You are probably tired of hearing from me but I’ll just give a little perspective because you will start hearing from the voices telling you how much better it would have been for you if you had invested conservatively in index funds and conservative stocks. Okay, here’s a little reality testing.
At the end of September, I was up 86.8% and the five indexes that I’ve followed for the last four or five months were up 10.2%. I said in my end of the month report that I was up eight times as much as the average of the indexes.
What has happened since. It’s been terrible. I’m down to being “only” up 52.9%. That’s a drop of 18.1%.
(152.9 divided by 186.8 equals 0.819, or down 18.1%)
How about the conservative indexes. Sure enough, they’ve only dropped a third of what I dropped and are now up 3.9%. (That’s a drop of 5.7% by the same calculation.)
So what does it mean? It means that if you had been in the indexes you’d be up about 4% now, while I’m up 53%, or more than 13 times as much.
Sure it’s been a terrible drop. And sure I dropped more than the markets. Markets go up and down, and it is what it is. But don’t let anyone tell you that you would have been better off investing in conservative index funds.
Saul
**Appendix**
**S&P up 3.8%**
**Russell up 2.1%**
**IJS up 2.6%**
**Dow up 3.6%**
**Nas up 7.5%**
**-------**
**Average of the 5 up 3.9%**
Prudent post, however might I add a piece to the puzzle?
The difficulty in growth stocks with higher volatility, is what point is an investor at in their journey with this style. As you say down from 86% to 53% for the year…whoopdedoo!
However for someone (not me) who might come across these boards in Aug/Sep and lay down their hard earned, only to be down 19% in the first few months and maybe more…well that’s a different story.
My assumption when entering high growth stocks is that at any given point a portfolio could be down as much as 50% - 60%, for uncontrollable reasons. In that scenario it would take 100% growth to recover those losses.
The psychology of this is important, for if you haven’t made significant gains over the market with this type of strategy a 20% - 50% underperformance to the market can cause people to capitulate and sell, or make poor decisions to recover the losses.
That’s not to say they should avoid this strategy in what appears to be a late-stage bull market, but rather a considered approach to entering a position should be made. In particular:
Consider your ideal total position and instead of buying in 2-3 parcels, spread out purchases over 6-12 parcels on a monthly basis.
As much as you dislike market timing, I’d avoid purchasing a stock after its price has broken downwards through its 200 day moving average. If the stock trend is still heading up, the price is above the 200 day MA and the 200 day MA is also still trending up, those are positive signs and help people avoid playing the ‘catch a knife’ game.
Overall I have no doubt that most if not all of the companies discussed in this forum have large price growth potential which will generate exceptional returns. However my personal opinion is at the moment, with valuations across the market very stretched, it is important to be mentally comfortable with your entry strategy into any of these stocks and mitigate any potential short term losses as much as possible.
If these tech stocks are only a portion of your portfolio, and you don’t have margin, you are good.
These firms were making money before and during the run-up, and they are still earning money as far as we know. Then the buyers will come back, greed will set in, then sell into it.
There is no macro-economic fear. No financial crisis, no $150 oil, no major imminent war. Some trade negotiations, long over due, are being made.
However for someone (not me) who might come across these boards in Aug/Sep and lay down their hard earned, only to be down 19% in the first few months and maybe more…well that’s a different story.
Nice post duncs. I just want to say a few words. One of the most difficult times of investing is when you first begin and that may even be taken one more step to when you first make a major strategy change. This is especially true for the risk averse. Let’s face it, some people just can’t handle seeing a large drop in the portfolios and that is just fine. Investing in high growth stocks may not be for them.
You post reasonable ideas on entering into stocks in smaller portions. To a degree, Saul does this as well, but likely invests much more quickly and in a bigger fashion than many others. But to each his own.
More importantly, you have to be comfortable with what you are doing and know the reasons why you are doing it. If not, downturns in the market can be very rough psychologically.
***When using the word “you” above it should have been better substituted with “one” as I wasn’t talking to anyone specifically.
Sorry for a bit of an OT rant. We are all responsible for our own decisions.
For the major indexes, yes, 3-4%, mine dropped between 6-7% today, largest $$$ amount I’ve ever seen it fall in a day! WOW, lucky that’s just on paper!
But no, I’m not selling either, in fact, I still have quite a bit of cash available from sales over the past few months of some older TMF stocks that did quite well but had run their course and I sold them to deploy more into the stocks discussed here…so I continue to buy what I feel are the best opportunities, and will continue to do so.
I think it’s the rise in interest rates, the ongoing trade “war,” with a background of political jitters after so many unpaired shoes have dropped. (Someday, some shoe from the other foot almost has to drop. It’s like watching a Jenga tower climb up and up and up…)
Sure it’s been a terrible drop. And sure I dropped more than the markets. Markets go up and down, and it is what it is. But don’t let anyone tell you that you would have been better off investing in conservative index funds.
If this is the beginning of a bear market, it is but a week old. The median duration of a bear market is 17 months.
This might just be an air hole from which the markets recover, of course.
But the air is getting thinner and thinner as the end of the economic expansion approaches.
Markets behave in characteristic but unpredictable ways, sand piles might be a fairly good example. We know that sand piles have avalanches (crashes/plunges), but there is no telling when or how large. Recently people have been looking for “fingers of instability” in sand piles to help with forecasting. Similarly there are fingers of instability in markets that affect the timing and intensity of crashes/plunges.
One unknown or maybe unknowable is when a change in direction will happen. Forecasts are made as if there were no inflection points, just straight line extrapolation. The only remedy that I know for this is to buy in tranches but it’s a two edged sword. I bought ALGN in four lots. Had I bought it all at once I would have paid 30% less. Hedging has a price but since pain is worse than gain we pay it. Same with diversification, had I put all my money in ALGN the porfolio would be worth a heck of a lot more. But we don’t know the future so we must hedge to some degree.
The other interesting observation is the anatomy of a crash/plunge which look like chain reactions. Some people try to protect themselves with stop-loss orders, others try to maximize gains with leverage. Both fuel crashes/plunges when the instabiity is great enough. When the market falls enough stop-loss orders kick in dropping the market further. As prices drop people run out of cover for their margin forcing sales and dropping the market even further. At first some people buy the dip but soon enough there is enough fear that buying dries up.
Berkshire-Hathaway is an icon of prudence and safety, or so people think. The following is a ten day chart of BRKA. As the crash/plunge develops BRKA rises 4.6% over six days as people “rotate into safety.” Then yesterday BRKA drops by 4.93%, more than the three main indexes. Nothing changed at Berkshire-Hathaway that I know of but market forces kicked in. Call it a Berkshire-Hathaway Black Swan.
BTW, BRKA is beating the Dow and the S&P 500 YTD and trailing NASDAQ by just a little bit. Just as Saul pointed out the outperformance of his method, BRKA is safer than the broad market but not immune to market forces
After all is said and done my belief is that a sturdy portfolio that one can hold through the crash/plunge is the best alternative but “sturdy” does no have to be “stodgy” low growth. Out of the thousands of stocks available surely one can find a dozen that are fast growth but strudy.
Saul - I got into the market this summer and currently sitting at about an 8% overall loss. But that is after having been up about 9%. So if I had started at the beginning of the year I think I could have been up at least 30 or 40% before the drop and would currently be positive. So timing is everything!
That being said, I am highly motivated to improve opportunities before the market comes back. I want to take advantage of bargain stock pricing. Do you have any additional criteria for selecting bargains or do you just look for the biggest drop in your holdings?
Out of the thousands of stocks available surely one can find a dozen that are fast growth but sturdy.
The growth of the underlying business may be sturdy, but if you have a high-multiple growth stock that’s up by a factor of 5 over two or three years, that’s not going to prevent the stock from going down 80+% if the entire market goes down by even only 30%.
The growth of the underlying business may be sturdy, but if you have a high-multiple growth stock that’s up by a factor of 5 over two or three years, that’s not going to prevent the stock from going down 80+% if the entire market goes down by even only 30%.
True but you miss my point or I didn’t make it clear enough. A 50% drop in high growth stocks is quite normal and should be expected. But sturdy stocks bounce back if the story has not changed unlike seculations which can easily go broke. That’s what I mean by sturdy. It’s a question of being able to live with the volatility. Modern Portfolio Theory (MPT) was devised for those who can’t stand volatility and volatility became a synonym for risk, which it is not.
A case in point, Saul advises to have enough cash on hand to live on for a long time. That pretty much neutralizes the risk of volatility at the cost of not earning a yield of the cash reserve. Insurance always costs money.
The best advice I can give in these times, as someone alluded to earlier, is to buy in tranches. Don’t rush in, there’s no point. Nobody picks the bottom so don’t even try.
If this is the beginning of a bear market, it is but a week old. The median duration of a bear market is 17 months.
For the people that keep fully invested your portfolio will look very good in 5 years even if this is the beginning of a bear market. Go back to 2007 and look at how well the stock market has done. Don’t be afraid of pull backs, get excited, because in 5 years you will thank yourself.
the only real long term stats we have available are for indices like SP 500 not not NPI type portfolios
But what we do have available shows that similar events are quite common during Bull Markets
And so far there is no evidence that this more than a typical correction. IOW there are way more of these than the final 10% one that turns into a 20+% bear
There have been very few bears without an inversion of interest rates and a small but several week long rise in unemployment. Neither of these has happened . So while I am not into the prediction business the odds are the Bull is not over
I am mosly B &H for companies with good numbers but I did add a small amount of SQ and an even smaller amount of AYX this AM .And kept most of my substantial cash position
If you own high beta stocks like most of the NPI stocks by definition you have more price volatility You are paid long for taking this extra short term risk
that post should have gone to NPI board but I did mention a couple of stocks by name
Thd longer the measurement periods ( hour day week month)the more the lag but the more reliable so tomorrow close gives us weekly figures
But only SQ seems to have any “new” news. I do remember Buffets advice about buying good business vs buying one with good management
I bought SQ for the business ,the numbers, and the irreversible trend toward cashless payments It is still
expensive but companies with anything over 35% growth never get cheap just less expensive
Want perpsective? There were larger crash days in February than yesterday. In fact 2 crash days in February were more than a thousand points each and qualified as the biggest crash days from a numerical total in the history of the stock market!
The current crash is not just one day but 3 or is it 4 days of crashing? That is what makes it scarier. But the 800 some points lost yesterday were smaller both numerically and percentage wise than the crash we had in February. No one remembers the February crash anymore. This one we might notice and remember for awhile (assuming it is over - never assume anything but we have to live in the here and now).
From a percentage basis it is not even close to a real market crash. It is indeed enough to shake out the riff raff however and put some reality back into everyone. The world is real and dangerous and not some Cinderella fantasy land where barbarians are not at the gates and we can afford to be complacent and think everyone is nice and catastrophes will not happen.
In perspective this is not a historical crash by any means, even though it is #4 on total nominal points crashed. I forget what #3 is, but that was much higher as a percentage of the market price at the time as well.
