Buying Great Stocks at the Worst Time

Eric Fry By Eric Fry
Macro Strategist

Market Trends

A wise old man once told me, “There’s no wrong way to say ‘I love you.’” Similarly, there’s no wrong way to buy a great stock.

The greatest error is failing to act – something I call “analysis paralysis.”

That said, timing is critical in both love and finance. Saying “I love you” after stumbling drunkenly through the front door at 4 a.m. is less ideal than saying it across a candlelit dinner table.

In finance, buying a great stock near a major peak is less ideal than buying it near a major low. But either one of these actions is better than no action at all.

In fact, the investment gains that can accrue from buying an excellent stock at the worst possible time can be absolutely astonishing.

Timing is important… but it’s not everything. That’s the point.

Let’s consider a few examples from the past.

Imagine, for instance, that you had purchased shares of Amazon (Nasdaq: AMZN) on December 10, 1999, at the very peak of the dot-com bubble… and then continued holding those shares until today.

That 18-year investment would have produced a total return of more than 1,500% – or eight times the return of the S&P 500 over that time frame…

But this delightful long-term result reveals nothing about the short-term pain you would have endured. Within two years of making your investment, Amazon shares would have plummeted 94%.

Nine years after making your investment, your shares would still be down more than 50%.

But one decade after your investment, the stock finally moved into the black – and then continued soaring from that point forward…

Netflix (Nasdaq: NFLX) subjected investors to a similarly depressive episode before going manic.

Anyone who purchased the stock at its 2011 peak would have watched their investment tumble 80% over the next 12 months. But investors who stayed the course until today would be sitting on a plump gain of 873% – or six times the S&P 500’s gain over the same period.

Even legendary stocks like Apple (Nasdaq: AAPL) have inflicted extreme pain on shareholders for long periods of time. Investors who purchased Apple at its 1983 peak were sitting on a 75% loss after two years… and were still nursing a 54% loss 14 years later!

But if they were still holding the stock today, they would have reaped a total return of more than 20,000%. In other words, their $10,000 investment in 1983 would now be worth $2 million.

And that would have been the result of buying Apple stock at the worst possible moment.

Obviously, I cherry-picked these particular success stories. But I could just as easily have selected examples from my personal investment history.

Many, many times, outstanding investments begin their legacies as utterly miserable investments.

In 1999, I produced an institutional research product in which I recommended buying Royal Garden Resorts, a Thai hospitality stock.

Two years after I recommended it, the stock was down 37%. Despite its dismal start, the stock gained:

  • 100% after three years
  • 500% after six years
  • 1,000% after seven years
  • 2,000% after eight years
  • 2,888% after nine years.

Also in 1999, I recommended buying shares of Adidas (OTC: ADDYY), the German shoe manufacturer. It too fell shortly after my recommendation.

After two years, the stock was still down 50%. But after 18 years, the stock had become a 10-bagger – up more than 1,000%. That result was three times better than what the S&P 500 delivered over the same time frame.

In hindsight, I recommended both of these stocks at the “wrong time.” And yet both of them produced large, market-beating returns over time.

Obviously, no one would advise losing 90% of your investment just to make 1,000% or 2,000% somewhere down the road. That would be silly.

A 90% hit from a stock like Amazon doesn’t feel any better than a 90% hit from some unknown penny stock. Either way, you’ve lost 90%…

But if your reason for making the initial investment remains intact, a stock that has fallen 90% does not automatically deserve a swift kick in the rear end. To the contrary, you may want to “average down” on the position by buying a bit more at lower levels.

Great stocks need time to flourish… and to compound their successes.

So if you’ve got a great stock that’s performing poorly, think twice before hitting the “eject” button.

Buying a great stock at the worst possible time can be one of the best investments you ever make.

Good investing,

Eric