Imagine this: You bought a stock for US$3.30 per share in January 2007. Five years later, the stock price soared to almost US$10.
How would you feel about this investment?
Let me put it in perspective for you.
This gain would be more than 200 per cent or an impressive 25 percent per year over this period. That’s a return that would put a smile on any investor’s face.
And that’s not all.
During this time, the S&P 500 (INDEXSP: .INX), the benchmark for the US stock market, lost almost 13 per cent of its value.
So, you not only beat the market, but you also crushed it.
Wouldn’t you be thrilled with such amazing returns? I reckon you would.
The treacherous journey of big returns
Here’s the thing: I haven’t told you the whole story yet. I only gave you the start (the price you bought) and the end (the price five years later) of the journey.
What happened in between was a wild ride.
This stock went from US$3.30 to over US$42, and then crashed to under US$10.
That’s insane, right?
But how do you feel about this investment now?
I bet you wouldn’t feel as good as before.
Maybe you wish you had sold your shares when they were above US$42.
That sounds like a smart move, doesn’t it?
But if you had sold the stock at this peak, you would still have missed out on a fortune.
Leaving money on the table
The story is far from over.
The stock I am talking about is Netflix (NASDAQ: NFLX), which I have held since January 2007.
Today, it’s worth over US$442.
That means if you had sold at US$42, you would have given up another 10 times your money as the stock price soared to US$442. Even if you had bought at US$42, you would still enjoy a huge profit.
Here’s what I want you to understand: Netflix’s stock price history shows you how hard it is to buy and hold a stock, even when it turns out to be a big winner.
It sounds easy in theory. You just buy a stock and do nothing.
But in reality, many investors lose their nerve and sell too soon, before the stock reaches its full potential.
That’s a painful mistake, because you miss out on the chance to make huge gains on your investment. It’s like having a winning lottery ticket in your hands and throwing it away.
The big money is in the holding
Charlie Munger once said the big money is not in the buying or selling but in the waiting.
He’s right, of course.
But holding a stock is hard.
Along the way, doubts creep in, and most investors end up sabotaging themselves by selling too soon.
As the stock soared to US$42, they may be tempted to cash in. On the flipside, as the stock plunged to US$10, some will panic and sell out of the fear of losing more.
This is why it is critical to learn how to hold a winning stock.
I want to share with you three principles to help you overcome these doubts.
Principle #1: Don’t fall into hate with your stock
Every investor knows you shouldn’t fall in love with your stocks. I would suggest you do the opposite too: do not fall into hate with your stocks.
The hardest part to endure is a stock decline.
When that happens, most investors will start looking for reasons why this is happening.
As they dig for answers, they often focus on the problems to the point where the positives are ignored.
Netflix is a great case study again.
A year ago, the online streaming platform recorded a loss of more than a million subscribers in the first half of 2022. As investors dug for answers, many reasons were cited, ranging from a crowded field of competitors to the lack of quality content.
In the process, they overlooked the positives.
Netflix had a strategy in place to launch an ad-supported plan while cracking down on password sharing. Within six months, the online streaming company launched its new ad-supported option, surpassing all expectations.
Since then, it has added over 15 million subscribers, over 15 times the amount it lost in 2022’s first half.
Those who sold in fear would have missed out on a 170 per cent gain from its 2022 low.
Principle #2: Beware of false narratives
The financial media loves pitting one competitor against another.
Painted as an epic battle, there is an underlying narrative suggesting that only one can be victorious. In other words, for one to succeed, the other must fail.
In the case of Netflix, Disney+ is often portrayed as its rival.
But here’s the truth: there are plenty of examples of two major competitors thriving in the same market.
Take Mastercard (NYSE: MA) and Visa (NYSE: V) in the payments processing space. Or Alphabet (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META) for digital ads. Or Coca-Cola (NYSE: KO) and Pepsi (NYSE: PEP) who have been competing since the 1980s.
All of the above have thrived despite the presence of another competitor.
So, while the popular narrative suggests that there can only be one winner, remember that there are many cases where this narrative simply does not hold up.
Principle #3: I would rather hold a losing stock too long than sell a winning stock too early
Cynics will point out that most stocks are not worth holding for the long term.
They are right.
There will be times where you buy a stock, hold it for five years, and end up with little to nothing to show for it. Or worse, you may even lose money.
I won’t argue with that. But let me show you the other side of the story.
What I have not told you is I sold half of my original Netflix holding along the way. By doing that, I estimate that I missed out on 6,200 per cent in gains for the shares sold.
Regret doesn’t even begin to describe my feelings.
It’s like holding 62 stocks that went bust. And the chances of finding another Netflix is slim.
The experience fuels my belief that it is better to hold a losing stock too long than to sell a winning one too soon. The winners, as we saw in the case of Netflix, will utterly overwhelm the losers.
After all, the most you can lose in a stock is 100 percent. But my remaining shares in the online streaming company are up close to 13,500 per cent.
Get Smart: Win or learn
To close, I would like to share a quote from the late Nelson Mandela.
Whenever you are faced with moments of doubt, remember his words: I never lost, I either win or I learn.
When you think about it, there are only two outcomes in holding stocks, either you are right and win, or if you are wrong, then you get to learn.
If you frame the situation this way, you will always come out ahead.
What’s more, I submit that any lessons learnt from holding stocks for years, if not decades, will stay with you for life.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of Alphabet, Mastercard, Meta Platforms, Netflix, and Visa.
