SIMON BROWN: Investing for the long haul takes courage
The 10 baggers are out there for the taking — think Nvidia and Capitec — but holding on for the long-term payoff often requires a big dollop of fortitude
I was looking at the Nvidia chart recently. It has delivered a return on investment, over the past decade, of 11,350%. Yes, your $1,000 investment back in 2013 would now be worth $115,000. If only we had time machines.
But on a more serious note it got me thinking about Nvidia’s journey, because though that return is awesome, it has been rocky — sometimes very rocky — and that makes it hard for investors.
A year after buying in 2013 at under $4 you’d have been up 20%, which is nice but, well, just nice. After two years the share hit $7 and after four years the price hit $40; you finally had a 10 bagger (1,000%). Now we’re talking.
Two years ago the price hit $320. But then the wheels came off, and Nvidia stock plunged to $120. The temptation to sell would have been intense. Yet today the stock trades at almost $450.
This is the problem, if you can call it that, with long-term investing: stocks never go up in a straight line and the better the return, the more likely you will experience a few nasty drawdowns
This is the problem, if you can call it that, with long-term investing: stocks never go up in a straight line and the better the return, the more likely you will experience a few nasty drawdowns in the share price over the journey.
I experienced a similar situation with my Capitec holding, having initially bought into the company sometime in 2008 for 2,000c before finally selling recently at R2,000. That’s a 100 bagger return excluding dividends, but it was a very rocky ride at times.
So how do you manage to hold on for the real jaw-dropping returns?
First, accept that nothing goes up in a straight line. Expect volatility and drawdowns — this is a key part of investing.
Then when the stock does experience a drawdown you need to double down on your research and understanding of the business. Does it sill have growth potential? Why has there been a selloff?
In the case of Nvidia the first huge rally was on the back of crypto mining, but then the crypto collapse drove the share price down. The second rally has been on the back of the artificial intelligence (AI) explosion. Neither of these trends even existed a decade ago, so they were very much bonuses to your investment thesis.
But it is also important to check that the core business is doing well. Does Nvidia still make top-notch chips? What’s the competition doing? How good are margins and how is demand aside from a crypto or AI rush?
All of this is to understand not only the share price rallies but also the collapses. After the crypto crash there was no need to despair as the business remained solid with strong demand. Sure, demand fell off from the crypto miners, but gamers and data centre demand remained in place and both had a decent growth trajectory.
As a final point, many may think that selling the tops and buying the bottoms is the solution. The honest answer is that you’re certain to mis-time both while incurring costs and tax implications, resulting in worse returns and a stressed investor.
Know the business, be prepared for the volatility and above all give the investment time to really shine.
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