains), ignoring the tremendous fortitude (holding through large drawdowns) and faith (believing it will come back) required to achieve that outcome.

The #1 stock, Netflix ($NFLX), is the perfect example.

The “death” of Netflix was predicted many times, first in late 2002, not long after its IPO. Wal-Mart was entering the DVD-by-mail business, and who could ever compete with the all-powerful Wal-Mart?

In 2006, its “death” was again predicted, when both Apple and Amazon announced plans to start movie-downloading services. Surely Netflix could not survive such a threat.

But survive they did, only to find new doubters after announcing their plans for streaming video. Netflix shares dropped 12% by mid-January of 2007 and analyst downgrades ensued. The streaming video service would cost Netflix an estimated $40 million in 2007, a sum that was deemed “too much.”

At the time, Netflix’s biggest threat was said to come from (don’t laugh) Blockbuster. Blockbuster’s online rental service was “taking off,” adding over 700,000 subscribers in the prior 2 months.

Blockbuster’s CEO had this to say about their closest competitor: “We have everything that Netflix has, plus the immediate gratification of never having to wait for a movie.”

What happened next?

Just 3 years later, Blockbuster would file for bankruptcy protection while Netflix stock has advanced 15,000% since their streaming video service was announced in January 2007.

Since its IPO in 2002, Netflix is up over 40,000%, an annualized return of over 38%.

Netflix’s rapid ascent in recent years seems easy and inevitable in hindsight, but in truth it was anything but.

There were many struggles along the way (see the pair of 75% declines below), and many more doubters than believers.

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The #3 stock (Amazon, $AMZN) tells a similar story…

Back in 1997, the year it went public, fortune published an article with the following headline: “Why Barnes & Noble May Crush Amazon.”

The author argued… “Anything can do on the Internet, so, too, can Barnes & Noble. Once you look beyond the Website you begin to see why, in this battle at least, the odds favor the $3-billion-a-year Goliath [Barnes & Noble].”

The rest, of course is history, but not before the dot-com crash and a 94% drawdown for Amazon shareholders. It would take nearly 10 years (December 1999 to November 2009) for Amazon’s stock to hit a new high.

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That means if you had $100,000 invested in Amazon in December 1999 it would have shrunk to $5,570 in September 2001. And you wouldn’t have recouped your loss until November 2009.

How many investors would have held on throughout such a decline?

Very few.

What about the almighty Apple ($AAPL), #22 on the list)?

I’m glad you asked.

Apple’s revenue fell more than 50% from 1995 to 2001, and was all but dead in the eyes of the investing public.

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In the last 30 years, Apple suffered two agonizing declines, including an 82% drawdown which lasted over 8 years (April 1991 to September 1999). Even after the release of the revolutionary iPhone in June 2007, Apple had a drawdown of more than 60% before bottoming in early 2009.

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Every single one of the top 30 stocks has its own gut-wrenching story, proving that large drawdowns are an inevitable part of achieving high returns. If you haven’t yet experienced such a decline, then you likely haven’t owned something that has appreciated 10x, 20x or more. Or you simply haven’t been investing for that long.

I know what you’re thinking. There has to be a better way. You want to own the next Netflix or Amazon without the periods of pain.

We all do. The only problem: in trying to hedge or time your exposure to the next big winners, you will likely miss out on a substantial portion of the gains. Or your emotions will cause you to sell at precisely the worst time (only after a large drawdown).

To reap the largest rewards, facing a high degree of pain is unavoidable. Which is why the ultimate superpower in investing is being good at suffering (see rule #13).

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