What’s really happening with that friend making a stock market killing
The other day my wife turned to me and asked me if we were invested in “stocks.” I sat there in shock. In our fifteen years of marriage she had never uttered one word, asked one question or showed any interest in our investments. I manage our money and would show her our balances and say things are on track for meeting our longer-term goals.
I asked what she meant by “stocks.” She said she had just had a conversation with one of her colleagues. It seems that he had been able to double what he makes in his day job by investing all his money in a few stocks: Amazon, Apple, Google and Netflix. When I told her we had made about 15 percent (a number I thought was exceptional) she gave me the “you bonehead” look. How could I be so inept?
I know her colleague. He is not a stock analyst or a technology industry expert; he sells hotel meeting space. Mark Twain once said, “It is strange the way the ignorant and inexperienced so often and so undeservedly succeed when the informed and the experienced fail.”
But this is what makes the market so beguiling: the potential exists for somebody without any skill or knowledge to make a lot of money.
In the past year, these four stocks have indeed done incredibly well. Netflix is up 73 percent and the worst performing of the lot has been Google at only 33 percent. By comparison SPY, which is an investment that tracks the S&P 500, was up 19 percent. If he made these investments five years ago, Netflix would have been up 1,347 percent, Amazon +306 percent, Google +211 percent and Apple +98 percent. Poor old SPY would have only been up +90 percent. If we created a portfolio and invested $1,000 into each of these four stocks in 2010 and held them through until today, it would be worth roughly $35,000. That is a 775 percent gain versus just 149 percent for SPY over the same period.
But these gains have not come without some very big bumps in the road. For example, from December of 2015 through February 2016, the value of the portfolio fell $8,500 (that is twice as much as the initial investment) and your gains at that time would have been cut by 35 percent. You would have seen even more dramatic drawbacks from 2010 to the end of 2011 – almost all your gains would have been wiped out during this period. Take just one of these stocks: Amazon. It has seen declines (from high point to low point) of greater than 20 percent in 16 out of the past 20 years. Its average decline has been 36 percent. At one point in its market life it was down 83 percent from its high. Would you have been able to stay the course and not sell off?
Most people could not take it — especially if these stocks represented a large portion of their wealth. Remember, when the market is going down day after day after day, it is hard not to believe that the scary news you are hearing is true. How many times has the end of Netflix been predicted? How many times have you heard that Amazon is never going to make a profit? And to concentrate all your invested wealth in a few hot companies just begs disaster to occur. Remember the Nifty Fifty? The dot.com bust — Enron and Nortel? Oil and gas just few years ago? I could go on and on.
In the short term the market is always volatile and prone to bouts of euphoria or fears of collapse. But, as you stretch your investment horizon — five years, ten years and beyond, the chance you will experience a negative return in a properly diversified portfolio, evaporates. Trust in the markets and avoid that instinctual sense of envy that we can all get when you hear others making so-called easy money. In the end, you will deal with less stress and drama and your returns will ride you through the changes of things to come.