And the current stocks in our showroom that I believe could do the same…
“Money grows on the tree of persistence.” — Japanese Proverb.
In his book ‘Outliers’, Malcolm Gladwell asserts that 10,000 hours of determined practice is required to achieve mastery in any field.
The evidence supporting this conclusion is extensive. In the early 1990s, for example, a team of psychologists in Berlin studied the practice habits of violinists throughout childhood, adolescence, and adulthood. All of the students involved began playing the violin at the age of five, all with similar practice times. At age eight, these practice times began to diverge. By age twenty, the elite performers had averaged more than 10,000 hours of overall practice each, while the less-able performers had only accrued about 4,000 hours.
Importantly, no ‘naturally gifted’ violinists emerged from the study. If natural talent had played a role in the development of skills, those individuals would have risen to the top of the elite level with fewer practice hours than everyone else. The data showed otherwise. Psychologists found a direct statistical relationship between hours of practice spent and achievement with no exception. These findings were also applicable to football, chess, baseball, art, cooking… virtually any other area of expertise you can name.
So it stands to reason that the same goes for investing.
In the movie ‘Becoming Warren Buffett’, it’s clear from the outset that Warren has practiced his pursuit with unwavering obsession from childhood, arguably at the cost of relationships and other interests. He clocked-up his first 10,000 hours practice at an age when most of us are still figuring out what we want from life.
If nothing else, I have been a persistent investor throughout my life. For over 20 years, I’ve relentlessly applied my focus and hard-earned savings to stock investing. Nonetheless, I’m no master. I’ve worked hard and put in at least 10,000 hours of practice, but still remain a student. I continue to make mistakes, albeit a lot less frequently with the passage of time.
Henry Ford’s quote that “even a mistake may turn out to be the one thing necessary to a worthwhile achievement” rings true. I could recite every single error I’ve made in my investment life and, more importantly, tell you what I’ve learned from each one. Broadly, these lessons can be summarized into themes, but more on that later.
The fact is that my determination and persistence as an investor has paid off in very many ways. One such reward came last week when Netflix—a stock I first bought fifteen years ago—became my first 100-bagger. This means that my entire position sailed past the 10,000% growth mark, or in other words, went up 100-fold.
There remains a significant difference in gains between Netflix and the next biggest winner in my portfolio—Facebook (which is now within sight of becoming a 10-bagger). But despite this apparent once-in-a-lifetime result, I firmly believe that I’ll own another 100-bagger. Or a third. Maybe four. Possibly even five.
Why am I so confident about this?
I’m 43 years old. I eat well, don’t smoke, drive carefully, rarely drink alcohol, never touch drugs, exercise often, and both of my parents are alive… so the probability that I’ll enjoy several more decades is reasonable.
If I am so lucky, that would give me something like a 35+ year runway to keep going as a buyer of great businesses with a vision that disappears beyond the visible horizon. By compounding my learnings from my past investments and applying them for the rest of my days, I’m confident that I’ll see more fantastic returns like this in the future.
If compound returns are the secret to wealth creation, then compound mistakes have been my key to learning.
Anyone who has stood around me for too long has heard a stock-market story that captivated my interest in my formative twenties.
While trawling Yahoo! Finance in its early days, I noticed that anyone who had bought shares in Dell Computers on the first day of 1990 and held for exactly 10 years saw their initial investment grow 1,600-fold. Ordinary people, with no push-start from family wealth, could have transformed a $3,000 investment into almost $5,000,000. Very few individuals caught that wave so early, but some did, and that was enough of a reason for me to go the distance as an individual investor.
When I first happened across Netflix, it had all the hallmarks of Dell’s early-days: first mover advantage with a great product, a mass-market opportunity, a founding CEO with significant ownership, and a delighted customer base.
However, I didn’t jump in with a long-term mindset.
I bought $1,419 worth of Netflix stock in May 2003. This may well transpire to be one of the best investing decisions I ever made. By November of that year, I’d sold two-thirds of that position for $1,953. The following month, I sold the remaining one-third for $1,097. Together, these decisions are contenders as the worst investing decisions I’ve made.
In the period since those sells, the stock has split 1:14, with the share price at $269.70 as I write. To frame it differently, I missed an extra $225,000 in gains because I hit the sell button too early, twice…
In 2004, Netflix faltered for reasons I can’t recall and the price fell to a level that called me back. So through good judgment (with a twist of luck), I bought shares in Netflix again exactly one year after completely closing my position. This time, I bought more shares than I had originally purchased 19 months previously.
Two and a half years passed. I bought again…
A further eight years passed and I soon needed cash, so I decided to cash-in a small portion of my holding. At the time, I sold 31 shares for $418.01 (or, when you take the 1:7 split that happened a few weeks later, an effective total of 217 shares were sold for $59.71).
Again, using today’s price, this sale means that I missed out on a further $45,451 in gains. That’s an aggregate of $270,000 in lost gains thanks to selling too soon for anyone who’s counting…
Thankfully, it’s not all about the losses though. I sat on the remainder of Netflix shares I owned from that day to now, where they are up 10,651%. But, as you can see, even my biggest winner carries the scars of mistakes.
Roy H. Williams said, “A smart man makes a mistake, learns from it, and never makes that mistake again. But a wise man finds a smart man and learns from him how to avoid the mistake altogether.”
Here are four short lessons that I hope all you wise men and women can learn from me.
- Never sell something that has a chance of growing in value because, over the very long term, it probably will. 90% of the mistakes I’ve made as an investor have been sells. Exiting a stock brings costs that include commission fees, taxes and, most importantly, your time. With only a few rare exceptions, buy a stock with the intention of holding it forever.
- Find a low-cost broker and stick with them. I’ve paid tens of thousands of dollars in accumulated commission fees, quite often $10 at a time. I regret that lost money.
- Never borrow money to buy. I lost my entire portfolio in 2000 thanks to margin trading. That was a mistake.
- Max-out whatever tax benefits your country and employer affords you. That may be a 401k plan, annual capital gains allowance, or the ability to carry forward losses to offset against future gains. Invest an hour with a tax advisor. I didn’t do that soon enough and it has cost me in recent years. Hear that? It’s the sound of another mistake.
My next multi-bagger
As I’ve said, I don’t believe my first 100-bagger will be my last.
In no particular order, here are some of the stocks that I believe will grow at least 10-fold by 2030. I’ve actually invested in all of them, so I’m eating my own cooking, so-to-speak.
- Arista Networks
- Under Armour
- Mazor Robotics
But caveat emptor! There are a few accompanying predictions:
- Several of these businesses will repeatedly be declared overvalued or destined to fail in mainstream media. This will test your resolve to hold long term.
- Some will actually fall meaningfully from today’s value and never recover. That’s just how it goes. Remember, it only takes one good investment to change your life, you just don’t know which one it will be. In the long run, your winners will more than compensate you for your losers.
- I will add new stocks to my portfolio that I feel even more optimistic about than the list of sixteen above. I just haven’t found them yet. When it happens, you’ll hear about it first in the Invest app or on my Twitter account @emmetsavage.
Finally, please don’t feel inclined to plow into these stocks just because I like them. Make sure to do your own research and determine what companies are a fit for your portfolio. Remember, I still make mistakes, despite 10,000+ hours of practice.
Here’s to the future, wealthier, you.
Thank you for your trust,
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