Down 60% or More on an Investment? Past Stock Market Bubbles Teach Us This

As of March 31, there were 3,739 stocks in the Nasdaq Composite Index. And according to Finviz, around 1,600 of these are down 60% or more from their 52-week highs. Similarly, there are 500 companies in the S&P 500, and as of this writing, a whopping 42 of these supposedly stable stocks are down 50% or more from their 52-week highs.

There are an unusually high number of stocks down 50%, 60%, or more right now. Two such stocks that I own are Pinterest (PINS 0.89%) and Peloton Interactive (PTON 2.62%), which are down 80% and 94% from their respective highs.

If you, like me, own stocks that are down substantially, you're likely wondering how long it will take to get back to breakeven. But this is the wrong question to ask. And we can look to dot-com bubble darling Micron Technologies (MU 3.06%) to help guide our thinking when deciding what to do with stocks like Peloton and Pinterest in this environment.

A stock market history lesson

Stock market bubbles happen when investors get too excited about stocks in the near term. Valuations jump higher and higher as investors frantically buy to avoid missing out. But eventually, the mood on Wall Street changes, buyers turn into sellers, and stock prices plummet.

The dot-com bubble swelled in the years preceding the year 2000. As the name suggests, investors were excited about many new internet companies. But tech stocks generally, not just internet companies, were seeing outsized gains. One of these tech stocks was semiconductor company Micron. From the start of 1995 until its peak in early 2000, Micron stock went up an astounding 775%.

The bubble finally popped in early 2000, and the Nasdaq Composite fell over 75% before it bottomed in 2002. For its part, Micron finally bottomed in early 2003 after it had fallen a stunning 93% from its all-time high. 

Chart from Jan. 1995 through Dec. 2003. Data by YCharts.

Here's the thing: Investors were behaving somewhat rationally when Micron stock was going up. The company's trailing-12-month (TTM) revenue more than doubled from the start of 1995 to mid-2000. And it was profitable over much of that time with a slight increase in net income. These financials mean it was quantifiably superior to many of its dot-com bubble peers. Therefore, it wasn't necessarily easy to spot a bubble forming around Micron, because the business was solid.

If you bought the peak with Micron

Let's say you invested $5,000 in Micron stock exactly when it peaked in 2000 at around $95 per share. By 2003, your $5,000 investment was worth $350. Ouch.

If you held that stock, you finally reached breakeven in April 2021. Yes, it took 21 years for shares of Micron to regain their previous all-time high. And now, shares are back down 43% from their high. Double ouch.

From 2000 to now, Micron's TTM revenue is up about 800%. And TTM net income was up over 1,800%. Therefore, the company has executed over the past 20 years. But investors who bought at the top of the dot-com bubble have watched their investment provide zero returns for over two decades.

What this lesson means for investors today

If you're down substantially on an investment, the first thing I'd say is I'm sorry. Nobody enjoys losing money.

Next, I'd encourage you to avoid price anchoring -- fixating on the price you paid. It may be painful to hear, but if you invested $5,000 in a stock that fell 93% (like Micron), that money is gone. It's worth $350 today. And you can only evaluate your choices based on where we are now.

Here's the wrong question: When will Micron make it back to my cost basis?

Here's the right question: Is Micron the best place for long-term, market-beating returns from today's price?

Of course, I'm not talking about Micron anymore. For me, I'm looking at Pinterest and Peloton. You might be looking at another stock in your portfolio. The point is that one must assess the business's current prospects and ask whether they offer potential market-beating returns.

In Pinterest's case, I believe it does offer market-beating potential. In the near term, advertisers may pull back spending as consumer discretionary income is challenged by inflation. But in the longer term, the Pinterest platform is uniquely positioned to offer better returns for advertising budgets than other platforms. Therefore, I believe demand will trend higher over the long run, to the benefit of shareholders today. And the company has over $2.6 billion in cash to weather any kind of storm on the horizon.

But I'm not so sure anymore about Peloton's potential to beat the market. It's true that its app just enjoyed a record month of adoption, which bodes well for future sales of exercise equipment. However, Peloton is where it is because of some bad managerial decisions from previous executives. New executives are in place, but it will take time for the new team to establish credibility with investors.

There's a more hopeful takeaway from Micron's story

Here's the final takeaway: Part of investing the Motley Fool way is investing new money regularly, either in new stocks or in stocks you already own. If you bought Micron only once at its peak, then yes, it took 21 years to break even. But what if you added to your investment over time?

To avoid cherry-picking returns, let's say you invested $1,000 in Micron five times -- every July 15 from 2000 (the worst possible time) through 2004, instead of investing all $5,000 at the very top. 

Returns as of June 20, 2022.

As the chart shows, returns are vastly different for Micron investors who kept adding to their positions over time. To reiterate, Micron was growing during that time, and semiconductors have long been an important industry. Therefore, it made sense to add to that position, and overall returns were far superior for those who did.

This is my long-term plan for my positions that are down, like Pinterest. It's important to watch the underlying business fundamentals and not be worried about the price per share. When the business is sound, it makes sense to add more money over time. And adopting this attitude can greatly alter the course of your investing career for the better.