This tale is not one that I’m particularly proud to tell. It teaches us the power of one extraordinary stock in a portfolio. For those that have seen the movie City Slickers and remember Curly famous line, “One Thing, Just One Thing” this tale is for you. In the movie Curly, played by Jack Palance, was explaining the secret to happiness. In this tale if there’s just one thing that you learn about individual stock investing it’s hold on to your winners.
The story starts out harmlessly enough. In mid 1990 I was asked to look into a company my friend was thinking about joining. The company was EMC. I liked it and bought shares for 22 of my clients and some for myself. A little over three years later I ended up selling the shares for 21 of the 22 clients that owned EMC including myself. At the time, I had made almost 15 times my money on this investment and the time to get out seemed appropriate especially since I had a few other companies that I thought offered better opportunities. Boy was I wrong. The real story is about Billy, the client that didn’t sell the shares.
It was just a matter of coincidence that I didn’t sell the EMC shares for Billy. At the time that I was contemplating selling it for all my clients, I had spoken with Billy and he told me about an unforeseen tax liability. He told me that if at all possible could I defer realizing capital gains until another year. I followed his wishes. I didn’t sell his shares of EMC. Billy’s original position in EMC had been about $5000 in mid 1990. By the time I sold it for everyone but Billy it was almost $75,000.
I kept an eye on EMC for the next several years and it moved up and down as stocks are known to do but as late as the fall of 1995 it was still worth roughly $75,000. The shares had not moved a lot during the almost 2 years since I had sold it for the group of 21 and myself. What happened next? The shares of EMC began to move up consistently. It didn’t take long for the stock to double and by Dec of 1997 Billy’s shares were worth about $600,000 and then they went up some more. To my regret, I sold some shares around this time thinking that the stock couldn’t continue to go up so rapidly and it represented a disproportionate percentage of Billy’s portfolio. By the end of 1999 the shares were worth almost $1.2 million dollars. EMC had probably been one of the top performers of the decade. I estimate that it had increased in value almost 500 times. This means that if someone had invested $10,000 at the start of the decade they would have almost $5,000,000 by the end of the decade. This is the power of one extraordinary stock.
What happened next? In early 2000 I sold half the shares in Billy’s portfolio when the shares of EMC reached 50% of his total portfolio. A few months later the shares had almost doubled in price again and I sold another half of what was left. As many of you know, the shares of EMC proceeded to drop by almost 95% from the peak price in 2000 to the trough price of 2002. I didn’t sell a single share of the EMC on the way down and still own it today.
What can we learn from this tale? We learn that some companies have the ability to generate extraordinary returns for their investors. This tale is closely linked to A Gardening Tale. In both we learn that selling individual stock winners is amongst the worst thing that you can do for your portfolio. We can also learn that luck plays a big factor in the investment process. Had Billy not spoken with me and explained his tax situation, I would have sold his shares along with all the others. Sometimes, it’s those tiny conversations that make a huge difference in a person’s results.
What else can we learn from this tale? We can learn that stock market success does not depend on picking stock market tops or bottoms. In the late 1990’s I sold shares for Billy as the price kept moving up and it became a disproportionate part of his portfolio. I didn’t sell his shares at the top of the market but I also didn’t sell them at the bottom of the market. Had I never sold one of Billy’s shares his original investment might have been worth as much as $5,000,000 at it’s peak and then when the stock of EMC went down 95% from it’s peak it would have dropped in value to about $250,000. It would have still been a great investment in hindsight to see $5,000 grow to $250,000 but by selling a little on the way up I was able to capture more wealth for Billy than by trying to pick a top like I did for myself and the other client’s that originally owned the stock.
Lastly, we can learn that if you are in the stock market long enough you come to realize that you can always do better. Many would go so far as to say that as a trader you are always wrong. You are not wrong in the traditional sense that you lose money. In fact you may very well have made a substantial amount of money. You are wrong in that in hindsight you can always analyze the subsequent market action of whatever it is that you are trading and come up with a set of what ifs that shows how you could have optimized your trade. As a trader you will always be subject to second-guessing and self-critique. I call this second-guessing the trader’s dilemma and illustrate it in A Trader’s Tale.