The Magic of Compounding Takes (a long) Time To Experience
I buy and share baskets of stocks called Coffee Cans. You can see the most up to date list of stocks and their performance here on my Scorecard.
Earlier I wrote about Norbert Lou’s June 2001 NVR stock pitch.
This has been a 22-Bagger since, one of the best stocks of the past 20 years.
But…
How long would you have had to wait before you really experienced these magical returns?
If you bought the stock when it was pitched, you would have...
Doubled your money in year 1 (2002).
3X'd by year 3 (2004).
5X’d by year 4 (2005)!
That's a great outcome. Would you have kept holding?
It took a whopping 8 years (2005 to 2013) to go from 5X → 6X!
But the next 6 years were when the magic really happened:
5X → 6X (2013)
6X → 7X (2014)
7X → 9X (2015)
9X → 12X (2016)
12X → 16X (2017)
16X → 21X (2018)
21X → 22X (2019)
Just amazing.
But to experience this, you had to wait.
Really wait.
And then wait some more.
So what does this tell us?
It tells us that yes, compounding is an incredible force. But, the magic of compounding takes a long long time to experience.
Owning the stock for that long is very hard. And the ride is not easy. Stocks always seem to “go nowhere” for long periods of time in between. This can feel like an eternity. For NVR, this happened between 2005-2013.
I realized that this phenomenon of stocks going nowhere for years at a time happens all the time. Pick any great stock and it likely had such a period. Below are the first 3 examples I chose off the top of my head. When I looked at their history, they all experienced similar periods.
*Note: Returns below were calculated based on stock price in August each year.
Starbucks (SBUX)
2006 to 2011 ⇒ It took almost 5 years to get back to breakeven.
2015 to 2019 ⇒ It took almost 4 years to get back to breakeven.
Tesla (TSLA)
Sep 2013 to June 2019 ⇒ All gains in between had disappeared.
July 2017 to Dec 2019 ⇒ It took almost three and a half years to get back to breakeven.
Google (GOOG)
Nov 2007 to Jan 2013 ⇒ It took more than 5 years to get back to breakeven.
This period of time where the “stock goes nowhere” can happen due to business-induced uncertainty (eg: Tesla’s cash burn) or outside forces (eg: financial crisis or the pandemic). Either way, during such times, there is lots of uncertainty about the future. And we all know, the market hates uncertainty.
The ironic thing about investing is that most stocks never recover to reclaim their high water marks, but the ones that do are very special, and provide amazing returns, but ONLY at the tail-end of the timeline. This always tests an investor’s conviction. And this is what makes investing hard.
I suppose that’s also what makes investing so much fun. As long term investors, we’re all on a quest to find, buy, and hold onto these rare but special companies.
Having grown up in the tech & venture world, I believe that approaching stocks like Venture Capital can outperform the market. And I believe it is one approach, if executed well, that can lead to magical compounding over time.
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