Chart of the Week
The legendary 10 bagger
Kitchener - Everyone wants a 10 bagger in their lifetime - to see a stock we own go up 10 times over. To turn $10,000 into a $100,000 and forever be able to crow about it. The problem is very few of us have the stomach for it. Look at the chart below from Michael Batnick of the Irrelevant Investor blog of the 10 best stocks in the S&P 500 in the past 10 years. Their returns have been spectacular.
Now look at the "Max Drawdown" column. This was the size of the drop you had to endure on the way to that mythical 1000%+ return.
Take Apple (AAPL) as an example. In the last 10 years it has risen a total of 1,388%. A $10,000 investment grew to $138,000. Wow, sounds amazing. However, lost in the numbers is the fact that along with way you would have had to endure a stomach churning 60% drop. Let's say you were almost half way there and it had grown to $60,000, would you have hung on as it fell 60% or all the way back to $24,000? I am guessing not, few of us can handle those sort of drops without panicking and selling.
Michael points out that a few things really stand out in this table.
Nine of the ten biggest winners were all cut in half. Granted, the S&P 500 was as well, but the point is that even the best stocks gave investors plenty of sleepless nights.
Even though these winners returned 23x what the S&P 500 did, only Apple and Priceline hit all-time highs more often.
The average standard deviation for these stocks was more than twice that of the S&P 500. No pain, no gain.
These stocks spent on average 34% of the time in “bear market territory.” That’s pretty wild. One out of every three days these stocks were at least 20% off their all-time high.
Making out sized returns requires having an iron stomach and riding through massive draw downs. An even bigger problem is knowing which companies to stick with when they do draw down and which ones to sell as they will never come back (RIM?). Bottom line, finding and sticking with 10 baggers is extremely hard. Focusing on slow and steady just might be the better course.
Mike Hayhoe, BSc, CIM® Branch Manager & Senior Investment Advisor | Independent Wealth Management Canaccord Genuity Wealth Management