When a Double-Digit Drawdown Is 'Completely Meaningless'

In September, I gave a presentation at the Stansberry Conference in Las Vegas called "Making Money From Ugly Charts."

Investors don't like ugly charts. But the fact is, no stock only goes straight up... Not even our most beloved winners.

In my Stansberry Venture Value newsletter, we focus on smaller companies – those trading for less than a $1 billion market capitalization, with a particular focus on companies with less than a $200 million market capitalization.

We do it for a reason. Small businesses are capable of scaling up revenue more quickly than their larger counterparts. It's harder to "move the needle" at huge companies – even the great ones.

Unfortunately, with small-cap investing, volatility comes with the territory.

Today, I'll talk more about this concept. And I'll show you how to shrug off short-term noise in the markets...

From 1997 to 2017, shares of e-commerce giant Amazon (AMZN) soared more than 50,000% in value. That's a compounded rate of 36% per year.

But it wasn't a straight shot up. There were dozens of times over that period when Amazon's chart was just plain ugly.

As you can see, Amazon shares have had significant slides every single year. In 1998, for example, shares fell 47.7% in less than two-and-a-half months. On average, AMZN shares endured at least one drawdown of 35% every year during this period...

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Financial blogger Michael Batnick wrote about these dynamics early last year...

This massive outperformance [from 1997-2017] has led to an explosion in hindsight bias, with investors fooling themselves into believing Amazon's ascent was somehow obvious or inevitable. But the truth is this [50,000%] return was... earned through enormous dedication. Actually, lunacy might be a better way to describe it, being that you had to be some sort of sociopath – void of any human emotions, to earn these monstrous gains.

Batnick's point is that any investor who enjoyed the 50,000% return had to endure an 83% drop in 2000, a 29% drop in 2005, a 64% drop in 2008, etc. "Sociopath" may not be the right word to describe this investor. "Unbelievably patient" will work just fine for our purposes.

This next chart demonstrates eight of Amazon's biggest sell-offs in the context of a broader, 20-year picture. They don't look like anything in hindsight. But sitting through them at the time would have been nearly unbearable for most investors...

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Remember... Amazon went public in 1997 at only $18 per share. And all these drawdowns happened on the way to a massive, long-term gain of 50,000%.

I often quote something Porter Stansberry said when we first launched Venture Value...

These companies' volatility is completely meaningless. Now it may indicate there's trouble, but it just as likely may indicate nothing...

This is incredibly important... We're going to keep coming back to this and coming back to this and coming back to this: If you are the kind of investor who cannot envision the idea that a stock price has gone down 20% or 30% and it doesn't mean anything, then this is not right for you.

A patient investor would have looked past Amazon's short-term share price movements to the fundamentals themselves...

The incredible thing about Amazon from 1997 to 2017 is that revenue increased every single year from just $150 million to about $178 billion in 2017. Operating cash flow also increased, almost every year, from around $1 million to an estimated $18 or $19 billion in 2017.

This is Porter's point. It wasn't a struggling business model that caused Amazon's volatility. That's how you distinguish the meaningful volatility from the meaningless. You have to look at the quality of the business.

Another way to put this is that focusing on the business gives you courage in your convictions... the kind of courage you need to invest in a small, high-quality business, and own it for the long haul.

That's how you make big gains in stocks. So as an investor, train yourself to look past short-term price movements... And focus on the business.

Good investing,

Bryan Beach

Editor's note: Bryan just put together a research report on five "dark stocks" that nobody on Wall Street is watching. These small stocks have explosive potential... And they could help you make 200% or more this year. Learn how to get instant access to this report – as well as a FREE bonus year of Bryan's research in Stansberry Venture Valueright here.

Further Reading

"It's the most important metric in investing, because it's almost impossible to manipulate," Bryan says. This idea is something he saw play out firsthand in an incredible, gusty bet on the quality of a business... Learn more here: A 'Common Sense' Secret Worth Up to 1,000%.

Recently, Porter Stansberry detailed how Bryan got ahead of a huge 200% rally. "This is a strategy that you can reliably use to double, triple, or quadruple your money in reasonable periods of time," he writes... Read more here: One of the Most Lucrative Strategies in the World.

Market Notes
HIGHS AND LOWS

NEW HIGHS OF NOTE LAST WEEK

Domino’s Pizza (DPZ)… pizza
Chipotle Mexican Grill (CMG)… burritos
Shake Shack (SHAK)… burgers, fries, milkshakes
Darden Restaurants (DRI)… LongHorn Steakhouse, Olive Garden
Dunkin’ Brands (DNKN)… coffee and donuts
Cal-Maine Foods (CALM)… eggs
Archer Daniels Midland (ADM)… food-processing giant
Sysco (SYY)… food products
Boston Beer (SAM)… America’s craft-brewery craze
Extra Space Storage (EXR)… America’s self-storage boom
Public Storage (PSA)… America’s self-storage boom
Planet Fitness (PLNT)… America’s fitness boom
Callaway Golf (ELY)… golf equipment
Madison Square Garden (MSG)… sports and entertainment empire
SeaWorld Entertainment (SEAS)… theme parks
Six Flags Entertainment (SIX)… theme parks
World Wrestling Entertainment (WWE)… pro wrestling
New York Times (NYT)… global news leader
Visa (V)… global credit-card leader
Square (SQ)… “cashless” society
PayPal (PYPL)… “cashless” society
GoDaddy (GDDY)… domain names
Facebook (FB)… “FANG” stock
Amazon (AMZN)… “FANG” stock
Netflix (NFLX)… “FANG” stock
Costco Wholesale (COST)… membership-only bulk retailer
Advance Auto Parts (AAP)… auto parts
O’Reilly Automotive (ORLY)… auto parts

NEW LOWS OF NOTE LAST WEEK

General Dynamics (GD)… “offense” contractor
General Electric (GE)… debt-ridden industrial giant
Cummins (CMI)… diesel engines, generators
Stanley Black & Decker (SWK)… tools and storage
Tupperware Brands (TUP)… household goods
Xerox (XRX)… office supplies