Peak to Trough: How To Handle Stock Price Declines

Sometimes great businesses see huge stock price declines. Yet some investors manage to ride out these tough times and cleverly hold onto declining assets. Today we look at some stats that may leave you feeling more philosophical the next time your portfolio takes a hit.

Warren Buffett’s business partner Charlie Munger gave an interview to the BBC in 2012. The first question that the interviewer asked was “How worried are you by the declines in the share price of Berkshire Hathaway and the difficulties the company is in?”. Without even letting him finish the question, Munger responded:

“Zero! This is the third time that Warren and I have seen our holdings in Berkshire go down, top-tick to bottom-tick, by 50%. I think it’s in the nature of long-term shareholding, with the normal vicissitudes and worldly outcomes of markets, that the long-term shareholder has the quoted value of his holdings go down, by say 50%. In fact, you could argue that if you’re not willing to react with equanimity to a market price decline of 50%, two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you are going to get.”

It’s been a rough earnings season so far. Some great companies have seen 20-30% drops after missing estimates or giving tepid forecasts for short-term future.

Following companies for decades rather than months, puts these drops in perspective.

From April to July in 1999, Amazon stock dropped 42%. That’s a tough loss to take as an investor. By the time the stock had recovered in November, the tech-bubble was just about to burst. Over the next year, Amazon stock lost 93% of its value – going from $85 a share to under $6.

When a stock drops something like 93%, that’s supposed to be game over. If you own a stock that has dropped 93%, you need 1324% gain just to break even.

Well, we know now that Amazon did recover and went on to become one of the best-performing stocks of the last twenty years – a $10,000 investment would now be worth close to $50 million.

However, even after that 93% drop, it wasn’t all happy sailing. The company dropped 50%, 48%, 22%, and 24% over separate time periods over the next 16 years. Now, most investors simply wouldn’t have the stomach to stick it out with a stock like that for twenty years, but I personally know one who held it from the very early days and is far wealthier today as a result.

The problem with using Amazon as an example in anything is that the typical response is “Amazon is an outlier. Most stocks don’t behave that way”. That’s true. Most stocks don’t behave that way, but many of the great businesses we know today weathered similar storms throughout the years.

Here’s a few examples of what I’m talking about. Keep in mind there are many others:

Netflix
May ’02 – Oct ’02:  -41%
Jun ’04 – Oct ’04: -74%
Jul ’11 – Nov ’11: -76%
Feb ’14 – Apr ’14: -32%
Aug ’14 – Dec ’14: -28%
Nov ’15 – Jan ’16: -26%

Total return since IPO: 10,452%

CostCo
Jul ’87 – Nov ’87: -46%
Jul ’91 – Apr ’92: -52%
Feb ’94 – Apr ’94: -34%
Apr ’00 -Apr ’00: -41%
Jun ’02 – Dec ’02: -39%
Mar ’08 – Feb ’09: -41%

Total return since IPO: 1,402%

Monster Beverages
Jun ’06 – Aug ’06: -42%
Oct ’07 – Jul ’08: -66%
May ’12 – Oct ’12: -38%

Total return since IPO: 48,329%

Ulta Beauty
Oct ’07 – Mar ’09: -86%
Jul ’11 – Aug ’15: -28%
Nov ’13 – Jan ’14: -36%

Total return since IPO: 663%

Starbucks
Jun ’98 – Aug ’98: -42%
Jun ’99 – Jul ’99: -38%
Jan ’01 – Sep ’01: -40%
Oct ’06 – Nov ’08: -76%
Apr ’12 – Jul ’12: -21%

Total return since IPO: 15,602%

Activision Blizzard
Dec ’93 – Aug ’94: -68%
Nov ’95 – Dec ’95: -37%
Dec ’97 – Aug ’98: -44%
Sep ’99 – Apr ’00: -65%
May ’02 – Dec ’02: -55%
Jul ’08 – Dec ’08: -52%

Total return since IPO: 4,523%

Disney
Oct ’72 – Jul ’74: -82%
Apr ’90 – Jul ’90: -29%
Apr ’98 – Jul ’98: -28%
Jul ’07 – Jan ’09: -47%
May ’02 – Dec ’02: -55%
Jan ’11 – Jul ’11: -30%

Total return since IPO: 104,738%

Nike
Dec ’92 – Dec ’93: -44%
Feb ’97 – Jul ’98: -52%
May ’99 – Feb ’00: -55%
Aug ’08 – Feb ’09: -39%
Mar ’12 – May ’12: -22%
Oct ’15 – Oct ’16: -24%

Total return since IPO: 30,455%

Nvidia
Aug ’00 – Dec ’00: -60%
May ’01 – Aug – ’01: -41%
Dec ’01 – Aug ’02: -87%
Apr ’06 – May ’06: -27%
Aug ’07 – Oct ’08: -79%
Dec ’09 – Jun ’10: -51%

Total return since IPO: 5,343%

Home Depot
Dec ’92 – Dec ’93: -24%
Dec ’99 – Nov ’00: -43%
Dec ’99 – Jan ’03: -70%
Jan ’01 – Feb ’09: -49%

Total return since IPO: 414,566%

Now this is not a call for investors to simply ride out stock price declines forever. Plenty of stocks keep dropping until they eventually go bankrupt, or get acquired at a price far lower than investors had bought in for.

But it’s important to keep in mind that really great businesses regularly see downturns – sometimes very painful ones – but that doesn’t stop them being great businesses and eventually great investments.

Berkshire Hathaway has been one of the best investments anyone could have made in the last 50 years and many investors have been made multi-millionaires simply by weathering the occasional storms.

That’s not to say it’s easy to do that. No one likes to see their portfolio lose value. I held shares in Netflix throughout the years shown above and it was certainly not easy to sit on my hands while the share price dropped over 70% (twice). But to leave you with another quote from Charlie Munger:

“Why should it be easy to do something that, if done well, two or three times, will make your family rich for life?”

He’s full of wisdom that guy.

Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions in Netflix, Activision Blizzard, Nike, Disney and Starbucks

2 responses to “Peak to Trough: How To Handle Stock Price Declines

    1. Hi there,
      Thanks for getting in touch.
      Apologies if feel as though we missed out on something in the blog. Please feel free to ask any questions here and we’ll answer you as best we can.
      Kind regards,
      James.

Leave a Reply

Your email address will not be published. Required fields are marked *

The Five on Friday | the biggest stories, straight to your inbox