The Surprising Thing That the 5 Best Stocks of the Past Decade All Have in Common

You would think that about half the stocks in the S&P 500 do better than average in any given year. One would expect a balanced distribution between superior and inferior market performers.

The reality is that the exact percentage moves up and down in real time. And generally speaking, only around 20% of the constituents of the S&P 500 outperform the market average. That's why finding a winner is such a big deal.

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According to MacroTrends, the five best stocks of the past decade are Nvidia (NASDAQ: NVDA), AMD (NASDAQ: AMD), Camtek (NASDAQ: CAMT), Fair Isaac (NYSE: FICO), and Tesla (NASDAQ: TSLA). These stocks have compound annual growth rates between 40% and 75%. On the low end, a $10,000 investment in Tesla 10 years ago is worth $290,000 today. On the high end, a $10,000 investment in Nvidia back then is worth nearly $2.7 million now.

One key component of The Motley Fool's investment philosophy is to "let your portfolio's winners keep winning." There are relatively few winners out there, and if you have a winner in your portfolio and sell it prematurely, you have about an 80% chance of replacing it with a loser.

Sounds simple, right? Just buy good stocks and hold tight to the big winners. But in reality, Nvidia, AMD, Camtek, Fair Isaac, and Tesla all share one surprising thing that made it extremely hard to hold them for the past decade.

Here's what the top five stocks all have in common

Over the past 10 years, these five stocks have all dropped 50% or more in value at least once. Tesla pulled back more than 70% from its high during the past 10 years. And even mighty Nvidia dropped by 66% as recently as 2022.

Nvidia has actually dropped 50% or more on two separate occasions in the past decade. Tesla has done so three times. So has AMD, if we round the numbers slightly, and it's currently down 40% from the highs it reached earlier this year.

NVDA data by YCharts.

When any stock falls this far, there will always be negative headlines stoking long-term fears. And these bearish cases will frighten investors into believing the time to sell has come.

On one hand, it's easy to empathize with someone who sold. Imagine having a position worth hundreds of thousands of dollars that falls by 50%. It would make you sick to your stomach to watch that much profit disappear. But on the other hand, selling any of these five stocks after a 50% pullback was ultimately the wrong move, causing sellers to miss out on massive gains.

What investors should do about it

Investing great Charlie Munger said, "If you're not willing to react with equanimity to a market price decline of 50% two or three times a century, you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations."

Munger was never one to mince words. He might sound harsh here, but his advice is nevertheless wise, for several reasons.

First, investors must accept that a drop of 50% or more is going to happen, and that it might happen often. If you want to make money investing, this is part of the deal.

Second, a drop of 50% or more doesn't actually tell investors anything regarding when to sell or when to buy. As we've seen, the best five stocks that you could have bought 10 years ago all dropped by at least 50% at least once. Those drops weren't selling opportunities.

By the same token, there are countless other stocks not mentioned here that have dropped 50% or more and never recovered. Munger mentioned equanimity, and that's what you need when you realize that stocks can either rebound or drop more after falling 50%. The bottom line is that investors need to respond with indifference to the price, which brings me to my third point: Investors must have an investment thesis when buying stocks.

Your thesis must articulate the necessary conditions for generating sustained shareholder value. Then compare a company's results to the thesis. If things are playing out as hoped, it's often a good idea to keep holding, as you'll have solid footing for when the stock market gets turbulent.

In summary, investors might see their portfolio get cut in half even if they've picked the best stocks possible. But volatility is part of the deal. If fear starts bubbling to the surface, investors should dust off their investment thesis to see whether they should keep holding the stocks in their portfolio.

Should you invest $1,000 in Nvidia right now?

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Tesla. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.