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For next week:

Good Morning, Last weekend's Barron's had an article citing the fascinating results of a study from Arizona State professor Hendrik Bessembinder. In a recent paper, Bessembinder studied the performance of more than 29,000 stocks from 1925 through 2023 and found that most stocks lost money over time and that a small number of stocks are responsible for the majority of the market's long-term gains. Looking back at stocks with a minimum of 20 years of returns, the study found that Nvidia (NVDA) had the greatest annualized compound return, which should surprise no one. Looking further back, though, of the stocks that have been around since 1925, the three with the biggest gains were Altria (MO), Vulcan Materials (VMC), and Kansas City Southern (KSU). All three have generated annualized gains of over 14% (table below is from the paper). When you think of the market's biggest winners over the last 100 years, would you have ever guessed the trio would include a tobacco company, an asphalt company, and a railroad? It's hard to imagine a sector of the economy that has been more out of favor in recent decades than tobacco. Given its addictive nature and how popular it was for most of the last 100 years, though, Altria's strength makes more sense. When it comes to Vulcan (VMC), it doesn't get less sexy than asphalt. Still, as the auto industry exploded over the last century, especially after WWII, and more Americans moved out of cities and into suburbs, none of it would have been possible without a company like Vulcan laying pavement. Just as networking companies have facilitated the movement of data around the internet since the late 1990s, companies like Vulcan and even Kansas City Southern can, in some ways be thought of as the networking companies of the physical economy of the 20th century. When the same study is conducted in 2125 looking at the best-performing stocks since 2025, will NVDA be as exciting as a tobacco or asphalt company is now?  If not, which companies of today will end up as the leaders of the next century? [ATTACH=full]191610[/ATTACH]

From the Compound:

Picking stocks that outperform the market is hard. Riding them through the ups and the downs is even harder.

Holding onto big winners in the stock market is difficult because the temptation to book gains is real. We all know how bad it feels to ride a monster only to see gains get cut in half.

If you’re a stock picker, then there is a 100% chance that you’ve had some stocks that you held onto for too long. Assuming that’s the case, then you have that in the back of your brain at all times, constantly telling you to not be greedy. At the same time, you don’t want to sell too early and leave money on the table.

Holding stocks on the way up isn’t easy, but holding them on the way down is even harder. When a winning stock falls, you’ll inevitably feel like, “Ugh I’m a greedy idiot. Why didn’t I sell before? Should I sell now? How low is this going to go?”

Josh opened the show this week by talking about holding big winners. 10 baggers and the such. How much of this is luck, and how much of it is skill?

Obviously, there is a degree of luck involved, but does it take skill to watch your stock get cut in half multiple times along the way to massive gains? I’m not sure “skill” is the word I would use. I would say a strong stomach and mental backbone, for sure. I would also say, and I really don’t mean for this to sound insulting, even though I know it will, that it takes a certain naivety about how the market works. I would say that non-finance professionals are, I don’t know, 10x more likely to buy and hold a massive winner than somebody who works in the industry.

Here’s why I say that. People who work in or around finance are more likely to know how unlikely it is that they’ll pick and hang onto the next Apple or Nvidia. We’re also less likely to view the market as a casino than retail investors are.

We can’t ride big winners because we know too much. I’m mostly sorta kidding. Here’s a story that I think is a decent analogy.

A husband and wife are at a casino. The husband is well-versed in gambling. He knows when to hit, when to split, when to raise, etc. The wife has never played before.

After an hour, she comes over to him. He asks, “How’d you do?”

“I lost $200 playing slots. What about you?”

“How’d you lose $200 playing slots????”

“I don’t know. Is that bad? How did you do?”

“I lost $2,000.”

“You lost 10x more than me, and I’m getting crap for it?”

“Yeah, but I know how to gamble!”

I don’t think I’ll ever get a 10-bagger. I know too much. I read a piece from J.P. Morgan back in 2014 that’s been cemented into my brain.

“More than 40% of all companies that were ever in the Russell 3000 Index experienced a ‘catastrophic’ price loss,’ which we define as a 70% decline in price from peak levels which is not recovered.”

One out of every four stocks has a monster decline from which they never recover. Yeah, no thanks. But there are giant winners. I mean, obviously. So, how likely are you to catch one? JPM says that “7% of companies generated lifetime excess returns more than two standard deviations over the mean.”

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All of these excess returners, with a handful of exceptions, I’m sure, have had multiple monster drawdowns. I mean, look at Apple, for example. It's probably the most widely held 10-bagger ever. Apple’s total return over the last decade is 875%, so close enough.

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Now this could cause some crazy moves. It may not, but with the market closed for MLK day and the inauguration on the same day...

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Now that does not fill me with confidence.

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Point State with SPY PUTS? LOL.

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LOL.

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Interesting.

Major earnings next week:

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jog on

duc