“Even the intelligent investor is likely to need considerable will power to keep from following the crowd.” – Benjamin Graham
The chart below, from Scott Krisiloff of Avondale Asset Management, shows the 15 top performing stocks from the Russell 1000 Index since 2003.
You should notice how large the losses were for these stocks in the past ten years, despite their large, market-beating gains. The losses ranged from -40% to -90%. And some of the stocks with the best returns of the past decade haven’t made any money since the prior peak in late 2007.
Even the best performing stocks have large losses and don’t go up in an uninterrupted fashion.
You have to be willing to think very long-term and live through periods of extreme ups and downs in individual stocks.
You have to be able to assess the value of a company when the stock price is falling 40-90% and make sure there is still value in the business.
It’s easy to say you would have bought in after those large losses in hindsight, but how many actually did so at the time of maximum pessimism?
Picking the best stocks is hard. It’s difficult to know whether to get out when you see these types of large losses or buy more. Overall markets come back but not necessarily individual stocks.
If you plan on investing in individual stocks, have a long-term process in place. Even then, you will need to be able to control your emotions to be a successful long-term investor.
Otherwise, stick to index funds or set aside no more than 10% of your portfolio for tactical investments.
A Wealth of Common Sense is a blog that focuses on wealth management, investments, financial markets and investor psychology. I manage portfolios for institutions and individuals at Ritholtz Wealth Management LLC. More about me here. For disclosure information please see here.
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