When not to listen to the cult of buy-and-hold … the “10 Best Days” myth … how to protect your capital today for use tomorrow … Luke Lango sees a 1,000% opportunity emerging
One of the most widespread, seemingly wise investment ideas out there boils down to “stay the course.”
Basically, the idea is that when times get tough, don’t get shaken out of the market. Stocks bounce back. Don’t sell based on your fears. Maintain a long-term vision. Hang in there.
Yes, this can be excellent advice.
For example, people love to talk about how much money you’d have made by investing early in, say, Apple or Amazon, and holding until today.
They point toward how Amazon fell 90% at one point (in addition to multiple 30%+ declines over the decades), but a disciplined investor who stayed the course would be a zillionaire by now.
That is true.
But it’s also true that Amazon’s performance is incredibly rare. In fact, for every Amazon story, I could probably tell you 10 stories of a stock that crashed and never recovered.
I’m still holding one of them – Nokia.
***In 2000, I was a young, inexperienced investor
My research led me to the world’s biggest cellphone manufacturer.
Younger investors may not know this, but at the time, Nokia dominated. It appeared to be a new blue chip, the king of its industry for years to come.
In fact, in summer of 2000, Fortune released its “10 Stocks to Last the Decade” issue. Nokia was number-one.
From Fortune, back in 2000:
At the top of our list sits Nokia, the Finnish maker of wireless phones that controls 27% of the market (compared with 17% for Motorola and 10% for Ericsson, according to Dataquest).
Over the past five years Nokia has seen off-the-charts sales growth, increasing its revenue fourfold since 1995, to an estimated $26 billion this year. And net income has climbed from $480 million to a projected $3.8 billion.
I bought in early summer 2000.
The stock meandered up for a couple weeks, confirming my belief that I would be the next Warren Buffett. Until this…
Down 27%.
What do you do?
When times get tough, don’t get shaken out of the market. Stock bounce back. Don’t sell based on your fears. Maintain a long-term vision. Hang in there.
That advice would be especially true for the number-one stock of the “10 Stocks to Last the Decade” list, right?
So, I did nothing.
Actually, that’s not true. I bought more.
I then watched a brief rally, followed by another 25% decline from my prior low.
At that point, I knew that protecting the money I had left was the wise choice. But I loathed the idea of locking in a massive loss. It was just too painful.
Plus, it would come back! This was Nokia! A new blue blood!
Not to mention, selling would reveal my lack of faith in the age-old wisdom of buy-and-hold. I didn’t want to be the guy who sold out of fear at the bottom, then watched a massive recovery that would have made me boatloads.
And so, I held.
And the losses continued.
***Below, you can see my entire investment history with Nokia
Seven years after my investment, I could have gotten back to roughly break-even if I’d sold before the 2008/2009 crash. But at that point, I was riding high.
You see, Nokia was back!
In 2007 Forbes had featured Nokia on its cover with the headline:
One Billion Customers – Can Anyone Catch the Cell Phone King?
Well, as you can see below, yes, someone can catch the Cell Phone King. A company named Apple, to be specific.
And catching the Cell Phone King can destroy a stock…and an investor who blindly follows buy-and-hold.
If you can’t read it, from my purchase back in 2000, that’s a loss of 82% over 22ish years.
(I still hold Nokia today because of a new investment thesis. In my opinion, it’s a great 5G play. But I suspect it could be a while before I ever see it get back to its circa-2000-glory.)
So, at the risk of getting tarred and feathered, I’m going to say it…
***“Stay the course” can be an awful investment philosophy
You might have read the below from CNBC a few weeks ago:
Timing the market is difficult at the best of times for even the most experienced traders.
Now, Bank of America has quantified just how large the missed opportunity can be for investors who try to get in and out at just the right moment.
Looking at data going back to 1930, the firm found that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%.
If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%.
This is the type of stuff that makes investors blindly follow “buy and hold.”
It’s also not the whole story.
Regular Digest readers know that before InvestorPlace, I worked with a quantitative investor named Meb Faber. Meb wrote a white paper that dug into the buy-and-hold argument above (it’s been around a while) called “The 10 Best Days Myth.”
From Faber:
One of the most common rhetorical bulwarks in the defense of buy and hold in investing is to demonstrate the effects of missing the best 10 days in the market, and how that would affect the compounded return to investors.
This is perhaps one of the most misleading statistics in our profession.
Meb explains that, theoretically, missing all the 10 best days would, indeed, gut your returns.
But there’s a very important missing detail that the buy-and-holders overlook.
If you’re going to highlight the 10 best days, shouldn’t you also include the 10 worst days?
Back to Faber:
The vast majority, roughly 60-80%, of the best and worst days occur after the market has already started declining.
The simple reason is that markets are more volatile when they are declining, and when the really volatile events and days occur, they tend to cluster together.
Our central argument is that returns improve and volatility is reduced when an investor is invested in uptrending markets thus avoiding the volatility and clustering of best and worst days inherent in declining markets…
Yes, if the market falls, say, 6% in a day and you sell based on fear, you might miss a rally a few days later that sends the market up 7%. This would be a poor, fear-based investment decision, and it could gut your long-term compounded returns.
But what if you simply weren’t in the market for any of that volatility because you’d seen red flags and gotten out? Or perhaps you hit a stop loss and moved your capital to a different, up-trending investment?
Meb ran a backtest using historical market data that studied being in and out of the market on these best and worst days, and came to this conclusion:
…If you miss the best and worst days, in every case your compound return is higher than buy and hold.
See for yourself.
***So, what’s the point of all this?
Have an investment plan that includes knowing when to sell, and then follow it.
As we’ve profiled in recent Digests, the S&P sits at a critical support level. If it holds and we see another sentiment rally based on, say, positive commentary from the Fed on Wednesday, the market could explode higher.
But if support breaks, the broad market losses could pile up quickly. And for any given stock, that could mean even worse losses.
This is where the buy-and-holders chime in with: “If support breaks, stay the course!”
Okay, but are you sure you’re holding an Amazon and not a Nokia?
Why gamble? Why not follow your investment plan, which includes some sort of stop-loss or risk mitigation strategy that’s right for you?
You can always buy back in later, even if the market reverses and you missed some early gains of a new rally. But you can’t always get back investment capital once it’s destroyed.
Please don’t misunderstand – this is not a predication that the market is about to roll over. Rather, it’s a reminder that the best investor is the most prepared investor. And that means having a plan for times of market weakness.
***If you’re unsure how to prepare, we have a great resource for you
Beyond helming InvestorPlace, our CEO Brian Hunt is an accomplished investor, trader, and teacher, having penned a series of classic investment essays which you can read here.
Not long ago, Brian added to his collection of writings, authoring a powerful, mini e-book titled, The Risk Vs Reward Manifesto.
It’s basically a roadmap for how to invest wisely, even during massive volatility.
It’s totally free – just click here to access it.
Now, there’s another reason to follow your stop-losses: It frees up capital you’ll need to take advantage of amazing buying opportunities.
And right now, one of the biggest buying opportunities in decades appears to be setting up, according to our hypergrowth expert, Luke Lango.
***The destruction in the Nasdaq is creating an amazing buying opportunity
Yes, the Nasdaq is now in an official bear market, which means down more than 20% from its prior high.
But that doesn’t even begin to tell the whole story.
Within the Nasdaq, the destruction is nothing short of jaw-dropping.
Jason Goepfert from SentimenTrader provided the following statistics last week about the carnage going on inside the Nasdaq:
More than 45% of stocks down 50%
More than 22% of stocks down 75%
More than 5% of stocks down 90%.
The only comparisons are Oct 2000 – Oct ’02 and Nov 2008 – Apr ‘09.
But let’s see this destruction for what it is…
Possibly one of the best buying opportunities in decades.
***Luke believes we’re setting up for gains of 1,000% or more due to something he’s calling “The 1,000% Divergence Window”
We covered the highlights of this divergence window in the Digest last week.
In short, the prices of certain, elite technology companies are now becoming wildly decoupled from the intrinsic value of those companies, as measured relative to their revenues/earnings.
It’s rare that this happens. But when it does, it opens up a “divergence window,” as Luke calls it.
These windows create the opportunity for a huge snap-back, wherein prices race higher toward their equilibrium level relative to revenues and earnings. When such a snap-back happens, Luke says you can see “enormous returns.” He’s calling for 1,000%+ returns.
Luke will be jumping into all the details of this tomorrow at 4PM ET. I consider this is a must-attend event. As you saw with Jason Goepfert’s research above, this type of tech destruction comes along about once a decade. This is not a regular opportunity. Click here to reserve your seat.
***Wrapping up, what can we say about the market today?
It’s simple – not easy, but simple.
First, have an investment plan and stick to it. As that relates to today’s highly volatile market, abide by your stop-losses if you hit them. “Hope” is not a strategy.
Second, take advantage of huge opportunities when the market provides them. And if Luke is right, we’re standing on the cusp of one of the biggest opportunities in years…possibly decades.
Today’s tech wreck could the beginning point of tomorrow’s quadruple-digit returns for your portfolio.
Have a good evening,
Jeff Remsburg
