The Agony of Investing

[XMFCochrane]

I apologize in advance, because this is probably going to be long and rambling, but I think it eventually makes its way to being on-topic. If not, then I apologize in advance for that too…

There’s a marriage book my wife and I enjoy that’s titled, What Did You Expect? It’s about how all marriages experience turbulence and trying times – that no committed relationship, no matter how loving, is just one long honeymoon phase. For anyone in a long relationship, I am sure you can relate. No matter how great your relationship is with your significant other, there will always be times of doubt and insecurity and hurt.

Some of the posts on this board the last few days remind me of that book. While my investing style does not mirror Saul’s, or some of the other fantastic posters on this board, there are few investors I more greatly respect. And I have plenty of exposure to the stocks favored on this board, though not quite as much as Saul or others here. I still remember discovering this board a few years ago and being impacted by it so much that I went back and read every single post ever made on this board. It has played a huge part in my evolution as an investor.

For those wondering why some of these amazing companies’ stock prices are down so much the past few days … well, what did you expect? Did you expect one could invest in a concentrated class of assets that consistently returned >50% each year without eventually paying the price? All stocks, even the best of the best – no, scratch that, especially the best of the best – will experience stomach-churning, agonizing drawdowns. That’s literally the price we pay for market-beating returns.

One of my favorite articles of all-time is former Fool contributor Morgan Housel’s “The Agony of High Returns.” He writes:

Monster Beverage (NASDAQ: MNST) was the best-performing stock from 1995 to 2015. It increased 105,000%, turning $10,000 into more than $10 million.

But this isn’t a retrospective about how you should wish you owned Monster stock. It’s almost the opposite.

The truth is that Monster has been a gut-wrenching nightmare to own over the last 20 years. It traded below its previous all-time high on 94% of days during that period. On average, its stock was 26% below its high of the previous two years. It suffered four separate drops of 50% or more. It lost more than two-thirds of its value twice, and more than three-quarters once.

That’s how the stock market works.

Take time to read the whole thing at https://www.fool.com/investing/general/2016/02/09/the-agony-…

There are some investors who – shudder – accept 2%-3% returns just so they don’t have to experience any volatility. Others accept “average” volatility by just investing in the indices and then tell themselves – and others – that no one can outperform the market anyway.

We’ve chosen another path. We believe individual investors can beat the market. We believe that by working together, we can discover great companies that can reward us with life-changing returns. That’s why we’re here. We know we’re going to get some wrong, but believe our winners will more than make up for our winners.

Will we be proven right? TBD. We’ll have to wait and see.

What are SaaS stocks going to do from here? Also TBD.

It is entirely possible that some of us invested in these names at valuations that were just too high. IMHO, that’s one of the most important metrics in investing that I believe has been overlooked a bit too much here lately.

But it’s also entirely possible this is just another gut-wrenching dip that feels so painful in the moment but we’ll barely remember a year from now.

The problem is none of us know what these dang boogers are going to do in the short term. Stocks don’t go up smoothly, nicely tracing their top- and bottom-line growth. Instead they go up in fits and starts, rocketing up before plummeting back down. Over the long-term, however, they can produce life-changing gains.

In the meantime, we experience the agony of investing. But these are the dips that can transform portfolios. Get a watchlist ready and target prices for your favorite companies that seemed unimaginable just a week or two ago. If they hit, be ready to take advantage. Personally, what helps me deal with these drawdowns is having some cash on the sidelines (even if it’s just a little) and seeing if I can pick up some favorites at bargain prices.

That’s just my $0.02. Drawdowns happen in investing – regularly. Expect them. Be ready for them. Take advantage of them. It’s part of the ride.

Matt
Phoenix 1 Contributor
BlackLine (BL), MasterCard (MA), Ollie’s (OLLI), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

[BroadwayDan]

Hey Matt,

Thanks. It seems on topic, within tight constraints, to put a little thought into the psychological elements of this board’s style.

Having just endured my most harrowing drop (dollar-wise) of my investment career I have been putting serious thought into the nature of Loss Aversion. We are biologically programmed to avoid loss at all costs. Therefore when your stocks move from say, 70 to 100 to 80 it FEELS like you’ve lost 20.

So to the rookies here I strongly encourage you to consider whether or not the value of peace of mind outweighs the value of making money.

If I asked “would you rather make $10,000 or $5,000?” Most people would scream bloody murder. Only a fool (small f) would prefer $5,000 over $10,000!

But what if the journeys look like this: You invest $2,000 go up to $20,000 then to $15,000 then to $25,000 then - in a flash, crash down to $10,000. This may feel a 1,000x worse than going from $2,000 to $3,000 to $4,000 to $4,500 to $5,000.

Obviously there’s no guarantee growth stock investing always gets you to the higher number. But I personally am doing a gut check. And not to be dramatic - though I am “Broadway” Dan - but as a kid I used to work as a messenger in NYC. And we had an account in the World Trade Center. And I used to deliver packages to the highest floors. Always worth remembering, especially today, there’s far worse things than losing money and far more important things than making it.

Anyway, I’m very grateful to this community and all the people who work so hard to help each other out. It’s particularly inspiring in this time when it feels like everyone is at everyone else’s throats for no good reason at all.

Fool On,

Broadway Dan

[jst3788]

I’m not a good investor at all, but I monitor growth stocks, boards like these, and seekingalpha all the time.

My question is realistically when a company literally doubles it’s market cap feb 2019 to july 2019… from 49 to 89… is that truely realistic? A company “doubling” in size in the span of 6 months.

When I look at TTD, AYX etc, they are great growth stories, but something in my mind asks myself…is it really realistic that a company doubles, triples in “size” in the span of a year or sometimes even less then a year as seen in ZS.

It would be like saying “costco” doubled in size in the span of 6 months…which would be crazy as it is a 100bil market cap.

I guess I understand the marketcap of growth stocks is small and it makes sense in that regard for growth stories of 5-10 billion with low float… but at the same time, I always ask myself if its realistic for a company to double in size in the span of 6 months.

Regarding ZS I was an investor at 35ish. Sold around 60. Today is pretty painful regardless.

[BobbyBe]

Is it realistic for these companies to double in size in a year?

To answer your question, just consider that revenues of these companies are increasing 50-70%.
Then consider that these are recurring revenues. Which means their new customers will be providing much more revenue than can be accounted for in the current year.

Of course there is a limit, but these are exceptional companies. They are not Costco.