At a minimum, the latter part of 2020 and the first half of 2021 will go down as one of the strangest psychological times for common stock investors. The euphoric mood has been overly apparent. While this is true for all ages and types of investors, younger investors (Millennials and Gen Z) have really stolen the show. We have a few interns in our office this summer. As we chat with them about the risk taking of younger people, we draw some conclusions. They love taking insane risks (crypto and options), but this is just like every age group was in the past when euphoric feelings were present. Love is in the air.
These young investors have adopted certain mantras. Maybe none more famous than the term “HODL.” HODL is short for hold on for dear life. What is striking to us is that while the term is well-founded, they know that to create a large net worth you must hold a position for a very long time. This increases your net worth, while keeping the government away from taxing your unrealized capital gains. In effect, you just hold on as long as you can.
As an example, we commonly think back to what it was like to be one of Buffett’s partnership investors, who turned into Berkshire Hathaway owners in 1969, when he dissolved his partnerships and became solely the Chairman of Berkshire Hathaway. Buffett and Munger held the stock through thick and thin. Some may call this long-term common stock ownership. I think it’s better understood through the word Hodlvolk. It’s the people who are the long-term common stock owners. It’s the Hodlvolk. It’s a strange term when you hear it, but isn’t that what these long-term owners are? They are strange.
Using Berkshire Hathaway, we can see that investors had to watch over 50% of the value disappear between 1971-1975. Then, they watched the shares of the business go down 19% in 1981-1982. This was followed by a fall of 37% in the 1987 stock market crash. Then, in a déjà vu-like fashion, another 37% in 1989-1990. In the depths of the tech bubble, they had to watch the stock price decline 49% from 1998-2000. The 2007-2009 debacle caused a 51% decline in the value of Berkshire Hathaway shares. Lastly, the scare over the pandemic caused its value to decline over 30% in the spring of 2020.
Who would want to go through all these declines? Only the Hodlvolk survives. We do know the names of the Hodlvolk that went through all/much of this. We know Charlie and Warren were there. We know the Seqouia fund, David Gottesman, Phil Carret and handful of Buffett’s personal contacts in Omaha were part of the Hodlvolk. Did they know that they were going to compound capital at high rates? No. Did they know that declines were going to be extreme? No. All of these are unknowable in advance.