PayPal is one of the great technology stories of the past 30 years.
The payments company was founded in the dot-com bubble. The PayPal Mafia of founders and employees who struck it rich when the company was sold to eBay in 2002 includes Peter Thiel, Elon Musk, Reid Hoffman, Max Levchin and more.
EBay spun out PayPal as its own public company in 2015. The seperation was a spectacular success for those who hung onto the shares of PayPal. From 2015 through the summer of 2021, PayPal stock was up nearly 750% versus a gain of 140% for the S&P 500.
And then the wheels fell off.
The stock price is now down 87% from the July 2021 peak.
Not only has the stock badly lagging the S&P 500 since the eBay spin-off, but you would also have been better off sitting in T-bills!
The tortoise beat the hare.
Hendrik Bessembinderâs research shows that something like 60% of all stocks underperform T-bills over the long haul. PayPal is a case in point.1
The run-up in PayPal shares shows how 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 darker side of concentration. Sometimes you strike out even after hitting a home run.
The current market environment is a good reminder that sometimes the high flyers are subject to a crash landing.
If you looked at any sort of diversified index or fund right now you would think things are going swimmingly.
The S&P 500 is just 0.66% off its all-time highs. The All-Country World Index just hit new all-time highs. 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 Itâs not a stock market; itâs a market of stocks.
If you look under the hood a bit, there are plenty of individual names that are in outright crashes right now.
I took a look at the latest list of drawdowns in individual corporations and pulled out some household names you know:
My kids would say these stocks are crashing out.
These are name brands. You likely use many of these products or services. These arenât simply healthy corrections. These are gigantic crashes of 40%, 50%, 60%, even 70% or worse.
All while the stock market as a whole is more or less sitting at new highs.
Maybe these stocks are a harbinger of things to come. Itâs possible the volatility in certain stocks, combined with the rollercoaster ride in crypto and precious metals is foreshadowing pain ahead in the stock market.
Either way, the action in these names offers a warning to investors with concentrated positions in individual stocks.
The stock market has experienced one 20% crash in a single day on Black Monday in 1987. That happens to individual stocks a handful of times per year.
You might get 2-3 crashes in excess of 50% in your lifetime for the overall stock market. That happens to individual stocks on a regular basis, regardless of whatâs happening in the market.
Investing in individual stocks can make you a lot of money when youâre right.
That upside potential only exists because of the enormous downside potential.
Concentrated positions are very fun on the upside.
They can also wreck you on the downside.
Further Reading:
Is Diversification Finally Working Again?
1Itâs also worth pointing out that some investors obviously made money in PayPal shares in the meantime if they took some profits and sold.
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