The surprising thing the 5 best stocks of the last decade have in common

You would think that about half of the stocks in the S&P 500 do better than average in a given year. A balanced distribution between outperformers and underperformers in the market can be expected.

The reality is that the exact percentage moves up and down in real time. And generally speaking, only about 20% of S&P 500 constituents beat the market average. That’s why finding a winner is such a big deal.

According to MacroTrends, the top five stocks of the past decade are Nvidia (NASDAQ: NVDA), AMD (NASDAQ: AMD), Camtek (NASDAQ: CAMT), Honest Isaac (NYSE: FICO)and Tesla (NASDAQ:TSLA). These shares have compound annual growth rates between 40% and 75%. At the bottom end, a $10,000 investment in Tesla 10 years ago is worth $290,000 today. After all, a $10,000 investment in Nvidia back then is worth almost $2.7 million now.

A key component of The investment philosophy of The Motley Fool is to “allow your portfolio winners to keep winning.” There are relatively few winners, and if you have a winner in your portfolio and sell it prematurely, you have about an 80% chance of replacing it with a loser.

Sounds simple, right? Just buy good stocks and hold on to the big winners. But in reality, Nvidia, AMD, Camtek, Fair Isaac, and Tesla all share one surprising thing that has made it extremely difficult to keep up with them over the past decade.

Over the past 10 years, these five stocks have fallen 50% or more in value at least once. Tesla is back more than 70% from its 10-year high. And even the mighty Nvidia is down 66% in 2022.

Nvidia has actually fallen 50% or more on two separate occasions in the past decade. Tesla did it three times. So is AMD, if we round the numbers slightly, and it’s currently down 40% from the highs it hit earlier this year.

When a stock falls this far, there will always be negative headlines fueling long-term fears. And these bearish cases will scare investors into believing that the time to sell has come.

On the one hand, it’s easy to sympathize with someone who has sold out. Imagine having a position worth hundreds of thousands of dollars that drops 50%. It would make you sick to your stomach to watch such a large profit disappear. But on the other hand, selling any of these five stocks after a 50% pullback ended up being the wrong move, causing the sellers to miss out on huge profits.

The great investor Charlie Munger said: “If you are not willing to react coolly to a 50% drop in the market price two or three times a century, you are not fit to be an ordinary shareholder, and you deserve the mediocre performance you have. We will be compared to people who really have a temperament that can be more philosophical about these market fluctuations.”

Munger was never one to mince words. It may sound harsh here, but his advice is nonetheless wise for several reasons.

First, investors must accept that a decline of 50% or more will happen, and that it can happen often. If you want to make money investing, that’s part of the deal.

Second, a drop of 50% or more doesn’t really tell investors everything in terms of when to sell or when to buy. As we’ve seen, the five best stocks you could buy 10 years ago were down at least 50% at least once. These declines were not selling opportunities.

By the same token, there are countless other stocks not mentioned here that have fallen 50% or more and never recovered. Munger mentioned composure, and that’s what you need when you realize that stocks can either recover or fall more after a 50% drop. The bottom line is that investors should react with indifference to price, which brings me to my third point: investors should have an investment case when buying stocks.

Your thesis should articulate the necessary conditions for generating sustainable shareholder value. Then compare the company’s results to the thesis. If things go as expected, it’s often a good idea to continue holding, as you’ll have a solid footing when the stock market turns turbulent.

In summary, investors may see their portfolio cut in half even if they have picked the best stocks possible. But volatility is part of the deal. If fear begins to surface, investors should dust off their investment thesis to see if they should continue to hold the stock in their portfolios.

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*Stock Advisor goes back to December 23, 2024

John Quast has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Advanced Micro Devices, Nvidia and Tesla. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.

The surprising thing the 5 best stocks of the last decade have in common was originally published by The Motley Fool

2024-12-26 14:05:00
https://media.zenfs.com/en/motleyfool.com/59e422ab74c933fa0a6ae4832aaf7f98

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