The Crashing of the Iceberg – A Treasure of Common Sense
PayPal is one of the great technology stories of the last 30 years.
The payments company was founded in the dot-com bubble. The PayPal Mafia of wealthy founders and employees when the company was sold to eBay in 2002 included Peter Thiel, Elon Musk, Reid Hoffman, Max Levchin and others.
EBay spun off PayPal as its public company in 2015. The split was a resounding success for PayPal stockholders. From 2015 to the summer of 2021, PayPal stock was up nearly 750% compared to the S&P 500’s 140% gain.
Then the wheels fell off.
The stock price is now down 87% from its July 2021 peak.
Not only has the stock lagged the S&P 500 since eBay’s inception, but you’d be better off sitting in T-bills!
The tortoise hit the rabbit.
Hendrik Bessembinder’s research shows that something like 60% of all stocks have underperformed T-bills over the long term. PayPal is an example.1
PayPal’s stock performance shows that concentration can make you rich in the stock market. Hit just one grand slam and you could be set for life.
However, the other side of the mountain shows the dark side of concentration. Sometimes he hits the floor even after scoring a goal.
The current market situation is a good reminder that sometimes high flyers are subject to landing crashes.
If you look at any kind of diversified index or fund right now you would think things are going well.
The S&P 500 just broke 0.66% from its all-time high. The All-Country World Index just hit a new high. So did the MSCI EAFE, the S&P 500 Equal Weight Index and the Russell 2000. The Dow hit 50,000 this week.
Some investors (not me) like to say It is not a stock market; it is the stock market.
If you look under the hood a little, there are plenty of individual names that are in direct danger at the moment.
I looked at the latest drop-down lists for individual companies and pulled out the household names you know:
My kids would say these stocks are falling.
These are the product names. You probably use many of these products or services. This is not just a healthy fix. This is a massive crash of 40%, 50%, 60%, even 70% or worse.
All while the overall stock market is sitting low or sitting high.
Perhaps these stocks are a sign of things to come. It is possible that the volatility of some stocks, combined with the rollercoaster ride in crypto and precious metals portends pain ahead for the stock market.
Either way, the action on these terms provides a warning to investors with concentrated positions in each stock.
The stock market experienced a 20% crash in one day on Black Monday in 1987. That happens to each stock several times a year.
You may experience 2-3 crashes of more than 50% in your entire stock market life. That happens to every stock every time, no matter what happens in the market.
Investing in individual stocks can make you a lot of money if you’re right.
That super power only exists because of the super power of the inconvenient.
Focused positions are more fun at the top.
They can tear you down again.
Further reading:
Is Diversification Finally Working Again?
1It’s also worth pointing that out others investors apparently made money on PayPal shares at the moment if they took some profits and sold.
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