Some of the best investments of the 20th century, which include Johnson & Johnson, Abbott Labs, Coca-Cola, Clorox, and Wal-Mart, each have contained a five-year period when they underperformed the S&P 500 or Dow Jones (back when that was the most relevant benchmark available) but went on to outperform the index from a commencement date that preceded the period of underperformance.
It should be obvious to state, but if you own any collection of investments, a sometimes lengthy period of time will occur where you are either losing in value, underperforming a basket of other stocks, and/or encountering disappointment in some other manner. This period can last years, and sometimes, even five years to a decade of underperformance from a great investment is not out of the realm of possible experience.
Correctly processing underperformance or mediocre results is a condition precedent to a successful investing career.
I will share with you the three things that I do process stocks that underperform:
- First, I dedicate my time and efforts to focusing on what I can control, which is often improving skills from labor that can be integrated into a desired task. That is what is most in my control, and that is what will determine my ultimate earnings power and ability to set aside funds for investment, and so that is where the focus should reside. Any underperformance can straighten itself out in the background and correct itself over time.
- Second, diversification. By owning multiple assets, I expect that some will be doing well and rising in value, and others will not. This view of assets as an integrated unit is quite helpful because you will effectively turn yourself into a walking conglomerate that is always making money somewhere.
- Third, at the time I make a given investment, I focus on the stock’s capacity to deliver double-digit returns. I have owned Under Armour stock, which at some points has dramatically underperformed the S&P 500, and has otherwise limited no, if hardly any, capital appreciation. But I look to the double-growth revenues overseas and the entrenching relationships in the United States, such as Under Armour’s deal with Major League Baseball, and see a company that still has a rosy double-digit growth future. A day will come when someone paying $20, or maybe even $30 a few years ago, will outperform the S&P 500.
Originally posted 2019-01-20 22:49:26.