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
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
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