-Jesse Livermore
Here’s a familiar refrain from some investors: “I don’t need to trade with a stop-loss because I only buy quality stocks.” Well, I have news for you; good companies can be terrible stock investments if bought at the wrong time. There’s no such thing as a “safe” stock. No stock can be put away and held forever. Most stocks can’t even be held unattended for even a few years.
Many so-called investment-grade companies today will face new challenges, business conditions, or regulatory changes that can materially impact future earnings potential. Often, before these new challenges or in many cases severe problems become apparent the price of the stock declines precipitously in anticipation of such developments.
And, don’t think for a minute that the company is going to let this type of information out easily. The company will try everything in its power legally, and in some cases illegally, to hide such problems or negative circumstances. (I can assure you that you won’t find this information in the annual report unless the company has no choice but to disclose it.)
Many “conservative investors” have gone broke owning and holding onto so-called blue chip companies with the philosophy of prudence by way of quality. If this happens to be your strategy, then I’m afraid you will eventually be in for a big surprise.
The lazy investor buys Coca Cola; he feels “safe” and smart that he bought quality. I can’t tell you how many times I heard the words: “They’re not going to go out of business, it’s Coke.” Maybe not, but the stock could at some point go down 60% or 70% and take a decade to recover!
Hey, wait a minute... that actually happened. Coke topped in 1973, declined 70% from its high, and then took 11 years just to get back to even. Sure, investors received a dividend of a few percent per year, but that doesn’t even beat inflation, and they were still sitting with a big loss. In 1998, Coca Cola topped again; the stock declined for 5 years and took an almost 50% haircut.
There are plenty of examples among “high quality” companies that had periods when their stock prices were decimated regardless of their status. After topping-out in 1973, it took Eastman Kodak 14 years to recover just to break even, this was just in time for the crash of 1987, which was followed by another 8 years of recovery back to its 1973 high. Twenty-two years to break even!
Xerox also topped in 1973 and took 24 years to break even; during the same period the S&P 500 Index advanced more than 500%. During the 1960s Avon Products became so popular that the stock price ran up way ahead of its earnings, resulting in a price advance that took the stock from $3 in 1958 to $140 per share in 1972; then the stock topped out and declined from $140 to $19, a decline of 86% in only one year. Fourteen years later the stock was still at $19 a share.
From December 1999 through February 2002, McDonalds fell 72% in just 32 months. From August of 2000, AT&T (the bellwether of all bellwethers) fell 85% in 50 months. A drubbing of that size requires a 566% gain just to get back to break even. How many stocks do you buy that go up 566%?
Click on image to enlarge
From April 2000 Cisco Systems plunged 90% in 30 months, which requires a 900% gain to break even. And, then there was the institutional favorite Lucent Technologies, which fell 99% in 35 months from 2000 through 2003. In 2008, General Motors went to zero. How about AIG, Bear Stearns, Lehman, Enron or Worldcom?
Need I say more?
I could go on and on with countless examples, cycle after cycle. These are just a few of the market’s casualties, and the above mentioned were, at the time, all “high quality” names. Maybe someday we will be saying the same for stocks like Apple, Amazon, Priceline, Baidu or Green Mountain?
Mark Minervini
To subscribe to "Minervini on the Market" go to www.minervinitube.com
Posts
0 comments:
Post a Comment