The Delicate Balance of Regret and Wealth

Investing often involves balancing the regret of not selling to protect gains with the regret of missing out on opportunities. It takes a disciplined mindset to avoid both. Let’s explore how these two common investment regrets can impact you, starting with the regret of not buying (or the fear of missing out).

 

 

Nvidia’s success is the dominant news story currently. Last week, it briefly became the most valuable company in the world and the stock is up 155% year-to-date. There seems to be an almost unanimous opinion that the future of Nvidia is exceptionally bright, leaving investors who don’t own it possibly thinking they are missing out on easy money. The siren song regarding this company is so strong that investing $10,000 in Nvidia just five years ago would now be worth $335,000. Few investors have held the stock for the entire five years, but a lot of investors have made significant money in Nvidia, leaving the illusion that it can only go up. Even if you don’t own Nvidia directly, if you own an S&P 500 index fund, 7% of your portfolio is invested in Nvidia. It is the heaviest-weighted company in the index. This is also a major reason why the S&P 500 is up 15% YTD while the Dow 30 has only advanced 4.7% and the small company Russell 2000 index is up a meager 0.35%. A reasonable question to ask is: How has buying the most valuable company in the world worked out in the past?

 

 

In 1999, Cisco was the leader in networking equipment (they still are) and it was clear the internet was going to grow. CSCO reached a high of $82 in 2000 making it one of the most valuable companies in the world. However, it soon proceeded to fall to $11 and has only “recovered” to $47 after 24 years, despite earnings growing from $0.34 to $3.00. Microsoft was another market darling in 2000, reaching $58 before dropping to around $17 a few years later. It has since regained a spot on the most valuable list, but this is one of the rare exceptions in history. Other past top companies like GE, AT&T, GM, Dupont, IBM, and Exxon have not fared well. In 1989 the five largest companies in the world were all in Japan, they are nowhere near that now. However, when the path seems to be only upward, it is hard to sell. The reason these companies almost never remain top investments long-term is not because they cease to be successful, but because investors pay too much for them thinking that it’s different this time. When a company becomes absurdly successful, every other company with any connection to that industry is going to try to emulate it. Eventually, someone succeeds.

 

 

If you were told that in the next decade there would be the worst depression in a century, a 25% decline in GDP, 25% unemployment, then the following decade brings the worst world war with half of the world’s production being destroyed and 70 million deaths, would you invest? Despite this bleak outlook, buying the S&P Composite in 1930 was a great investment, compounding money at 6.6% for the next two decades, easily outperforming bonds. Many investors regret not selling when they experience substantial losses, wishing they had sold before the decline. Since 2000 the S&P 500 has experienced two declines of 50% and one of 35%, yet it has a compounded annual return of 7.7%. Individual companies are entirely different, they can become dramatically more overpriced. The paradox between the overall market and individual companies can leave you nervous about being invested in the market, but more than willing to ride Nvidia. History shows this is a hazardous dilemma that can lead to regret. Selling the market to protect your profits has never worked long-term while riding the most valuable companies is also problematic. This situation is aptly summarized by Morgan Housel:

 

 

“Every few years you hear a story of a country bumpkin with no education and a low-wage job who managed to save and compound tens of millions of dollars. The story is always the same: They quietly saved and invested for decades. They never bragged, never flaunted, never compared themselves to others, or worried that they trailed their benchmark last quarter.

They just compounded.

Their entire financial universe was contained to the walls of their home, which allowed them to play their own game and be guided by nothing other than their own goals. That is their superpower. It was actually their only financial skill, but it’s the most powerful one of all.”

 

 

Nobody knows if Nvidia will be higher in a decade, but you can be almost certain the S&P 500 total return, which includes dividends, will be (there is never absolute certainty). Buying the most popular stock is dangerous, selling out of the market is dangerous, but staying in the middle of the road creates wealth.

 

Observations On The Market No. 396