Experiencing Stock Price Loss Is Almost Necessary For Long-Term Success

On certain college campuses in the United States, particularly places like Oberlin and UC Santa Barbara, there is a new trend afoot to preface potential intellectual discomfort with a “trigger warning.” For example, at Oberlin, if an English 101 professor desires to have his class read “The Great Gatsby”, a drafted proposal to the faculty encourages the professor to “be aware of racism, classism, sexism, heterosexism, cissexism, ableism, and other issues of privilege and oppression” in devising their syllabi. In other words, just like the surgeon general places warnings on packages of Marlboro reds, an English professor would have a duty to warn the student body of the sexism to come in Francis Scott Key Fitzgerald’s classic work.

The spirit of this trend, in addition to perhaps crossing the line that marks the difference between mature sensitivity and whiny helplessness, is problematic in that it suggests that unpleasant, inconvenient, and troublesome experiences that rattle one’s comfort zone have no social, emotional, or intellectual value (or at least so little value that it should be avoided).

Applying this to money, it is the experience of loss that gives conservative styles of stock investing its appeal. If you possess the rare skill in that you can learn vicariously through the experience of others rather than yourself, then God Bless you. Hopefully you will consciously be aware of that fact and use it to your advantage. For others, they have to go through the experience of working 500 hours at a $20 per after-tax hour rate in order to make a $10,000 investment, and seeing it all go to nothing has tremendous value in determining how you conduct your affairs going forward.

When you look back on that kind of experience and think, “I essentially gave up 62 days (assuming 8 hours of work per day) of my life for what is now nothing in return”, you are probably going to find yourself building a collection of the highest quality assets at reasonable or better prices going forward after that. The games are over at that. Amazon’s 1000x earnings valuation ratio? No, thank you, I’ll let someone else deal with that. Chinese telecommunication companies losing $2 per share on behalf of shareholders each quarter? Nope, not gonna take a flyer on that. Cyclical companies like Alcoa that lose money in down years and can barely break the cost of their long-term capital investments in good years? No, this is my money we’re talking about!

Some people go straight to blue-chip investing, and that is nice. But a lot of people work their way towards it after getting burned somewhere else—it is the failure of the inferior investments that lead to seeking companies of the highest and most diverse profit-generating caliber. Almost all failure with high-quality blue-chip stocks is confined to people drastically overpaying for their ownership stakes, buying a bank that is too overexposed to debt, a technology company with an obsolescent product line, or an industrial company with too high fixed expenses. Or, they might sell when prices are depressed (which is an internal problem with the person, not the company). But that covers most of it.

When you buy Colgate-Palmolive, there’s not really a whole lot of bad things that can happen because the company has dozens of brands selling indispensable products in dozens of different countries. Absent gross mismanagement, the legendary toothpaste company will be standing a century from now. Even if you bought shares of Colgate in 1999 at over 30x earnings and sold at the market low in March 2009, you still reaped 3.33% annual returns over that time period. You bought super high and sold super low (breaking two commandments of intelligent investing), and yet, you didn’t lose money because the profit growth of the company over the decade shielded you from your own error in judgment. A lot of people find value in companies that grow profits so regularly that they become shielded from their own errors in judgment regarding buy and sell decisions.

(As an aside, if you hold those Colgate shares purchased in 1999 through today—essentially buying high and not selling—you would have reaped 8.51% annual returns. If you purchased the stock in 1993 before it started to get pricey during the bubble years, you would have reaped 13.47% annual returns through today).

C.S. Lewis once called experience “the most brutal of teachers—but you learn—my God do you learn.” With investing, you don’t realize how valuable a high-quality brand that regularly grows profits really is until you spend some time dealing in the shady underbelly of low-quality securities. Partially, it is the bankruptcy of companies like Pets.com in 2000 that give subsidiaries like Nestle’s Ralston-Purina added appreciation in the hearts and minds of long-term investors.