Most stocks have underperformed the stock market this year. To add insult to injury, they also experienced deeper drawdowns.
66% of S&P 500 stocks have underperformed over the last year, while 76% had a deeper drawdown, as you can see in the chart below.
If you were throwing darts at the S&P 500 over the last year, you were eight times more likely to hit a stock with a max decline of more than 60% than you were to hit a stock that had a max decline of less than 20%. That sentence was horrible so maybe some plain English will help. Only 10 stocks* avoided bear market territory (sorry), while 81 fell 60% or more.
This year was unique in many ways, but stocks underperforming the index is not one of them. In his excellent paper published in 2017, Hendrik Bessembinder wrote:
“Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries.”
So if you know that most stocks suck, then you should have some sort of risk management strategy that you’re implementing on individual securities.
Before you buy, you have to plan your exit should things go awry. It could be something simple like a moving average, or a maximum amount that you’re willing to lose or maybe a margin of safety where you pay so little relative to its underlying fundamentals that you can’t possibly lose any money. Yes, that last part was a joke.
The six most expensive words in the investor’s dictionary are “I’ll get out when I’m even.” Eliminating that line of thinking will make your investment journey a lot more profitable and a lot less frustrating.
*Costco, Walmart, Clorox, Hormel Foods, Dollar General, Verizon, Eli Lilly, Vertex, NortonLifeLock, Citrix Systems
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