The Only Ones to Get Hurt on a Roller Coaster are the Jumpers

By Amit Rupani

Imagine you are on a roller coaster ride. You have your seat belts and safety bars on. The ride is in full swing. In the middle of the ride you realize that it is too much handle. Now what's the safest thing for you to do? Just close your eyes and hang in there. Don't jump. If you do this, in most cases, you will come out just fine. But if you jump out while the ride is on, you are sure to get hurt.

For an average investor, stock market is like an amusement park and each stock is like a roller coaster ride. There are not many smooth rides in this amusement park. Each ride has its own volatility. An average investor will get in at the wrong time (high price) and also get out at the wrong time (low price). The problem isn't only that we're impatient. It's that the ride is not often easy.

Apple, Amazon, Google, Microsoft, Netflix, Berkshire Hathaway. These are some of the most honored companies in the world. These have created tremendous money for its shareholders. But it was not a smooth ride in these stocks. Each gave the sinking feeling in the stomach many times to its shareholders. Let's take a look.

Amazon (AMZN): has gained 92,143 percent since its IPO in 1997 giving annualized return of 35.18 percent so far. $10,000 invested in its IPO has increased to $9,214,300 in about 23.5 years. See the chart on the right.

In December 1999, the initial $100,000 investment would have grown to $5.4 million. By September 2001, less than 2 years later, this $5.4 million would shrink down to $304,000, a 94% drawdown. It took over eight years, until October 2009, for Amazon to finally recover from this drawdown to move to new highs. I wonder if there was any investor except Jeff Bezos who would have taken so much pain.

Apple (AAPL): has gained 72,558 percent since its IPO in 1980 giving annualized return of 18.36 percent so far. This is just capital gains and ignoring dividend income that investor would have received so far. $10,000 invested in its IPO has increased to $7,255,800 in about 40 years. See chart that follows.

These are very impressive gains. But one need should also zoom-in and look through the pain the investor would have gone through. It's one crazy roller coaster ride for last 40 years. Investor would have faced 78 percent drawdown from 1993 to 1997. And another 58 percent drawdown from 2000 to 2003.

In both cases, investors had to go through several sinking feelings. There are two points that I want to make here. First, is that large drawdowns are inevitable part of achieving such high returns. It's almost impossible to escape the volatility with any stock in the long-term. Second, if you are looking at the above tables or long-term charts and are thinking that I can handle this, don't kid yourself. It's never easy as it looks. One needs very strong stomach to handle such volatility and very few investors have it. One needs to control their emotions during periods of adversity to become a better investor.

So how can one reap such gains? How can one handle such a ride? If you find or discover a business that you truly believe in and where you admire the management, you want to be sure that you put yourself into a position to participate fully in all that the business offers you. If you overpay, you will get less than the business produces, but if you are lucky enough to find a bargain, you will gain more than the business produces.

As we know, once the roller coaster is in full swing, the safest place to be is inside the roller coaster. If you have found the “right" business, an investor would have two protections. First are the sound fundamentals of the business which act as the seat belt. Second is the sound and reliable management of that business which acts as the safety bar. The key is to buy “right" business and then sit-tight in the roller coaster ride.

“The only ones to get hurt on a roller coaster are the jumpers." – Paul Harvey

I will share similar details of couple of more businesses in next month's post. Happy Investing!

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Amit Rupani, CFA is an Independent Investor, practices Value Investing principles, manages money for long-term wealth creation through Equities asset class. Email: rupaniamit@yahoo.com