They All Fall Down

Yesterday Facebook had a market capitalization of $602 billion. Today it’s $500 billion. A 20% decline in one day hurts, a lot, but this is type of move happens from time to time in the strongest stocks. Even after today, Facebook is still up 500% over the last five years.

One common theme amongst the best stocks is that they all fall down. To illustrate this point, let’s look at what sort of experience a Disney shareholder has had over the last few decades.

$1 invested in Disney in 1970 is now worth $197. $1 invested in the S&P 500 is worth $125, for comparison. The 19,500% return in Disney had plenty of bumps in the road. The stock lost 10% on a single day 11 times, including a 29% loss on October 19, 1987.

Disney gained 11.5% for 48 years. But of course, there is a huge difference between 11.5% for 48 years and 11.5% every year for 48 years.

These returns were earned only by those able to withstand a massive amount of pain. Disney experienced 13 separate bear markets over the last 48 years, including an 86% crash during the 1973-74 bear market. The S&P 500 experienced just four over the same time.

Nobody could have known in real-time what the future held for this company, or whether its best days were behind it, but these would have been very real questions during every decline along the way. Disney hit an all-time high in January 1973, and wouldn’t see those levels again until 1986. It made a high in April 2000 and then didn’t get back there until February 2011. (I’m using total returns for this, data from Stockcharts.com)

I could have done this exercise with Walmart, Microsoft, Starbucks, Nike or any of the big winners. They all fall down.

Days like today are tough for Facebook stockholders, and who knows if this was the top or just a temporary one, but the point is that you have to be mentally prepared for these sort of events if you’re hoping to ride a giant winner. Double-digit declines are the cost of doing business.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.