Do you know Joe Jackson, Tris Speaker, and Harry Heilman? If not, you’re not alone. How about Barry Bonds, Hank Aaron, Babe Ruth, Alex Rodriguez, and Sammy Sosa? All these guys played Major League Baseball. The first three names are in the all-time top-10 for career batting average – the others, top-10 for career home runs.
Both groups are Hall of Fame-worthy, but hits don’t get you name recognition like home runs.
2020 – A Wild Ride
In A Random Walk Down Wall Street, Burton Malkiel wrote, “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” That’s 2020 in a nutshell. Tesla was up 743%, Bitcoin – 322%, and GameStop – 210%. Some of the more established names even had monster years – Amazon – 76%, Apple – 81%, and Microsoft – 41% (YCharts).
The last 12 months will likely go down as the best buying opportunity of our lives.
But, investing isn’t about hitting home runs. Most investors don’t have the risk appetite to hit a home run. Even if you do, trying to pick the next unicorn is a fool’s errand. Enphase Energy was the second-best performing company in the S&P 500 in 2020 (YCharts), and you’ve likely never heard of it.
Home Runs Aren’t Easy to Find
Here’s one reason why home runs are so hard to come by
This company was down over 90% in 2001. A few years later, it was down over 65% from its high. Over the following ten years, it dropped more than 25% six times.
If you invested $10,000 at their IPO, your position 18-months later was worth $547,000. By the end of 2001, it was worth just over $55,000.
Very few investors can stomach a 90% loss or stick with the company through that kind of drawdown. Even if you could, would you stick it out for a company that was the “leading online retailer of books”?
The chart above shows the max drawdowns of Amazon. If you knew Amazon would turn into what it is today, it would have been a no-brainer to stick with them. But even Amazon wasn’t promoting themselves as anything but a book store before their IPO.
Since their 2001 low, Amazon is up 56,000%, and that $10,000 investment is worth $17.2 million.
Amazon – Even Warren Buffett Didn’t Get it Right
Arguably the best investor of all time didn’t get in right. Berkshire Hathaway didn’t take a position in Amazon until early 2019.
Fair to say we aren’t the next coming of the Oracle of Omaha and that we’ll never pick the next Amazon. Instead, we should focus on Buffett’s bet against a hedge fund manager. In his 2017 shareholder’s letter, he said;
Making money in the stock market “does not require great intelligence, a degree in economics, or a familiarity with Wall Street jargon such as alpha and beta. What investors then need instead is an ability to both disregard mob fears or enthusiasms and to focus on a few simple fundamentals. A willingness to look unimaginative for a sustained period – or even to look foolish – is also essential.”
There were a lot of home runs hit in 2020. Buffett proved you don’t have to hit home runs to ‘win’ the game.
Hits are boring, but they get the job done.
This is not a recommendation to purchase or sell the stocks of these companies picture/mentioned.
Past performance may not be indicative of future results.