markets
Punctuated Returns
The rule
Returns arrive in rare sudden bursts after long boring stretches. So you must hold through the quiet years to be there when it finally jumps.
Where it flips
This can become an excuse to hold a genuine dud forever, always insisting "the burst is coming." The fix is to demand that the business itself keeps improving during the quiet years. A flat price on rising fundamentals is patience; a flat price on rotting fundamentals is denial.
A good business rarely rewards you in a smooth, steady line. For years the price may drift and feel like it is going nowhere. Then a large part of the total return can come in a short, surprise burst. If you lose patience during the dull years and sell, you are usually the one who misses the jump. Holding the business through the boredom is the price of a ticket to the eventual leap.
A worked example
Aayra holds a quality company that goes almost flat for three frustrating years. In the fourth year earnings surprise on the upside, and the stock nearly doubles. She only caught that gain because she was still holding. [illustrative]
How to spot it
- ·expects long flat stretches as normal
- ·does not confuse a boring price with a failing business
- ·stays invested to capture the rare jump
Pulak Prasad · What I Learned About Investing from Darwin