On The Value Perspective we like to quote from a film once in a while and what better one to quote than Forrest Gump.
"Lieutenant Dan got me invested in some kind of fruit company. So then I got a call from him, saying we don’t have to worry about money no more. And I said, that's good – one less thing."
The spectacular investment returns enjoyed by Forrest Gump and his friend Lieutenant Dan on the back of their investment in the nascent Apple Computers at the start of the 1980s came to mind as we enjoyed an excellent piece by Barry Ritholtz in The Washington Post, The world’s greatest stockpicker? Bet you sold Apple and Google a long time ago.
The article addressed the question of whether having the ability to pick out the most successful stocks of the future when they floated might be the path to untold riches. It would have been a pretty dull read if the answer had been ‘yes’ but of course it was not – being able to spot winning businesses from the start does not mean you are wired to keep hold of them for their entire journey to the top.
Before we consider the latter point, let’s briefly put into perspective the sort of odds you would be overcoming to be such a great stockpicker in the first place. As you can see from the table below, over a 10-year period, the percentage of businesses that manage to achieve above-median growth rates in each of those 10 years is just 0.9% of the starting universe.
Source: NBER Working paper series; The Level and Persistance of Growth Rates; Louis K.C.Chan, Jason Karceski, Josef Lakonishok
To make his point, Ritholtz highlights five companies that have each racked up returns of more than 1,000% since their respective stockmarket debuts – the ‘laggard’ being Google, which has managed a return of just the 1,300% or so since its initial public offering (IPO) in 2004. Tesla meanwhile has returned some 1,350% in four years while Chipotle has returned not far off 2,900% since 2006.
More than doubling that showing is the 5,800% Netflix has returned since 2002 but even that pales in comparison with Apple – now the world’s largest company by market capitalisation after rising a mind-boggling 22,000%-plus since its IPO in 1980. So well done Apple and indeed Forrest – always assuming he has held on to his shares over all this time.
Because the big question is whether he could have done – or, more importantly, could you? Clearly all of these five stocks have done brilliantly in their time as public companies but there will have been periods when it will certainly not have felt that way to their investors and, again, Ritholtz has some illuminating figures for us.
Despite returning that 6,000% overall, Netflix has lost at least a quarter of its value on four occasions. Over one four-month period alone in 2011, it lost 80% of its value and, on its worst day, it dropped 41%. In other lowlights, Chipotle lost 76% of its value between 2007 and 2009, Tesla once lost 40% over a 10-week period and Google dropped almost 70% in 2009 – including almost 40% in one quarter.
For its part, Apple has lost 25% or more of its value no fewer than six times over the past decade alone and, in its worst week, fell 51%. These are, to put it mildly, volatile stocks and frankly the only way any investor – even one endowed with superhuman stockpicking abilities – could ever stick with them through those sorts of gut-wrenching falls would be if they had forgotten they owned them.
Equally, as Ritholz also notes, it would be almost impossible to stick with them through their mouth-watering highs. Say, 20 years ago, you invested £10,000 in a portfolio of 10 stocks, including Apple, and still held them now, then your portfolio would, to all intents and purposes, be Apple. Could you really stomach a 50% drop in its shares today compared with when it was just a tenth of your wealth?
Modern portfolio theory suggests that, whenever any investment position becomes too large in relation to the others, it is time to ‘rebalance’ and yet, if you know in advance that one business is going to hit the jackpot and you would like to do likewise, then you are going to have to tear up the rulebook and sink every last penny into the shares – and take whatever the journey throws at you.
But the point is, people cannot do this – human beings are not wired that way. As Ritholz, concludes: “The good news is that your brain has kept you alive long enough to read this column; the bad news is that it made you sell Apple 10,000% ago.” Behavioural finance, as Mrs Gump might have told her son, is not like a box of chocolates. Usually you have a pretty good idea what you are going to get.