Riding the Ride
I have kids, two of them. In our attempt to teach them about the world, my wife and I take them to a lot of places. Recently, the best and most exciting place has been Kennywood. With the lights, sounds, people, thrills and food, the kids love it. Our oldest, nearly 4 years old, is now over 42 inches tall. He is able to ride almost any ride he wants, except the very big rollercoasters.
A few weekends ago, after realizing he could ride a big ride, he immediately wanted to. What kid wouldn’t?
We decided to try out the Jack Rabbit. Now, the Jack Rabbit is an old rickety wooden rollercoaster. And, at one point, it feels like you fly off the tracks. It is exciting even for adults.
While we were waiting in line something changed. You could see it all over his face. The expression was a combination of apprehension and dread. As it turns out, he was carefully watching the rollercoaster riders scream and wail as they came speeding past. After a while, he turned to me and said he didn’t want to ride it anymore. When I asked him why he said it looked too scary. As we got out of line, I suggested we try riding next time. He agreed.
There is an investing lesson here. That lesson is that if you are going to buy stocks you better be able to ride the ride.
Now, the stock market, produces extreme winners once in a while. Take Amazon.com for instance. If you had invested $10,000 at its IPO in 1997, you would have $9,224,000 today. The chart looks like this:
This chart is like watching people get on a ride and then off without seeing the journey. So, yes, Amazon.com is a big-time winner, but it hadn’t always felt that way. In fact, to capture the massive returns noted above you had to hold on for dear life.
Even for a company like Amazon.com, a remarkable success story, the pattern of returns can be tough to stomach. At one point the stock plunged 95% percent over a two-year stretch. That was during the tech bubble and it took nearly 10 years for investors to breakeven.
The worst drop on the Jack Rabbit pales in comparison to watching your $10,000 investment in Amazon.com drop to $95. But that is part of the ride and being able to ride through the twists, turns, ups and downs takes nerves of steel. It also takes an understanding of what the ride entails.
When we get on a rollercoaster, we know what we are getting ourselves into. We can look at the track and estimate how thrilling it may or may not be. We can then make a judgement as to whether or not we can handle it. Investing is same except you cannot see the path ahead of you. So be aware, the ride may not be as smooth as we sometimes suspect and appreciate that to do well you have to stay invested for the entire journey.
Investing, with its flashing stock prices, fast talking commentators, and never-ending scroll of breaking news, is thrilling. It is also a heck of ride and can be immensely profitable. Yet on the path to meeting your goals, the journey can shake even the strongest-willed. Its important for every investor to appreciate what they sign up for and be able to be patient for what they wish for.
Adam K. Wright, CFA, CFP®
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