patience

The Rip Van Winkle Effect

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Rip Van Winkle is a character in a Washington Irving short story written nearly two centuries ago. You might know the story: Rip sleeps for twenty years up in the mountains, eventually returning home to find that much had changed.

One of the most dynamic companies in the world emerged on the scene a little over twenty years ago. An investor who purchased it on its first day of trading would have made several hundred times his original investment, had they held all the way through.

In spite of the incredible long-term result, it would have been very difficult to achieve even if one had bought in early. If you carefully looked every day to see how it was doing, as of November 12th this is what you would have experienced:

• On 1,346 of the days of ownership, the value would have been less than 50% of its previous peak. This is nearly one day in four, out of the 5,410 trading days in question1.
• On 494 of the days, the value would have been down 80% from the prior peak.
• The worst drop from a prior peak would have been 94%.

It isn’t always easy to hold an investment that has declined in value. We strive to own bargains, even when they become better bargains. (Once upon a time, a client asked me “What kind of moron would watch a stock go down from $11 to $7, dropping day after day, and do nothing?” Of course, I am that kind of moron.)

We have noticed that a certain few of our clients use the Rip Van Winkle effect, to their benefit. In the example above, they would have accepted in advance they would be under water at times, and just held for the long term. They enjoy the long-term result, without the day to day anguish of fluctuating values—they did not need to look every day.

We work diligently to understand what we should own, and why. Sometimes we change our opinion and sell at a loss. But often the Rip Van Winkle effect would help us. Clients, if you would like to talk about this or anything else, please call.

Notes & References

1. Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved November 12th, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Stock investing involves risk including loss of principal.

The Three Investment Strategies

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Great thinker Morgan Housel recently wrote that there are only three legal investment strategies.

1. Be smarter than others.
2. Be luckier than others.
3. Be more patient than others.

Does one of these jump out at you as being a lot more accessible than the others?

Luck falls where it may. We do not control the luck we have. Smarts? We do what we can to improve our odds. Reading, studying, analyzing, thinking…we do our best to understand what we can. But there will probably always be somebody smarter, somewhere.

The edge that anyone may choose is patience. We talk endlessly about the long view, about waiting out the downturns, about hanging in there when times seem rough. Anyone may choose patience, but it is not always easy!

After decades, we have yet to see a fool-proof indicator that will tell you which way the market is going to go in the short run. Nor have we seen evidence that any person can reliably predict the direction of the market. But we do know a couple key things:

• In the past, the broad market has tended to go up about three years out of four, and down about one year out of four.1
• Over extended periods, these ups and downs have potential gains for those who are patient.

Past performance is no guarantee of future returns, of course, so it takes some courage to exercise patience. We appreciate that in you.

Clients, if you would like to talk about this or anything else, please email us or call.

Notes & References

1. Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved November 26th, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.