Even Multi-Bagger Stocks Aren’t Immune To Major Drawdowns, Research Shows


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Most investors aspire to hold those stocks that deliver exceptional returns over time. But could you stomach the ride? Perhaps not, suggests recent research. Most high-performing stocks don’t see a smooth upward trajectory and the ride can be bumpy. It’s a good reminder that volatility is a fact of life for investors, even if you are apparently picking the correct long-term winners.

Concentrated Wealth Creation

Researcher Hendrik Bessembinder, previously found, perhaps surprisingly that the average stock delivers poor performance, often worse that Treasury Bills. You might well then question how the S&P 500 and other indices are able to show such strong growth, if, in fact, the average stock is a dud.

The Big Winners

The reason that the market delivers high returns is often due to a much smaller proportion of stocks offering multi-bagger returns, where the stock price grows to many multiples of its prior value.

For example, much of the wealth creation over the prior decade in the stock market has been due to the likes of Apple

, Visa

, J.P. Morgan Chase, Amazon

and Facebook. Over the 2010-2019 all created substantial wealth for investors. This level of gains offset many of the losses elsewhere in the markets.

The Risks Of Long-Term Winners

However, the ride for these stocks has seldom been smooth. For example, Apple has lost over 70% of its value three times during the stock’s history. Amazon, another strong performer has fallen by 90% on occasion. This means that substantial peak-to-trough drawdowns are not always a sign of a broken long-term investment thesis.

In fact, many of the best long-term holdings have seen precisely this scary outcome. As such, in order to see long-term gains, short-term losses are often a necessary part of the equation, at least if history is any guide.

A Longer-Term Look

This isn’t just a function of recent stock market history either. Exxon Mobil

, AT&T

and General Motors

are now household names that were also exceptional stock market performers in earlier decades, but each of them lost at least a third of their value along the way.

Major Drawdowns


is a great example of how painful this can be, it was among the best performing stocks in the 1990s, but still managed to lose over a third of its value from 1993-1996. Despite being a long-term winner for the decade, it was in drawdown for three years of those ten. Now that drawdown was relatively long, typically the peak-to-trough decline can be faster. For example, Facebook, lost more than 40% of its value during just two months during the summer of 2012. Like the other names we’ve mentioned, it too has delivered stellar long-term performance for investors.

Hendrik Bessembinder who conducted this analysis is a researcher at Arizona State University and the full research paper can be found here. So next time you wish that you had more of the likes of Amazon, Apple or Microsoft

in your portfolio, remember that investors in those companies over time have had to weather extreme declines in value. Long-term winning stocks are not immune to major price declines. Just because you hold a long-term winning stock, it may not protect your portfolio from volatility.

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