The surprising thing that the 5 best stocks of the last decade have in common

You would think that about half the shares of the S&P 500 do better than average in a given year. One would expect a balanced distribution between the top and bottom performers of the market.

The reality is that the exact percentage goes up and down in real time. And generally speaking, only about 20% of S&P 500 constituents beat the market average. That’s why finding a winner is so important.

According to MacroTrends, the top five stocks of the last decade are Nvidia (NASDAQ: NVDA), AMD (NASDAQ: AMD), Camtek (NASDAQ: CAMT), right isaac (NYSE: FICO)i Tesla (NASDAQ:TSLA). These actions have compound annual growth rates between 40% and 75%. On the low end, a $10,000 investment in Tesla 10 years ago is worth $290,000 today. At the high end, a $10,000 investment in Nvidia back then is now worth nearly $2.7 million.

A key component of The Motley Fool’s Investment Philosophy is “letting the winners in your portfolio keep winning.” There are relatively few winners, and if you have a winner in your portfolio and you sell it early, you have about an 80% chance of replacing it with a loser.

Sounds simple, right? Just buy good stocks and hang on to the big winners. But in reality, Nvidia, AMD, Camtek, Fair Isaac, and Tesla share one surprising thing that made it extremely difficult to keep up with them over the last decade.

Over the past 10 years, these five stocks have dropped 50% or more in value at least once. Tesla retreated more than 70% from its peak over the past 10 years. And even the mighty Nvidia fell 66% in 2022.

Nvidia has dropped 50% or more on two separate occasions in the past decade. Tesla has done it three times. So has AMD, if we round the numbers slightly, and is currently down 40% from the highs it hit earlier this year.

When stocks fall this far, there will always be negative headlines fueling long-term fears. And these bearish cases will scare investors into thinking it’s time to sell.

On the one hand, it’s easy to empathize with someone who sells. Imagine having a position worth hundreds of thousands of dollars that drops 50%. It would make you sick to your stomach to see so many benefits disappear. But on the other hand, selling any of these five stocks after a 50% pullback was ultimately the wrong move, causing the sellers to miss out on massive gains.

The great investor Charlie Munger said: “If you are not prepared to react with equanimity to a 50% drop in the market price two or three times a century, you are not fit to be a common shareholder and you deserve the mediocre result you are getting. They will be compared to people who do have the temperament, who can be more philosophical about these market fluctuations.”

Munger was never one to mince words. It may sound harsh here, but his advice is wise nonetheless, for several reasons.

First, investors must accept that a drop of 50% or more will happen and that it can happen often. If you want to make money investing, that’s part of the deal.

Second, a drop of 50% or more does not tell investors anything about when to sell or when to buy. As we’ve seen, the top five stocks you could have bought 10 years ago dropped at least 50% at least once. Those drops were not sales opportunities.

Likewise, there are countless other stocks not mentioned here that have dropped 50% or more and never recovered. Munger mentioned equanimity, and that’s what you need when you realize that stocks can rally or fall further after falling 50%. The bottom line is that investors should respond indifferently to price, which brings me to my third point: Investors should have an investment thesis when buying stocks.

Your thesis must articulate the conditions necessary to generate sustained shareholder value. Then compare one company’s results to the thesis. If things turn out as expected, it’s often a good idea to hold on, as you’ll have a solid foundation for when the stock market turns turbulent.

In short, investors can see their portfolio cut in half even if they have picked the best possible stocks. But volatility is part of the deal. If fear begins to rise to the surface, investors should dust off their investment thesis to see if they should continue to hold the stock in their portfolio.

Ever feel like you’ve missed the boat on buying the hottest stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock. recommendation for companies that believe they are about to exit. If you’re worried you’ve already missed your investment opportunity, now is the best time to buy before it’s too late. And the numbers speak for themselves:

Nvidia: if you invested $1,000 when we doubled in 2009, you would have $363,593!*
Apple: if you invested $1,000 when we doubled in 2008, you would have $48,899!*
Netflix: if you invested $1,000 when we doubled in 2004, you would have $502,684!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another opportunity like this anytime soon.

See 3 “Double Down” actions »

* Stock Advisor returns from December 23, 2024

Jon Quast has no position in any of the aforementioned stocks. The Motley Fool has positions and recommends Advanced Micro Devices, Nvidia and Tesla. The Motley Fool recommends Fair Isaac. The Motley Fool has one disclosure policy.

The surprising thing that the 5 best stocks of the last decade have in common was originally published by The Motley Fool

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