I’m doing my taxes and had to figure out the tax basis of one of my first individual stock purchases. I thought it would be a good illustration at how painfully difficult it is to make up for a devestating loss even when you subsequently make what appears at first blush to be tremendous returns (warnings in advance – my math may be off on the following, and this is not intended to be investment advice on individual stocks!).
In 1995, before I knew anything about investing in stocks, on a hot stock tip from a broker friend, bought $1200 of a very early internet stock company that was so bad it happened to be at the peak of its stock run in1995 and it was all down hill since then (yes even through the bubble of 1998-2000).
I sold the shares in 1999 for a grand total of $260, representing a 77% loss over about 4 years. I had my goal of isolating this money and seeing if I could make up the loss.
In Feb. of 2000, I perused the Value Line Investment Survey at my local library for a good technology stock and took the approximately $300 of tax savings I obtained from the loss, added it to the $267, and bought 10 shares of Symantec (SYMC) at 52.75 a share (SYMC has split several times so post split price now would be about $6.59 a share; it’s now trading at $16.84 a share).
Symantec then went on a tear reaching a peak of $33.48 a share on December 3, 2004. Splits occurred as follows:
2/1/2002 2:1 -> 20 shares
11/20/2003 2:1 -> 40 shares
12/1/2004 2:1-> 80 shares
This was the peak. I should have sold. In 5 years, I had turned the $567 into $2400 and had doubled the original 1995 investment of $1200, not bad for a 10 year investment despite the huge loss in 2000. Instead, I did what everyone does, I bought more near the top! In July of 2005 without doing much research (if any) I put in $1000 more and bought 40 mores shares of SYMC @23.85 a share.
I held unto it until March of 2009 at the depths of the stock market plunge (wasn’t DOW around 6000?) I decided SYMC was never coming back but Oracle was going to be a winner (I always have thought ORCL is underappreciated) . I sold 120 shares of SYMC @ 13.361 (40 of these shares represented a 50% loss as I had purchased at twice that price, but the remaining 80 shares had been bought at the equivalent of about $6 a share, so I had made 100% on that money over a period of about 10 years). I then bought 108 shares of Oracle @ 14.859 a share.
Oracle is now at 25.69 a share, so the shares are valued at $2774. So, I look at that and think, hmm, pretty good, I took the original $567, nearly had a 5 bagger over 10 years. 500%!
But take another look. What was the actual year to year return over such a fairly long period of time? Using this calculator , despite the tremendous returns of both SYMC and Oracle, it looks like I did about 8% a year since 2000 when I decided to make the money back. Not bad.
BUT if you look at the original $1200 investment made in 1995, a calculation which is done over 15 instead of 10 years, and which figures in the loss of $1000, my additional contributions of $1400 (my tax savings from the loss, plus the additional cash contributions for the additional 40 shares of SYMC stock, the return comes out to… 0.69 percent a year!! Yes, that’s not 69%, that’s ZERO point six nine percent a year – and that’s after a roller coaster of risk. You could have done much better in the bank without the risk and if I was able to do a risk-adjusted return, my return would surely be in deep negative territory.
And the long story/short of this is that 1) It takes a LONG time to make up a loss even with risky investments, and 2) be wary of people who criticize companies that have what seem to be outsize returns for a few years (e.g., wall street, big oil, big pharma, etc.). Outsize gains in some years are necessary to make up for outsize losses in other years. The overall year to year return is a lot less then it appears.