You would think that about half the stocks in the S&P 500 do better than average in any given year. One would expect a balanced distribution between superior and inferior market performers.
The reality is that the exact percentage moves up and down in real time. And overall, only about 20% of the S&P 500's constituents outperform the market average. That's why finding a winner is such a big deal.
According to MacroTrends, there are five best stocks of the last decade Nvidia(NASDAQ: NVDA), AMD(NASDAQ: AMD), Camtek(NASDAQ: CAMT), Fair Isaac(NYSE: FICO)a Tesla(NASDAQ: TSLA). These stocks have compound annual growth rates between 40% and 75%. On the low end, a $10,000 investment in Tesla 10 years ago is worth $290,000 today. At the high end, a $10,000 investment in Nvidia back then is worth nearly $2.7 million now.
One key element of The Motley Fool's investment philosophy is “let your portfolio winners keep winning.” There are relatively few winners out there, 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 tight to the big winners. But really, Nvidia, AMD, Camtek, Fair Isaac, and Tesla all share one remarkable thing that made them very difficult to catch for the last decade.
Over the past 10 years, all five of these stocks have fallen 50% or more in value at least once. Tesla pulled back more than 70% from its peak in the last 10 years. And even mighty Nvidia dropped 66% as recently as 2022.
Nvidia has actually dropped 50% or more on two separate occasions in the last decade. Tesla has done that three times. So is AMD, if we round the numbers a bit, and is currently down 40% from the highs it reached earlier this year.
When any stock falls this far, negative headlines will always capture long-term fears. And these bearish cases will scare investors into believing that the time to sell has come.
On one hand, it's easy to empathize with someone who sells. Imagine having a site worth hundreds of thousands of dollars that drops 50%. It would make you sick to your stomach to watch so much profit disappear. But on the other hand, selling any of these five stocks after a 50% pullback ended up being the wrong move, causing sellers to miss out on huge gains.
In investing brilliantly, Charlie Munger said, “If you're not willing to respond evenly to a 50% drop in market price two or three times a century, you're not fit to be an ordinary shareholder, and you deserve the average result. 'are going to be compared to the people who have the temperament, who can be more philosophical about these fluctuations in the market.”
Munger was never one to mince words. He may sound harsh here, but his advice is nevertheless wise, for several reasons.
First, investors must accept that a fall of 50% or more is going to happen, and that it could happen often. If you want to invest money, this is part of the deal.
Second, a drop of 50% or more doesn't really tell investors anything about when to sell or when to buy. As we've seen, the top five stocks you could have bought 10 years ago dropped at least 50% at least once. Those drops weren't sales opportunities.
Likewise, there are countless other stocks not mentioned here that have dropped 50% or more and never recovered. Munger talked about parity, which is what you need when you realize that stocks can either rebound or drop more after falling 50%. The bottom line is that investors need to react indifferently to the price, which brings me to my third point: Investors must have an investment thesis when buying stocks.
Your thesis must identify the necessary conditions for the generation of sustained shareholder value. Then compare company results to the thesis. If things are going as hoped, it's often a good idea to hang on, as you'll have a solid base when the stock market gets turbulent.
In summary, investors may see their portfolio cut in half even if they have picked the best possible stocks. But volatility is part of the deal. If fear begins to bubble to the surface, investors should scrap their investment thesis to see if they should still hold the stocks in their portfolio.
Have you ever felt like you missed the boat when buying the most successful stocks? Then you'll want to hear this.
On rare occasions, our expert team of analysts discuss a “Double Down” stock. recommendation for companies they think are about to pop. If you are worried that you have already lost your opportunity to invest, now is the best time to buy before it is too late. And the numbers speak for themselves:
Nvidia:if you invested $1,000 when we doubled down in 2009,you would have $363,593!*
Apple: if you invested $1,000 when we doubled down in 2008, you would have $48,899!*
Netflix: if you invested $1,000 when we doubled down in 2004, you would have $502,684!*
Right now, we are issuing “Double Down” alerts for three amazing companies, and there may not be another opportunity like this anytime soon.
Jon Quast does not have a position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micro Advanced Devices, Nvidia, and Tesla. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
