In an earlier blog, I discussed a fascinating study that asked whether stocks outperformed T-Bills. Surprisingly, the answer was that most stocks do not and the bulk of stock market returns have come from an incredibly small number of companies that have produced the estimated $32 trillion in wealth (returns in excess of T-Bills) between 1926 and 2015. The following table shows the largest contributors, none of which should come as a surprise. If the list were updated as of today I would not be surprised to see Facebook on there as well.
The takeaway from the study is that while any single company has a low probability of producing an acceptable risk-adjusted return, the big winners are so significant that they can meaningfully change the average portfolio returns for those who hold a diversified portfolio, particularly with exposure to high quality, large capitalization companies with low leverage. Since it is very difficult to pick winners it is best to be diversified when it comes to investing in stocks.
Winners Like Apple and Amazon
What about those lucky ones who were able to pick winners like Amazon and Apple? From the chart below, one can see that a long-term Amazon investor would have done remarkably well and had the potential to achieve life-changing type of returns if a meaningful investment were made early on (or even later).
May 8, 2017 – Amazon Market Cap surged to $453.62 Billion. May 30, 2017, Mkt Cap of $478.25 Billion with a stock price of $1001.20 per share – a 49,000% increase in 20 years. August 15, 2017, AMZN opened at 988.90.
August 30, 2018 – Amazon stock surpassed $2,000 ($2016.47) pushing Amazon towards $1 Trillion with a Market Cap of $950.28
Because the stock has gone from less than $2 per share to approximately $2,000, the true volatility is not well depicted in the chart above. I decided to go back and look at the daily closing price of Amazon’s stock from May 16, 1997, through April 18, 2017, and then identify all of the times Amazon’s stock price dropped by more than 30% from each peak. The following table shows the results.
| High Date | Low Date | High | Low | % Drop | |
| 1/11/1999 | 2/18/1999 | 22.33 | 12.17 | -51.5% | |
| 4/23/1999 | 6/14/1999 | 92.3 | 44.75 | -56.2% | |
| 7/15/1999 | 8/9/1999 | 69.8 | 42.75 | -38.8% | |
| 12/10/1999 | 1/28/2000 | 106.7 | 61.69 | -42.2% | |
| 2/3/2000 | 7/28/2000 | 84.19 | 30.00 | -64.4% | |
| 9/6/2000 | 10/17/2000 | 45.88 | 21.94 | -52.2% | |
| 11/2/2000 | 1/2/2001 | 39.75 | 13.88 | -65.1% | |
| 1/24/2001 | 4/4/2001 | 17.56 | 11.36 | -61.6% | |
| 5/4/2001 | 6/19/2001 | 16.98 | 5.97 | -35.3% | |
| 7/20/2001 | 9/28/2001 | 19.94 | 12.49 | -64.8% | |
| 1/22/2004 | 4/27/2005 | 57.18 | 31.72 | -44.5% | |
| 12/15/2005 | 8/11/2006 | 49.48 | 26.07 | -47.3% | |
| 10/23/2007 | 3/6/2008 | 100.82 | 62.74 | -37.8% | |
| 8/11/2008 | 11/20/2008 | 88.09 | 35.03 | -60.2% | |
| 12/29/2015 | 2/19/2016 | 693.97 | 482.07 | -30.5% |
There have been 15 declines greater than 30% with the average drop being 50.2%! Talk about a roller coaster ride. The question is how many of us could have stuck it out through all of these heart-wrenching corrections? I don’t think very many of us could. Fear that we were now owning a falling knife could have easily bluffed us out of the game, especially as more of our net worth became tied up in the stock.
What is interesting, however, is that after the 60% drop in three months during 2008 (read that again to let that sink in), there has been only one 30% correction in nearly nine years while the stock has increased approximately 26-fold during that time. So perhaps the lesson is that when a company hits critical mass in terms of market dominance and has the corresponding size and financial strength, combined with a bull market, perhaps this is the best time to invest. The winner-take-all opportunities for companies with huge network effects can offer incredible rewards even if one has missed out on the large returns from having invested early. One is also able to bypass the huge volatility and greater risk of the company from being a smaller, less dominant and more financially vulnerable company.
The next company I analyze is Apple which, interestingly, Berkshire Hathaway bought $18 billion of the stock in 2015. Buffett bought it because of its incredible consumer appeal, franchise value, fortress balance sheet, global presence, and compelling valuation, just to name some of the key reasons. So let’s see if Apple follows the same pattern.
[NOTE] May 8, 2017 – Apples Mkt Cap surged to $800 Billion with Buffett’s stake boosted to $20 Billion. In an August 2018 regulatory filing, Buffett’s Berkshire Hathaway increased its stake in Apple by 5% resulting in an August 2018 Berkshire Hathaway stock price of $317,850 per share with Apple stock at $224 per share.
As the following chart shows the wild ride started back in 1994.
| High Date | Low Date | High | Low | % Drop | |
| 1/11/1994 | 6/23/1994 | 1.2 | 0.80 | -33.4% | |
| 6/21/1995 | 7/2/1997 | 1.59 | 0.42 | -73.4% | |
| 8/7/1997 | 12/23/1997 | 0.95 | 0.42 | -55.7% | |
| 3/22/2000 | 5/31/2000 | 4.67 | 2.72 | -41.7% | |
| 9/1/2000 | 12/19/2000 | 4.11 | 0.91 | -77.9% | |
| 5/19/2001 | 10/3/2001 | 1.67 | 0.97 | -41.8% | |
| 4/17/2002 | 4/17/2003 | 1.69 | 0.85 | -49.8% | |
| 1/13/2006 | 7/14/2006 | 11.09 | 6.56 | -40.8% | |
| 12/28/2007 | 2/26/2008 | 25.89 | 15.44 | -40.4% | |
| 6/5/2008 | 1/20/2009 | 24.54 | 10.13 | -58.7% | |
| 9/19/2012 | 4/19/2013 | 91.35 | 51.34 | -43.8% |
While there were only been 11 corrections for Apple going back a longer time than Amazon (2015), the average decline was virtually identical at 50.7%. Amazon lost approximately 65% from peak to trough during the 2007-9 bear market and Apple lost approximately 60%. Like Amazon, Apple has had only one major correction since then (44% versus Amazon’s 30%) and has had a spectacular run in this bull market, growing by approximately 14 times from its bottom to where it is today.
In a previous blog post, I referenced Charlie Munger’s response to a question at the Daily Journal shareholders’ meeting about the poor performance of his fund during the bear market of 1973-74. This is how he responded:
“At the bottom tick, I was down from the peak, 50%. You’re right about that. That has happened to me 3 times in my Berkshire stock. so I regard it as part of manhood. If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing too much about it. And so my lesson to all of you is conduct your life so that you can handle the 50% decline with aplomb and grace. Don’t try to avoid it. (applause) It will come. In fact, I would say if it doesn’t come, you’re not being aggressive enough.”
Charlie Munger is the perfect Apple and Amazon investor. He has the mental fortitude and financial wherewithal to handle the average 50% declines in Apple and Amazon to get to the financial promised land of where they are dominant, high performing companies and stocks with less volatility.
Over to You:
Now the real question is whether you’re the perfect investor for them as well when they are in their rapid growth and investment stage when they are building their market dominance? Can you handle multiple 50% drops and still hang in there? Or would you be better off after they’ve built their market dominance and financial fortress and ride the coattails of possibly lower returns and presumably less risk?
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