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Why Even the Best Stocks Have to Crash

Why Even the Best Stocks Have to Crash

Posted On September 18, 2020 3:32 am
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By Ben Carlson 

Sometimes the biggest reason the stock market or certain stocks experience a severe decline in price is that they first experienced a massive rise in price.

Trees don’t grow to the sky and all that.

The pandemic has changed the way we view the many previously held ways of doing things which have led to some insane gains in certain stocks that have been able to capitalize.

Many of those pandemic winners finally took a breather in recent days.

Overstock has crashed more than 44% after rising more than 2,000% since the bottom in March.

Wayfair is down more than 23% after rising 1,000% since March 23rd.

Zoom fell more than 19%.

DocuSign is down nearly 20%.

Peloton is down 12% from its pandemic-induced high.

It’s possible these stocks have gotten ahead of themselves. Maybe people have overreacted about how things will look in a post-pandemic world.

But let’s assume these companies were not only in the right place at the right time, but end up becoming some of the biggest stocks from here on out.

Even if these companies live up to their now lofty expectations and their stocks end up being grand slam investments, it’s not going to be a straight line up and to the right.

These companies could become some of the most successful stocks of the next few decades and they will still crash spectacularly at some point.

This is the way it has to be for even the best of stocks because it’s impossible for expectations to stay in line with reality when you have uber-successful companies.

Let’s take a little stroll down drawdown memory lane to see how some of the most successful companies, brands, and stocks in history have done over their life as a public company.

Apple is up almost 120,000% (19.5% annualized) since the early 1980s. Yet the stock has fallen more than 75% on three different occasions and has been cut in half more times than you could count on one hand:

Facebook is up more than 600% (27% annualized) since its IPO in 2012. The stock has endured three separate declines of 30% or more since then including a 53% crash immediately after going public:

Netflix is up more than 43,000% (39% annualized) since 2002. The stock of the streaming giant has fallen 50% or worse four times including two 75% or worse crashes:

Microsoft is up nearly 350,000% (27% annualized) since the mid-1980s. It was, however, in a drawdown for nearly 15 years following the bursting of the dot-com bubble, which saw a price decline of 75% from peak-to-trough:

Amazon is everyone’s favorite “If you would have put $10k in at the IPO…” stock for good reason.1 It’s up almost 170,000% (38% annualized) since 1997. The worst crash in the company’s stock was a plunge of almost 95%. There have been multiple 30% slides since then:

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About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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2 Comments

  1. joan fisher September 21, 2020 at 4:52 pm

    Is how I read this is these stocks have dramatically decreased but should rebound once the virus deminishes and people have more confident in the market.
    So there recommended buys…
    I bought FMG they have gone up thinking of selling but not sure when too.
    I only have 15,000 in varies blue chip and everything spare $1000 I get i buy but rely on reading media news and try to understand a very confusing charts that are so unpredictable

    Joan Fisher
    0418659155

    • Dividend Sensei September 22, 2020 at 3:18 am

      “Our favorite holding period is forever.” – Warren Buffett

      “Fortunes are made by buying right and holding on.” – Todd Phelps “100:1 In the Stock Market”

      Don’t buy with the goal of short-term profits, buy a piece of a great business, at a sensible price, with the goal of long-term returns, generated by growth over time.

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