Investing, a continuous process
A very common approach or idea towards estimating investment returns are simply 'if you invest in a certain stock x years ago, you would have earned y times your principal now'. However, that is typically not the case.
For example, investing in Apple shares 10 years ago would approximately 9-fold your principal now, while even investing in a market index such as Dow Jones would see a slightly over 3-fold return in the last decade.
This idea of a one-off buy and hold investment is simple to understand and estimate, but chances are in most cases, this is not what's happening for many of us. It is simply due to the fact that most people are continuously investing their income and earnings into their portfolio, rather than a one-off event. Therefore, if a person simply uses the buy-and-hold strategy to estimate their portfolio returns, they would realize it to be under-performing their expectations. Before you continue reading, you might want to take a look at the data here:
Secondly, this also serves to prove another challenge that investors have to deal with. Let's say one purchases a stock he finds is under-valued after a tedious amount of due diligence and research and a year later, that stock reaped the expected performance and soared 20%, giving the investor a 20% return per annum. At this point in time, should the investor continue holding that share, it will probably not continue increasing 20% year after year, odds are it might probably fall instead.
There are thus two things the investor can do now:
1) He can sell off that share and reinvest the proceeds in another under-valued stock he may find after another round of research.
2) He holds that stock, knowing that it is a company that will still grow pretty decently into the future.
In case number one, there will be a lot of effort required which may or may not be reciprocated. After all, you are not the only one doing the research, finding undervalued stocks is the entire job scope of asset-management companies, a trillions-dollar market.
Two, the shares you bought cheaply that have earned you a handsome unrealized profit might still grow well into the future, but probably not at such an astronomical figure.
On top of that, a year later, that investor now have more capital to invest in from his salaries and savings. Should he continue pooling money into the stock that be bought a year ago? Will it still give him the stellar returns back then?
Obviously the investor would now have more work to do if he wants to continue earning market-beating profits, but that is a little beside the point of this article. The point to note is that any shares a investor purchase must take into account a regression to the mean of returns, and it would be reckless to continuously channel funds into the same company year after year because it might be the next 'Apple'. If a investor does so and the share price drops back to the original price 1 year ago, he would immediately be at a loss instead. One must always look at the value at risk before chasing returns.
A more sensible approach to investments is to approximate the market returns and catch onto opportunities when it arrives, such as a the plunges that occur every now and then. It happened during the Trump elections, Brexit, oil price plunges, trade war etc. Yes they aren't as bad as the 2008 crisis, but opportunities are opportunities, just don't expect every investment to perform as well as your best, lest you lose more than your worst.