60% or more discount on investment? Past bubbles in the stock market teach us that

As of March 31, there were 3739 shares in Nasdaq Composite Index. And according to Finviz, about 1,600 of them have fallen by 60% or more from their 52-week highs. Similarly, there are 500 companies in S&P 500and at the time of writing, a huge 42 of these supposedly stable stocks are down 50% or more of their 52-week highs.

There are currently an unusually large number of shares declining by 50%, 60% or more. There are two such shares that I own Pinterest (PINS 2.55%) and Peloton Interactive (PTON 0.72%)which are down by 80% and 94% of their respective peaks.

If you, like me, own stocks that have fallen significantly, you’re probably wondering how long it will take to get back on track. But this is wrong question to ask. And we can look at the dot-com bubble baby Micron Technologies (MU -0.81%) to help us focus our thinking when deciding what to do with stocks like Peloton and Pinterest in this environment.

A lesson in stock market history

Stock market bubbles occur when investors get too excited about stocks in the near future. Ratings are jumping higher and higher as investors buy frantically so as not to miss out. But eventually, Wall Street’s mood changed, buyers became sellers, and stock prices plummeted.

The Dotcom bubble swelled in the years before 2000. As the name suggests, investors were thrilled by many new Internet companies. But technology stocks in general, not just Internet companies, have made huge profits. One of these technology stocks was the semiconductor company Micron. From the beginning of 1995 until its peak in the beginning of 2000, Micron’s shares rose by an incredible 775%.

The bubble finally popped in early 2000, and the Nasdaq Composite fell more than 75 percent before hitting lows in 2002. For its part, Micron finally hit bottom in early 2003 after falling a staggering 93 percent. from its highest level of all time.

Diagram from January 1995 to December 2003. Data from YCharts.

Here’s the thing: investors were holding on somewhat rationally when Micron shares rose. The company’s revenue for the last 12 months (TTM) has more than doubled from early 1995 to mid-2000, and has been profitable for much of that time with a slight increase in net income. This financial data means that he was quantitatively better than many of his colleagues with the dotcom bubble. Therefore, it was not necessarily easy to spot a bubble forming around Micron, because the business was stable.

If you bought the tip with Micron

Let’s say you invested $ 5,000 in Micron shares just when they peaked in 2000 at about $ 95 a share. By 2003, your $ 5,000 investment was $ 350. oh

If you held this campaign, you finally failed in April 2021. Yes, it took 21 years for Micron shares to regain its previous all-time high. And now the shares are falling by 43% from their highest level. Double egg.

Since 2000, Micron’s revenue from TTM has grown by about 800%. And TTM’s net profit grew by more than 1,800%. Therefore, the company has been performing for the last 20 years. But investors who bought on top of the dotcom bubble have watched the investment provide them with zero returns for more than two decades.

What does this lesson mean for investors today

If you have lost a significant investment, the first thing I will say is that I am sorry. Nobody likes to lose money.

Next, I would encourage you to avoid fixing the price – to stick to the price you paid. It may be painful to hear, but if you invested $ 5,000 in a stock that fell 93% (like Micron), that money is gone. It costs $ 350 today. And you can judge your choice only on the basis of where we are now.

Here’s the wrong question: When will Micron return to my cost base?

Here’s the right question: Is Micron the best place for long-term, market-beyond returns today’s price?

Of course, I’m not talking about the Micron anymore. For me, I watch Pinterest and Peloton. You can search for another stock in your portfolio. The point is that one must assess the current prospects of the business and ask whether they offer a potential return on the market.

In the case of Pinterest, I believe right offer market potential. In the short term, advertisers can cut costs because consumer discretionary incomes are driven by inflation. But in the long run, the Pinterest platform is uniquely positioned to offer better returns on advertising budgets than other platforms. Therefore, I believe that demand will increase in the long run, in favor of shareholders today. And the company has more than $ 2.6 billion in cash to weather all kinds of storms on the horizon.

But I’m not so sure about Peloton’s potential to beat the market anymore. It is true that its application has just enjoyed a record month of adoption, which portends future sales of exercise equipment. However, Peloton is where it is due to some bad management decisions from previous executives. There are new leaders, but it will take time for the new team to establish investor confidence.

There is a more encouraging conclusion from the history of Micron

Here’s the bottom line: Part of investing like Motley Fool is regularly investing new money in either new stocks or stocks you already own. If you bought a Micron only once at its peak, then yes, it took 21 years to catch up. But what if you add to your investment over time?

To avoid an incredible return, let’s say you’ve invested $ 1,000 in Micron five times – every July 15 from 2000 (worst possible time) until 2004, instead of investing all $ 5,000 on top.

Date of investment Investment Present value
July 15, 2000 $ 1,000 $ 577
July 15, 2001 $ 1,000 $ 1429
July 15, 2002 $ 1,000 $ 2280
July 15, 2003 $ 1,000 $ 3,934
July 15, 2004 $ 1,000 $ 4,133
Total $ 5,000 $ 12,353

Returns June 20, 2022

As the chart shows, the return is significantly different for Micron investors, who continue to increase their positions over time. To reiterate, Micron has been growing during this time, and semiconductors have long been an important industry. It therefore made sense to add to this position and the overall return was much better for those who did.

This is my long-term plan for my positions that are down, like Pinterest. It is important to monitor the basic business fundamentals and not worry about the share price. When your business is stable, it makes sense to add more money over time. And adopting this attitude can significantly change the course of your investment career for the better.

Leave a Comment