Riding out the bumps and valleys
What’s the “cost” of investing in stocks as a passive partner in a business? Passive, in the sense that we can buy and own a small percentage of large businesses, while the employees work and create for our benefit.
The chart below illustrates that cost. It doesn’t matter which stock this is, but Dock Street clients have owned this one for most of the period shown. In that time, the stock has fallen by 50%, or more, twice. So half of our investment was wiped out in both 2018 (which doesn’t look so big in the chart) and 2022—just a few months ago.
While this might be the most violent ride we’ve experienced lately, it’s not unusual. Apple lost half its value in 2008. But gutting out these painful periods is how we “earn” the outsized returns offered by common stocks over the long term.
We often wish we could offer our clients a smoother ride. But in our experience “smoother” means lower returns.
We believe in the strength of the businesses we own, the one above included. This allows us to ignore (or at least not be emotionally swayed by) the noise around us. In 2022 investors dumped stocks because of the widespread worry about a recession later that year or sometime in 2023. However, here we sit, halfway through the year with unemployment well below 4%, job growth robust, and the earnings of our portfolio companies surprising everyone with their strength.
Strangely, with the major indexes up 20% from the low point in October of last year, there is still doubt that the bear market of 2022 has ended. This is not unusual. In 2009 the consensus was that the bear market of 2008 was far from finished. Doubts about recoveries in stock prices are normal and only later do we look back with confidence and say, “the worst is over”.
Investors who constantly wonder if we are in a bull or bear market are allowing themselves to be distracted from what matters. Instead, they should stay laser focused on the businesses that underlie the stocks they own. That is what we plan to do as we live through the peaks and valleys that most certainly lie ahead.
Daniel A. Ogden