Investing For the Long Term Doesn’t Always Work
It is a common saying that you should invest for the long term because stocks go up over long periods.
However, when applied to single stocks, this advice could lead to terrible outcomes.
Let’s review the evidence:
Out of more than 6,500 companies from 1985 to 2024, the max drawdown experienced on average was a bone-crushing -80.7% —
$1M becomes worth less than $200K
The statistics paint an even more challenging picture for stock pickers.
About 54% of stocks never fully recover from their losses.
The median stock only recovers 90% of its losses.
But, what if you were exceptionally skilled at picking stocks?
As Warren Buffett famously said, “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
Berkshire Hathaway, Buffett’s vehicle for investing has lost 50% of its value multiple times. Once in the early 1970s, once in 1999 and during the 2007 GFC.
His partner, Charlie Munger, an exceptional stock picker in his own right ran his own partnership between 1962 to 1975, compounding 19.8% over that period. Similarly, his partnership also experienced crushing losses. In the two years ending 1974, the Munger partnership suffered a 53.4% drawdown.
With each major drawdown, we learn something new. Papers are written, and data is reviewed. In today’s day of modern investing —
You do not need to lose 50% to grow your wealth
“The most important quality for an investor is temperament, not intellect.”
— Warren Buffett, 2019
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