*One of the most successful companies of the modern era once fell by ninety-four percent. Almost nobody who owned it at the start was still holding at the end.*
Amazon is among the most successful enterprises in commercial history, and an investor who purchased its shares at its initial offering and held them to the present would have earned a return that is difficult to state without sounding absurd. This fact is widely known and is frequently offered as an argument for identifying great businesses and holding them patiently. The argument is sound. What is almost always omitted is what holding them actually involved.
Between its peak in late 1999 and its low in late 2001, the company's share price fell by approximately ninety-four percent. An investor who held ten thousand dollars of the company at the peak held roughly six hundred dollars at the trough. This was not a temporary dip of the sort investors are urged to ignore. It persisted for a considerable period, it occurred amid widespread and entirely reasonable doubt about whether the company would survive at all, and it was accompanied by commentary from serious analysts questioning whether the business model was viable.
The company did survive, and the subsequent return to those who held was extraordinary. But the phrase to those who held is doing an enormous amount of work in that sentence, and it conceals the entire difficulty. Almost nobody held. The overwhelming majority of investors who owned the company in 1999 did not own it in 2003, and this is not a failure of character on their part. A decline of ninety-four percent, sustained over two years, amid credible doubts about survival, is not something that most people can hold through, and it is not obvious that they should have.
That last point deserves to be taken seriously rather than dismissed. An investor who sold during that decline was not necessarily irrational. The company was losing money, its path to profitability was disputed, and a great many of its contemporaries, which had appeared equally promising and had been equally admired, did not survive at all. Selling was a defensible response to genuinely alarming information, and the fact that it turned out badly does not make it foolish in prospect.
This is where survivorship bias does its most misleading work, and the distortion is worth naming precisely. We tell the story of the companies that recovered because they are here to be discussed. The companies that fell ninety-four percent and then fell the rest of the way are not remembered, and their investors, who held faithfully through the decline exactly as the patient investor is urged to do, were rewarded with nothing at all. An investor in 1999 could not distinguish, with any reliability, between the company that would recover and the many that would not.
The general pattern is well documented and it is more uncomfortable than the individual case. Studies examining the businesses that produced the greatest long-term returns have consistently found that nearly all of them subjected their owners to declines of fifty percent or more at some point, and frequently to declines far worse than that. The extraordinary returns and the devastating declines are not separate phenomena. They occur in the same securities, and enduring the second is the price of receiving the first.
This produces an implication that is genuinely difficult to accept. If an investor's approach is to hold only those securities that do not inflict severe declines upon them, they have, by construction, excluded most of the businesses that produced the greatest returns. The comfort and the reward are not available together. An investor who cannot tolerate a fifty percent decline in a holding cannot own the kind of holding that has historically produced extraordinary results, and this is not a matter of discipline but of arithmetic.
The honest conclusion is not that investors should therefore hold every collapsing security in the hope that it becomes the exception. That advice would be actively harmful, and it is precisely the reasoning by which investors ruin themselves holding businesses that are genuinely dying. The distinction between a great company suffering a temporary catastrophe and a failing company suffering a terminal one is real, and it is also extremely difficult to draw in the moment, and pretending otherwise is dishonest.
What follows from this, practically, is an argument for diversification rather than for heroic conviction. An investor who holds a broad collection of businesses owns the ones that recover and the ones that do not, and the extraordinary performance of a small number is sufficient to carry the whole, without requiring the investor to identify them in advance or to endure a ninety-four percent decline in a position that represents everything they have. This is a considerably less romantic approach and it is the one available to people who do not possess perfect foresight.
There is also an argument for position sizing that follows directly. A holding sized such that a severe decline would be devastating is a holding the investor will sell during a severe decline, and severe declines are the ordinary experience of exactly the securities that eventually reward. Sizing a position so that its collapse would be painful but survivable is what makes it possible to hold through the collapse, and holding through the collapse is the whole of the strategy.
At VESTFY™ this case is presented as the necessary counterweight to every story about a great company held patiently. The stories are true, and they conceal the experience of holding. The investor who intends to own transformative businesses should understand, before they begin, that the record suggests they will watch their holding fall by half or more, repeatedly, and that most people who set out to do this did not manage it.