There are 325 stocks that would have earned you annualized returns greater than 20% from 1996 through 2005. These incredible investments have a few characteristics in common. One of the most striking is their unpredictability.
The numbers story
While a buy-to-hold strategy would have earned you massive returns, it wouldn't have been a steady ride. Instead, it could have been a loss one year and a huge gain the next. Consider these examples from 1996 to 2005:
|
Company |
1996* |
1997 |
1998 |
1999 |
2000 |
2001 |
2002 |
2003 |
2004 |
2005 |
|---|---|---|---|---|---|---|---|---|---|---|
|
MGM Mirage |
53.4% |
3.2% |
(24.5%) |
81.4% |
12.6% |
6.8% |
13.6% |
9.6% |
95.4% |
0% |
|
Constellation Brands |
(15.0%) |
96.6% |
4.2% |
(11.1%) |
15.0% |
50.4% |
10.9% |
33.8% |
41.3% |
12.8% |
|
Stryker |
14.0% |
26.5% |
48.0% |
29.4% |
45.6% |
20.3% |
17.5% |
25.2% |
15.4% |
(7.7%) |
|
Countrywide Financial |
33.8% |
53.4% |
19.9% |
(48.5%) |
101.7% |
(14.6%) |
27.7% |
91.5% |
50.5% |
(6.0%) |
|
Activision |
12.0% |
43.3% |
(32.0%) |
40.9% |
(1.2%) |
179.0% |
(44.7%) |
76.0% |
61.0% |
21.1% |
|
Winnebago Industries |
5.9% |
25.6% |
77.5% |
28.2% |
(11.1%) |
181.1% |
5.9% |
68.5% |
15.9% |
(13.9%) |
|
EchoStar Communications |
(6.3%) |
(24.8%) |
180.9% |
721.2% |
(53.3%) |
25.9% |
(22.6%) |
46.0% |
0.5% |
(18.3%) |
Each of these companies would have earned you greater-than-20% annual returns over the past 10 years, yet not a single one went up every year. Moreover, there were only two years when all seven of them increased in value -- and there was no year when all 325 of the market's best increased in value.
What does this tell us about earning returns for 10 years or more? It tells us that we need to be patient. The best we can do today is buy good companies with bright futures and hold them despite inevitable market volatility.
How many folks dumped EchoStar during its early down years? They would have missed out on the stock's meteoric rise during 1998 and 1999. Or how about those who punted Activision when it nosedived in 2002? The gains were great after that.
The Foolish bottom line
One year is not long enough to judge an investment thesis. That's why the real gains are made by folks who identify opportunities and hold onto them. Master investor Warren Buffett readily admits that his incredible portfolio would be better off today if he'd never sold a single share.
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This article was originally published on Jan. 31, 2006. It has been updated.
Tim Hanson does not own shares of any company mentioned in this article. Activision is a Stock Advisor recommendation. No Fool is too cool for disclosure.
