For someone with a 200% ytd return, even if there’s a 50% haircut they’ll still be handily beating the market. But for someone thinking of getting in, that could be devastating and they’ll have to think 10 times harder about that investment decision. That’s where I was coming from.
First, that wasn’t at all evident in your first post, which talked about “valuation” and P/E ratios and, heck even the growth discussion was centered around P/E, not in growth in revenue nor any other business metric, just valuation. So, I concur with majority opinion expressed here.
I’ll even add to that the lesson of the “Dean of Valuation,” Aswath Damodaran, in valuing companies like Amazon. He’s a smart, honest man, and admits his failings in this blog post: http://aswathdamodaran.blogspot.com/2018/04/amazon-glimpses-…
…if you want to see some horrendously wrong forecasts, at least in hindsight, you can check out my valuation of Amazon in that edition… I have not owned Amazon since 2012, and have thus missed out on its bull run since then. Second, through all of this time, I have consistently under estimated not only the innovative genius of this company, but also its (and its investors’) patience.
So, in terms of “valuation,” you simply can’t use the same metrics that apply to more established and slower growing companies. It’s like using a SUV buying checklist when looking to buy a race car. Just doesn’t apply.
That said, it is a fair question to ask how people can get into these companies some safely, since many of them are volatile. I’ve been meaning to write a post on this, so I’ll take this opportunity to put down some thoughts.
As an example of what I think new growth company investors fear, we recently saw ZM shoot up to $589 and then drop into the high $300’s. People who got in “early” were either able to ride it out with profits still positive at all time, while anyone buying in the $500s might have a more sinking feeling in the pit of their stomach. So, how to overcome this?
What I recommend is:
• Look at your existing portfolio and decide which of those companies you’re willing to not own anymore. Sell them.
• Treat the proceeds as a separate entity. If not in a 401K, maybe even transfer the funds to a separate account, which can often be done for free within a brokerage or to a new brokerage.
• Now look for the growth companies that appeal the most to you. Read this board’s many discussions. Read the earnings call transcripts. Look at the 10K statements.
• Choose a couple or three companies and leg into them, in perhaps 1/3 of what you think your final position should be. The idea is to start smallish. Not tiny, just not more than 1/2 for your first buy. Since commissions are $0 or close, you can even spread out the buys over days or weeks.
• Now that you’ve got your toes wet, watch them over the next few months. Maybe some go up as the company is doing better and so buy more of them. Maybe some go down - figure out whether that’s justified or whether it’s a new adding opportunity for you.
And then, before you know it, you’ll find yourself invested in a few/several good growth companies, and hopefully will have profits providing that cushion to volatility you’re worried about today.
My penultimate thought is that the people most worried about volatility are those that have small profits they want to protect. When you’re invested in high-growth companies, the trend is decidedly more steeply up, so the gyrations in market pricing affect you less. When your company is growing over 45% a year, chances are the stock is also growing about that much. So when a 10% or even 20% “correction” occurs, you’re not panicking.
As an example, my portfolio dipped by over a third (33.8%) in late March this year, but that was down less than 10% from the start of the year, and was still up double digits from the end of the previous year. So I was able to confidently hold tight, make some slight adjustments as I saw new opportunities, and I am now up 255% since that March low. If you’re invested in companies based on valuation, chances are you didn’t have that cushion, nor the same possibility of increase afterwards. Think of a sine curve that’s angled up and to the right. Higher highs, and even higher lows. It’s bumpy, but after a while the lows are higher than some previous highs.
I’ll just conclude with an observation that most fund managers can’t do what we do here. First, the nature of most such funds is that clients can add or withdrawn their money at any time. When the overall market goes down, many people sell. Not only is that bad for them (closing the barn doors after the horses have left), it’s bad for the fund as it forces the fund managers to sell some of their assets at the worst time. Compounding that is that most funds have percentage limits as to how much of a single company they can own. Even high-flying funds like ARK Invest’s family have a 10% of portfolio size limit - and many people on this board often have a position or two that’s double that. Finally, the size of many funds means that investing in the smaller market cap companies that are more likely to be high growers is not worthwhile in terms of moving the needle for those large funds. So, when we say we beat almost all active fund managers, it’s not necessarily because we’re smarter, it’s because we don’t have the same hurdles fund managers have to deal with on a daily basis. We can concentrate on a smaller number of companies that we understand really well, can invest more when prices are artificially depressed, and can invest in companies of any size. That as a group we’re smarter, too, is just icing on the cake.
Note that the more successful investors here enjoy what they do. If you’re too worried about valuation to enjoy the ride, or just don’t feel like putting the time into investigating and evaluating companies, the kind of growthoriented investing we discuss here may not be for you. Nothing wrong with that, btw. And, if you’re indeed not ready for this, then perhaps just start buying some of ARKK, for instance, a little bit at a time. That’ll get you some diversification with good companies and good fund management, for far less time and effort investment and no worries about our “cult.”