Written by Jonathan Rawicz and Haichuan Yu, co-managers of the New Capital Global Equity Conviction Fund
A common regret we often hear is: “Why didn’t I buy Amazon/Netflix/Apple stocks 15 years ago?”
A $100 investment in these stocks back in 2005, would turn into $18,683 (Netflix), $6,384 (Apple) or $4,048 (Amazon) 15 years later. The same $100 invested in the S&P 500 index would have returned $267.
But, even if you did buy these stocks in 2005, would you have held onto them? These are dominant market players today, but their growth trajectory has not always been smooth. Let’s take a closer look:
Case Study 1: Netflix in 2012
Netflix started as a DVD rental company and launched video streaming in 2007. By 2011, its streaming subscribers exceeded 20 million. In September 2011, Reed Hastings split the streaming business from DVD rental and raised prices. Customers were outraged. Meanwhile, competition was rising from the likes of Hulu and Amazon. Unprofitable international expansion was disliked by the market. Subscriber growth, the most important metric, stalled. Had Netflix run out of growth?
Its share price plunged by almost 80% between July and December 2011 and stagnated for the whole of 2012.
Case Study 2: Amazon in 2014
In 2014 Amazon’s revenue growth was decelerating, while spending heavily on cloud computing, logistics and media. Margins were also declining, leading to questions around the long-term viability of cloud computing, Prime and e-commerce. 2014 financials were disappointing: revenue growth slowed from 40% in 2011 to 19% in 2014, while operating margin dropped from 4% in 2010 to 0.2% in 2014. Investors would have wondered whether Amazon was ever going to be profitable.
As a result, its share price dropped -22% in 2014, compared to a +12% rise for the S&P 500.
Case Study 3: Apple in 2015
Assume you held onto Apple shares through the 2008 financial crisis and the passing of Steve Jobs. In 2015, Apple was facing problems. The smartphone market began to saturate, replacement cycles lengthened, and competition was rising. Tim Cook was often viewed as lacking innovation. In 2016, iPhone unit sales started to decline, and no new flagship product was in sight. Where was the growth going to come from? Apple’s share price declined -25% between July 2015 and June 2016.
Would you have held onto your Apple stocks having underperformed the S&P 500? One person who went against consensus was Warren Buffett, who began buying Apple shares in 2016.
In conclusion, even for the most successful equity stories, periods of underperformance are inevitable. These periods could last for over a year. That’s why long-term investing is easy in theory but difficult in practice
