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Fishing for Sharks

Fishing for Sharks

July 17, 2023

Growing up, my family used to spend two weeks every summer at South Padre Island. My grandparents had a fishing boat, and the three of us spent many an early morning patrolling the Laguna Madre Bay in search of speckled trout.

On one of these fishing trips, when I was around six or seven years old, I happened to hook a small blacktip shark with my child-sized fishing rod. I battled the shark for ten or fifteen minutes, but right as I managed to bring it to the boat, the line snapped and the shark sped away.

Naturally, my six-year-old self really wanted to catch that shark, and I wasn’t ready to give up hope. Thus, for several years after that near-catch, I pleaded with my grandparents to return to that same fishing spot, convinced that the shark was still lurking there, waiting to take my bait.

This may come as a surprise, but I never did manage to catch that shark.

My story speaks to the naivete of six-year-old boys, of course, but I think there are a few ways in which this story applies to investing as well.

For every little boy, landing a shark is a far more exciting prospect than hooking a trout or a flounder or any lesser-sized, common fish. Likewise, every investor wishes they could find the next Tesla, rather than, say, a steady, dividend-paying blue chip stock.

However, it takes patience and a great deal of luck to hook a shark, much less reel it all the way into the boat. For investors who are lucky enough to get in early on a stock like Tesla, they typically have to endure a prolonged and challenging fight to reel it in and realize significant profits. Per the chart below, it took nearly ten years for Tesla to rise from $1.50 per share to $20 per share. It then took only a year for the stock to rise from $20 to $200, and today, Tesla sits at $277 per share. Still, even during the last three years of eye-popping growth, Tesla shareholders have had to endure six separate declines of >20%, including a heart-stopping 65% drop in 2022. Over the last thirteen years, I wonder how many Tesla shareholders have reeled their gains all the way to the boat, only to lose their catch right at the last moment by selling too early...or too late.

It is also tempting to believe that, if you go back to the same fishing spot, you might have better luck next time. I’m pretty sure that I never caught another fish at that same spot where I hooked the shark, since it was more or less a random location in deeper water. Perhaps you bought Tesla, sold too soon, took your boat back out and bought in again at a higher price, then sold after one of those 20%+ declines. Or perhaps you saw Tesla’s success and decided to cast your line for another EV startup like Rivian or Lucid, neither of which has lived up to the same promise (as shown in the charts below):

Exotic catches and high-flying stocks can certainly add excitement to an investor’s portfolio, but it’s never easy to find them, much less bring them all the way into the boat. Just because you hooked one once doesn’t mean you can go back to the same spot and hook another.

On the other hand, if you focus your efforts on smaller, more common fish, you’re far more likely to find success. In all my years of fishing at South Padre, I only hooked one shark. During that same time, I caught – and landed – hundreds of speckled trout, redfish, catfish, and black drum. These fish weren’t quite as thrilling as the shark, but the fights were still fun, and the meat was still good to eat.

Similarly, investors who are satisfied with owning diversified portfolios of companies with strong balance sheets, proven products and services, and prudent management teams are far more likely to find success, even if their portfolio never grows 10x in the span of 12 months (notably, the diversified portfolio is also far less likely to decline by 65% over 12 months). Slow and steady growth won’t be as thrilling, but it’s still fun, and it still puts food on the table.

There's nothing wrong with fishing for sharks every now and then, but I would urge you not to waste too much time on it. Better to aim for more modest gains and stack the odds of success in your favor.

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