The Secret Behind Our Biggest Investing Legends

As a consumer of financial news, you’ve probably seen stories with headlines like…

Here’s How Much Money You’d Have If You Invested $1,000 in the IPO of [insert hugely successful company name here]

Here’s How Much Money You’d Have If You Invested $1,000 in Apple When Steve Jobs Launched the iPhone

If You Invested in Disney 10 Years Ago, Here’s How Much You’d Have Now

It’s a kind of parlor game. Pretty much every major financial news outlet does some variation on this theme.

It’s like looking at multimillion-dollar homes on Sotheby’s. Some people call this “real estate porn.”

But like the feeling of inadequacy you can get looking at real estate way out of your price range, there’s a downside too.

Obviously, these stories are the epitome of 20-20 hindsight.

More importantly, they make investing look easy. And it’s not. Even investing in the best-performing stocks isn’t easy. Most times, it takes a lot of intestinal fortitude to stick with these high-power stocks through thick and thin.

Consider the following:

1. Amazon’s Delivery to Shareholders Was Longer Than “Next Day” Amazon (Nasdaq: AMZN) shares have risen nearly 40,000% since its 1997 IPO. If you had invested $5,000 in Amazon stock when it first hit the public markets, your stake would be worth at least $2.4 million today!But Amazon stock has had a double-digit drawdown every year since going public, with an average decline of 36%. And from December 1999 to October 2001, Amazon fell a whopping 95%.95%!Amazon’s “massive outperformance has led to an explosion in hindsight bias, with investors fooling themselves into believing Amazon’s ascent was somehow obvious or inevitable,” writes Michael Batnick, director of research at Ritholtz Wealth Management.

   In other words, many investors had the wisdom to buy Amazon – but holding on through its dramatic ups and downs was another story.

2. Netflix Buffered – and Many Investors Lost Patience Since going public in 2002, Netflix (Nasdaq: NFLX) has outperformed the Nasdaq 100 by nearly 4 times and was the S&P 500’s best performer in 2013 and 2015.But Netflix has also had multiple peak-to-trough declines of more than 70% in its history as a public company.Remember Qwikster? Netflix announced it was splitting off its original DVD service from the faster-growing digital streaming business in 2011.Subscribers fled in droves – about 800,000 in the third quarter of 2011 alone – and the stock fell 50% in two months.

   There were even calls for founder Reed Hastings to step down. Hastings eventually relented, reversed the strategy and kept his job.

   The rest is bull market history… but do you think it was easy for shareholders to ride out that storm?

3. Apple Bit Off More Than It Could Chew Apple(Nasdaq: AAPL) was the first U.S. company to reach a $1 trillion valuation, and it has been a phenomenal wealth creator since Steve Jobs & Co. introduced the iPhone in 2007.I recently read a profile of an optometrist who is now a billionaire. He built his wealth in part because he bought 1.25 million shares of Apple’s 1980 IPO.He’s living on easy street today… but it couldn’t have been easy to watch Steve Jobs go hat in hand to Bill Gates in 1997 when Apple was on the verge of bankruptcy…Or to watch the stock languish in the single digits to low teens for much of the early aughts.

   Even during its amazing run since the iPhone launched, Apple stock has fallen more than 30% from its peak at least seven times.

   This includes drawdowns of more than 80% between 2001 and 2003, and 58% in 2008.

Keeping Great Stocks… in Sickness and in Health

I could tell a similar story for pretty much any great long-term stock holding.

It’s estimated that Microsoft (Nasdaq: MSFT) has created as many as 10,000 millionaires. The stock has been on fire lately, but Mr. Softee was pretty much dead money (at best) from 2000 to 2014.

Pretty much every great investment has had its major bad patches. Even Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) has had three drawdowns of at least 50% in its glorious history.

The first one struck in the early 1970s. Then, in 1999, Buffett was viewed as being “out of touch” for not investing in tech stocks. Finally, the stock plummeted again during the financial crisis of 2007 to 2009.

So yes, you can make fantastic sums of money being an early investor in tomorrow’s giants.

But what the mainstream media fails to tell you is that you need a really strong stomach – and some powerful stock market intel – to find the pot of gold on the other side of the rainbow.

Good investing,

Aaron

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Founded in 1999, the goal of Investment U is to give you impartial, no-nonsense investment advice and investment research on how to build long-lasting wealth.