Rethinking Stock Picking for Long-Term Success
The Stock Market’s Strength and the Catch: Long-Term Patience Required
Why Long-Term Investing Is Key
Key Points
- While the stock market continues to perform well, achieving solid gains now requires longer holding periods — typically 20 years or more.
- The stock market's rolling 5-year and 10-year returns have shown significant volatility, with periods of underperformance since the 2000s.
- Despite shorter-term volatility, long-term returns of 20 or 30 years still offer consistent gains that outpace inflation.
Do you feel like stock market returns aren't as reliable as they used to be? You're not alone. Many investors have noticed that net gains over the last few decades haven't matched those of the past. Since the dot-com crash of the early 2000s, short- and mid-term returns have fluctuated more wildly, leaving some wondering if the stock market’s golden era is behind us. However, when we look at long-term performance, the S&P 500 continues to offer solid annual returns, averaging around 10% without dividends and 11% with them.
But there’s a catch: you now need to think long-term — 20-year holding periods are becoming the standard to guarantee these kinds of returns. Shorter time frames, like 5 or 10 years, may not be enough to weather the volatility of today’s market.
Why Long-Term Investing Is Key
Historically, investors could expect to see solid returns from the stock market over 10-year periods. Brokerage firms and mutual funds frequently highlighted the fact that no 10-year period after the Great Depression had resulted in a loss. Even after major events like the dot-com bust in 2000 and the financial crisis of 2008, the S&P 500 managed to bounce back over a 10-year span.
But recent data suggests that 5- and 10-year periods have become more volatile, with gains sometimes hovering near zero. The S&P 500’s rolling returns for these shorter time frames have dipped into negative territory several times since the mid-1950s. On the other hand, the 20- and 30-year returns — though not always spectacular — have remained consistently positive, beating out most alternatives.
This means if you're investing to build long-term wealth, the stock market remains the best option. However, success requires a 20-year investment horizon or longer. Shorter holding periods could lead to disappointment or disrupt your retirement plans.
Rethinking Stock Picking for Long-Term Success
With long-term investing becoming more important, how should you adjust your stock-picking strategy? The key is to focus on the longevity of business models. Ask yourself whether a company’s products or services will still be relevant 20 years from now.
For example, Charter Communications, a major player in cable television, may seem like a safe bet. However, with the rise of streaming services, consumers may eventually demand a more customized, a la carte approach, bypassing traditional cable providers. In contrast, there’s little doubt that mobile device manufacturers will still be essential in the future, as we continue to rely on connected devices.
Company resiliency is another crucial factor to consider. Look at Johnson & Johnson and General Electric — two companies that were industry leaders 30 years ago. Today, both face challenges as their once-dominant positions have eroded. This serves as a reminder that long-term success hinges on a company’s ability to adapt to changing markets and consumer demands.
Current Market Euphoria and the Risks of Overconfidence
While the stock market has reached new highs in 2024, some analysts, like Mark Spitznagel, warn that investors may be too confident. According to Spitznagel, the market is in a "Goldilocks zone" — a period of optimism driven by factors like disinflation and rate cuts. But this euphoria could be masking deeper risks that could send the market into a sharp downturn.
Spitznagel, head of Universa Investments and a known "Black Swan" investor, pointed out that the uninversion of the yield curve is a reliable recession indicator. Once the yield curve disinverts, historical patterns suggest that a market downturn could follow. He believes that the effects of the Federal Reserve’s aggressive rate hikes in 2022 have yet to fully play out, and the market could face a significant correction once they do.
Spitznagel has been warning of a stock market crash since early 2023, calling the current rally the "greatest bubble in human history." While he admits that a downturn may take time to materialize, he remains firm in his prediction that a recession is on the horizon.
Conclusion: Patience Is the New Key to Success
In summary, the stock market remains a reliable way to grow wealth, but today’s investors must adjust their expectations. While annual returns for the S&P 500 still hover around 10-11%, achieving these gains requires long-term patience. Five- or 10-year investment periods may not be enough to ride out the modern market's volatility. Investors need to adopt a 20-year investment strategy to secure the kinds of returns necessary for retirement or other long-term financial goals.
In the short term, as market highs continue, it's important to be mindful of potential risks. Euphoria can lead to overconfidence, and as experts like Spitznagel warn, underlying factors like the yield curve and the effects of rate hikes may soon reveal deeper issues in the economy.
For investors, the best course of action is to focus on long-term value and resilient business models that can thrive for decades, ensuring that your portfolio weathers both the highs and the inevitable lows of the market.