Growth stocks as a class has a striking tendency toward wide swings in market price (II)
But is it not true, that the really big fortunes from common stocks have been garnered by those
- who made a substantial commitment in the early years of a company in whose future they had great confidence and
- who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?
The answer is "Yes."
This is a fascinating and central tension in investing philosophy, pitting the romantic ideal of the "visionary founder or early backer" against the cold, hard statistics of market behavior.
Let's break down the provided statements, elaborate, discuss, critique, and then summarize.
Elaboration and Discussion
The two paragraphs present two seemingly contradictory truths about growth stocks and wealth creation.
The General Rule (The "Striking Tendency"):
What it means: Growth stocks, as a category, are inherently volatile. Their prices are not tied to stable, current earnings but to expectations of future earnings. These expectations are based on narratives, forecasts, and sentiment, all of which can change rapidly.
Why it happens:
Speculative Fever: Good news can lead to euphoria, driving prices to unsustainable heights.
Disappointment & Fear: A single missed earnings target, a new competitor, or a shift in the economic landscape can shatter the narrative, leading to a brutal sell-off.
High Valuations: Since they often trade at high Price-to-Earnings (P/E) ratios, even small changes in future growth projections can lead to large swings in the present value calculation.
The Path to Extreme Wealth (The "Big Fortunes"):
What it means: The legendary returns in the stock market—the kind that create generational wealth—do not typically come from trading in and out of stocks. They come from identifying a truly exceptional company early and having the conviction to hold onto it through thick and thin, allowing the power of compounding to work over many years or decades.
Iconic Examples: Think of early investors in companies like Amazon, Apple, Tesla, or Microsoft. Those who held on through the dot-com bust, the 2008 financial crisis, and countless periods of doubt were rewarded with life-changing returns.
The Synthesis: These two ideas are not opposites; they are two sides of the same coin. The very volatility that defines the class of growth stocks is the price of admission for the astronomical returns of the few individual winners. The "wide swings" include the dramatic upward swings that create 100-baggers. You cannot have the latter without the former.
Critique and The Crucial Caveats
While the "buy, hold, and get rich" narrative is powerful and true in specific cases, it is critically important to understand its limitations and the survivorship bias it contains.
Survivorship Bias is Overwhelming:
This is the most significant criticism. For every Amazon that succeeded, there are dozens of companies like Pets.com, Webvan, or countless other tech, biotech, and growth companies that failed completely or never lived up to their hype. We hear the stories of the winners; the losers are forgotten. The narrative asks "Is it not true that the really big fortunes...?" but ignores the more common question: "Is it not true that the really big losses have been garnered by those who made a substantial commitment in the early years of a company that ultimately failed?"The Difficulty of "Great Confidence":
Having "great confidence" in a company's future is easy in hindsight. In the present, it is exceptionally difficult to distinguish the next Apple from the next BlackBerry. Many companies that seemed like sure bets were disrupted by new technology or mismanagement. The business landscape is littered with "can't lose" companies that lost.The Psychological Torture of "Holding Unwaveringly":
Holding through a 50% or even 90% decline is emotionally devastating and goes against every human instinct for self-preservation. Most investors lack the temperament for it. Furthermore, during these "wide swings" downward, the financial media and your own brain will scream at you to sell. The few who succeed in holding are often either extraordinarily disciplined, oblivious, or the founders themselves who have inside information and control.The Opportunity Cost:
"Holding unwaveringly" requires immense patience and capital that is locked away for decades. During that time, an investor might miss other, more reliable compounding opportunities. A strategy of holding an S&P 500 index fund, while less glamorous, has proven to be a more consistent and less risky path to wealth for the average person.The Question of "When to Sell":
The narrative glorifies buying and holding but is silent on when, if ever, to sell. No company grows at an explosive rate forever. Eventually, most become large, mature, and slower-growing. Is it still the right move to hold? The 100-fold return in Microsoft from the 80s to the 2000s is legendary, but an investor who held from 2000 to 2013 would have seen zero price appreciation. Timing the exit, or at least rebalancing, is a complex part of the equation.
Summary
In conclusion, the provided text highlights the core paradox of growth investing:
As a class, growth stocks are characterized by high volatility ("wide swings in market price") due to their dependence on uncertain future prospects.
However, the only way to capture the legendary, life-changing returns from the stock market is to identify specific companies from within this volatile class, invest meaningfully in them early, and possess the rare combination of foresight and fortitude to hold them through extreme market fluctuations until they multiply in value many times over.
The critical takeaway is that the second path, while true and proven by historical examples, is far more difficult, risky, and rare than the romantic narrative suggests. It is the exception, not the rule. For every investor who achieves a 100-bagger return, countless others see their early-stage "conviction" bets evaporate. Therefore, while the strategy of buying and holding growth stocks is a valid path to extreme wealth, it should be pursued with a clear understanding of the immense risks, the powerful role of luck, and the psychological challenges involved. For most, a diversified approach that acknowledges the "striking tendency" of growth stocks to be volatile may be a more prudent long-term strategy.
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