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

By Amit Rupani

Last month we took a deeper look at big drawdowns in Apple and Amazon's annual historical returns. For this edition we will look into Microsoft and Google (Alphabet).

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, generally you will come out fine. But if you jump out while the ride is on, you will 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 that we're impatient. It's that the ride is not 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.

Microsoft (MSFT) has gained 271,843 percent since its IPO in 1986 giving annualized return of 26.34 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 $2,718,4322 in about 34 years.

These are very impressive gains. But one should also zoomin and look through the pain the investor would have gone through. It's one crazy roller coaster ride. Investor would have faced 70 percent drawdown from 1999 through 2009. And another 44 percent drawdown in 2008.

Alphabet (GOOG) has gained 2,728 percent since its IPO in 2004 giving annualized return of 23.99 percent so far. $10,000 invested in its IPO has increased to $272,800 in about 15.5 years.

Google saw largest drawdown of 65 percent from 2007 through 2008. The journey in Google seems to be less difficult, but it has been only 15.5 years since its IPO so far. I will not be surprised if it sees more such large declines in next 15 years.

There are two points that I want to make here. First, is that a large drawdown is an 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. At the end of the day, investing at sound valuation is about prudence and common sense.

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.


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