The Next Big Thing

Investment Management

May 06, 2021

The benefit of hindsight causes many investors to look back and wonder what it would be like to have purchased some stocks a number of years ago. The stats that show you the astronomical returns you would have had if you put a certain amount in a stock in a said year can really put a damper on investor expectations. The reality of it is that there were many gut checks along the way. The stocks didn’t go up in a straight line.

So, is investing hindsight really 20/20? If you look at certain situations that a stock has run through, it is very difficult to say in good conscience that you would have held on. Let’s look at Amazon for example. 20 years ago, you could have bought Amazon for around $10. The stock is currently trading around $3300. That is quite a return. However, the stock had some rocky periods along the way. It had two drawdowns of more than 50% between 2001 and 2009. Think about that for a second. You were enjoying this nice run in the big winner you picked and then you run into a freight train and half of it is wiped out. Did you hold on? Then from 2009 to present, there were five drawdowns of 25% or more. Again, would one of those time periods been enough to scare you into pulling the plug?

It is hard to answer those questions and is one of the most challenging things about investing. Knowing with complete certainty if an individual stock will come back is impossible. It can take years or even decades to recover. Unless you are in the moment, you can’t fully understand the feelings associated with it. It is very easy to say that you would have held on, but when sentiment shifts on Wall Street, one can quickly get consumed with the negativity. The negativity leads to overthinking and the overthinking leads to micromanaging the account. This can lead you down a rabbit hole that you never get out of.

If you just look at the end result, it sounds so easy. However, being along for the ride is a different story. The diversified approach is arguably easier. While diversified portfolios can have large drawdowns, they are usually of less frequency and magnitude than individual stocks. Diversification leaves you more room for error. While it still offers no guarantees, it does offer a higher level of predictability. You can’t build a financial plan that assumes you will find the next Amazon. You can, however, build one around a diversified portfolio.

While the hindsight may feel like a crystal clear 20/20, you have to be honest with yourself and admit that it really isn’t. Next time you hear one of those stats, don’t focus on what could have been. Instead, stay focused on what could be if you maintain your discipline and stick with your plan. If you veer off track trying to chase the next Amazon, you can miss out on years of compounding. There is a reason why most investment advertisements end with the phrase “past performance is not a guarantee of future results.”


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