I just finished reading a post, linked here, about an individual that entered the coronavirus pandemic with 50% of his wealth invested in stocks and 50% in bonds, sold a large chunk of it during the late March lows, witnessed the recent 20-30% gain in stocks, and now regrets his decision and wishes to invest again.
I share this information with you because I don’t want you to make the same mistake with your investments. Study after study of market performance has shown that stock market wealth is created in short bursts of gains—it’s not a trickle of 0.1% gains and penny per share rises.
For those of you who are data-minded, check out this study from Fidelity about the growth of $10,000 invested in the stock market on January 1, 1980. If you invested continuously in the S&P 500 during this time, your $10,000 would have grown to $708,143. If you missed the five best days? You are down to $458,476. Miss the ten best? Down to $341,484. The thirty best days? $135,226. The fifty best? Down to $62,342. There were roughly 10,120 trading days during this time frame. Less than a month of those days account for the supermajority of those gains.
Yes, if you exit the position, you will avoid some down days, but over 68% of trading days result in stock price gains. In Las Vegas, the house cleans up on Roulette because of those “0” and “00” numbers that reduce your odds of betting on red or black to 48% over time. If that is enough to make you go broke eventually, so is engaging in a trading strategy where 68% of days are up and 32% are down.
Holding stocks through periods of adversity was always burnished in my mind throughout my studies of the stock market performance during the Great Depression. The best single-day gain in the history of the American stock market occurred on March 15, 1933 when the stock market increased 15.3% because President Roosevelt was lifting his shutdown of the banks. At the time, the New York Times predicted that March 15, 1933 would result in the greatest withdrawal of bank funds in the history of the country, leaving many financial institutions insolvent, and the conventional wisdom was that the markets would continue to decline.
Honestly, if you look at the past month, could you have predicted the 30% decline and 20% rise as it occurred? If you could, you sure as heck don’t need me and you should be registering with your state and the SEC to launch an investment fund.
For me, I have always been able to hold on through major stock market declines due to keeping cash on hand heading into the decline and recognizing the enormous advantage of the “perpetuity” form of the corporation. People are finite. We get 70, 80, 90 years if we are lucky. Berkshire Hathaway and Coca-Cola are organized to last forever. For each share of any common stock investment that you hold, you have a claim on the profits that it generates for the rest of your life. Not just 2020, 2021, or 2022. It goes on and on and on. Sticking with the Coca-Cola example, it has been raising its cash payouts every year since the quarterly payout before President Kennedy was assassinated. You don’t part with ownership of cash-generating assets that are inherently designed to reward you over time (due to the nature of retained earnings) because there is uncertainty about a year or two’s worth of performance.
Sometimes, you see people brag on forums about predicting some decline or another. The problem with getting in and out of stocks, aside from the tax considerations which are also considerable if you somehow find a way to make money, is that you have to always be right. If you miss a market cycle, or a big-short term upswing (like the guy mentioned above), you miss out on most of the gains as Fidelity has calculated.
The scary part is that selling your stocks, and missing out on a recovery, can undo years of wealth-building. Or even decades if enough of the recovery is missed. Warren Buffett was right when he said: “The stock market exists to serve us, not instruct us.” When stocks fell by 30% in a two-week span, American stocks weren’t worth 30% less (though some impairment obviously occurred due to the shutdown, it is of a temporary nature when viewed across the equity class). And they are not worth 20% more than they were two weeks ago.
Charlie Munger put it more bluntly when he said that, if you aren’t prepared to experience a 50% or greater decline several times over the course of a lifetime, you don’t deserve the outsized compounding that is possible due to equity ownership. You cannot sell. You cant play musical chairs. You cannot play hot potato. You sit, hold, and add. Anything else is, statistically speaking from Fidelity, begging for trouble and regret.