Lately I’ve been thinking a lot about prices, in particular what is the best strategy to buy into a stock.
A 20% to 30% fall from all time high is usually a safe bet.
Certainly, I bought the dip. However, what I did not anticipate with regards to my investment in Chinese stocks, is that there was going to be a further dip.
Already, the investments that I have made have lost 22%, which means that if I had bought at this price, a rise to the price that I bought in would already mean a 22% increase.
It was impossible to time the bottom. But what I did not expect is for the further dip to be so drastic.
This prompted me to examine the charts.
Looking at previous financial crashes (a loss in value of more than 30% can almost certainly be termed a crash), stocks typically take a year or more to base out.
Microsoft’s value fell from all time high of $26 in Jan 2008 to $12 in Sep 2009. The next time it broke through the $26 ceiling was in Jan 2013.
The harsh reality is that, if you invest in the tail end of a bull cycle, it would take 5 years for you to break even.
During those time, many things can change - to the industry, as well as to that particular company.
However, if you had invested at a 33% dip from all time high (around Aug 2008 when it was at $17.4), it would take you a year to break even, and another 6 month (Jan 2010) to reach a 35% growth, a reasonable % for you to be closing that stream.
Google also took a year to bottom out in 2008. If you had invested when it was $227 (67% of ATH), you’d reach break even in Aug 2009. Thereafter, in Jan 2010, you’d have made more than 30% from your investment when it was at $305.
However: if you had held every investment for more than 10 years, you would have made around 3x your original investment - irrespective of whether you invested in ATH, or half of ATH.
Let’s say you decide to close the position of your original investment of 2008, when it was $227, 10 years down the road in 2018. In Jan, it’s trading at $1000. If you had bought in ATH, your returns would be 3.125x. If you had bought in @ 227, your returns would be 4.4%.
I feel like this should be the benchmark for my returns. A 3x to 4x rise in the value of my original investments, after 10 years.
I feel like this insight cannot be emphasized more:
The risk of you losing money from an investment reduces dramatically for holdings period longer than 10 years, to almost 0. On the other hand, the reward increases exponentially with every additional year you hold after the 10 year mark.
If you had cashed out your Googl in 2018, the returns would be 3x - 4x. If you had cashed out 1 year later, the returns would be 5x. If you had cashed out in 2020, it would be 6x. If you had cashed out in 2022, after a 14 year holding period, it would have been 10x.
TL:DR: It’s not very sexy, but the best way to make a million is just to buy, wait, and hold, for 10 years or more.
However
I feel like there is a caveat. Let’s say you invested right before the dot com crash of 2000: you bought MSFT for $30 in 2000. The next time you’re going to break even is at 2014.
Which brings us to Lesson #2:
Bad investments simply means that you’ll need to hold for more than 14 years, in the worst case scenario. After that, it’ll most likely turn into a good investment.
With this caveat, there is another implication.
Many companies simply might not survive another 14 years.
For instance Google, the giant it is today, has only gone public in 2004. To date, it has been around for 18 years. And we’re talking about the most successful company of the last decade.
The 99% of the other companies, have simply disappeared into the ethers. Where is friendster? Myspace? Soundcloud? Snapchat?
Looking outside of Faang, if you had held Netflix from 2008 to 2018, your returns would have been 40x. Lol. Yet, Netflix only came into mainstream consciousness at about…2016? Throughout those 10 years, many would never even have heard of Netflix.