This is as important a lesson as there is in the stock market, and it's a particularly important lesson to heed today. It's simply this: The stock market is volatile, but volatility does not prevent you from earning great returns.
See, there are 271 stocks that would have earned you more than 20% in annualized returns from 1998 through 2007. The one trait they have in common is their unpredictability.
The numbers story
With these stocks, a buy-to-hold strategy would have earned you massive returns, but you'd have had an unsteady ride. It was loss one year and huge gain the next. Consider these examples from 1998 through 2002:
|
Company |
1998 |
1999 |
2000 |
2001 |
2002 |
|---|---|---|---|---|---|
|
Adobe Systems |
13% |
188% |
78% |
(47%) |
(20%) |
|
CAM Commerce Solutions |
41% |
420% |
(80%) |
14% |
(12%) |
|
Cephalon |
(21%) |
284% |
77% |
19% |
(36%) |
|
FactSet Research Systems |
101% |
93% |
(6%) |
(6%) |
(19%) |
|
Fuel-Tech |
33% |
9% |
(25%) |
259% |
(31%) |
|
Gilead Sciences |
7% |
32% |
47% |
59% |
3% |
|
Tractor Supply |
63% |
(33%) |
(47%) |
301% |
121% |
Figures reflect annual performance.
And then from 2003 through 2007:
|
Company |
2003 |
2004 |
2005 |
2006 |
2007 |
|---|---|---|---|---|---|
|
Adobe Systems |
58% |
61% |
20% |
11% |
4% |
|
CAM Commerce Solutions |
101% |
139% |
20% |
17% |
73% |
|
Cephalon |
(1%) |
5% |
30% |
9% |
2% |
|
FactSet Research |
35% |
53% |
8% |
37% |
(1%) |
|
Fuel-Tech |
(15%) |
32% |
95% |
172% |
(8%) |
|
Gilead Sciences |
71% |
20% |
51% |
24% |
42% |
|
Tractor Supply |
107% |
(5%) |
43% |
(16%) |
(20%) |
Figures reflect annual performance.
Each of these companies would have earned you greater-than-20% annual returns during the past 10 years, yet a very few (Gilead in the tables above) went up every year.
What does this tell us about earning returns for 10 years or more? It tells us that we need to be patient. Our best move today is to buy good companies with bright futures and hold them, despite inevitable market volatility.
How many folks panicked and dumped CAM Commerce when it dropped 80% in 2000? That would have been a very bad decision. The company continued to generate cash, and it was acquired at a healthy premium this year.
Market-beaters of the future
One year isn't long enough to judge an investment thesis. That's why real gains are made by folks who identify opportunities, grab them, and hold on to them. Master investor Warren Buffett readily admits that his incredible portfolio would be better off today if he'd never sold a single share.
Fool co-founders David and Tom Gardner have made it their mission to identify market killers for Motley Fool Stock Advisor subscribers for the next 10 years. They can't predict whether their recommendations will go up or down in any given year (though this is looking like a down year), but they are confident in their long-term prospects.
The market's greatest gains from now until 2018 will be made by investors who can be patient and stick with investing despite the current downturn. If you'd like some help finding stocks worthy of your patience, click to take a 30-day free trial of Stock Advisor. There's no obligation to subscribe, but we hope you'll stick around our community until 2018 and earn incredible returns along with us.
This article was originally published Jan. 31, 2006, as "Earn Great Returns Until 2016." It has been updated.
Tim Hanson does not own shares of any company mentioned in this article. The Motley Fool owns shares of FactSet Research. No Fool is too cool for disclosure. Not even Tim.
