Don’t interrupt compounding growth
Even the best hyper-growth companies take several years, if not decades, to live up to their full potential. Developing ground-breaking technology or successful consumer products takes time, even if an elite group of experts are working on it.
OpenAI, for instance, was launched in 2015 but took seven years to release ChatGPT, their leading large language platform. Similarly, Amazon took five years to open its marketplace to third-party sellers. And, for the first 25 years or so of its existence, Apple exclusively sold desktop computers and nothing else.
Assuming Amazon was just a book retailer or that Apple was just a computer company would’ve been a mistake for any investor trying to value these stocks. Missing out on the long-term vision would’ve been an expensive error.
An investor who purchased Amazon stock when it was first publicly listed in May 1997 would have made a stunning 2,877% return by selling the stock three years later. However, if the investor held onto the stake indefinitely, they would have enjoyed a total return of more than 260,000%.
In other words, compound growth works best on longer time horizons. As Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily."
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Learn MoreReal winners are rare
Another reason why you shouldn’t cut your winners and sell early is because there are few good alternatives available.
Hyper-growth stocks are extremely rare and difficult to find. Tech giants like Nvidia, Apple, Amazon and Tesla have created generational wealth for early investors, but it’s difficult to predict the next hyper-successful multibagger stock.
In fact, most stocks underperform the index. In 2024, only 28% of the stocks included in the S&P 500 outperformed this index, according to a recent report by First Trust.
That’s why it’s important to diversify your investments with varying levels of risk both inside and outside the stock market.
Picking stocks is a difficult endeavor. It takes time, effort, research and a fair bit of luck to find a robust growth stock with excellent leadership. Selling such high-quality growth stocks early is counter-productive. This is why it’s so important to let the winners in your portfolio keep winning over the long term.
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