The stock market has not been kind to growth investors this year. The Nasdaq lost almost 15% YTD, the Cloud stocks index has lost close to 20% YTD and our individual portfolios have developed deeper craters that continue to fester…without any end in sight.
These losses are hard to take…no doubt about it.
For the first few weeks, I noticed a lot of camaraderie amongst the online investor community…supporting and encouraging each other…we will get through this together. This was followed by some panic and early selling by those who could not take the pain…hah, such amateurs! Those that held on started passing around historical data points about how markets tend to do well when interest rates increase…history has shown us…And then there was more silence as many of these hopes continued to be dashed. Online forums are getting quieter and sometimes ugly.
Underlying all of these human behaviors is the one trait that I have personally fought all my life - stubbornness - Having dogged determination not to change one's attitude or position on something, especially in spite of good arguments or reasons to do so. Of all the investor sins, this is perhaps the most harmful to our portfolio’s health.
So lets not be stubborn and as Bruce Lee said, lets be like water. Lets step back and evaluate where and how we need to change our mind-set and portfolios.
If my time horizon (when I need to take out money from my investment accounts to buy groceries and pay for utilities) is less than 3 years, I need to seriously think about raising cash by selling losers that will not likely come back within that timeframe. I am using all market up-days to raise cash - selling losers, trimming over-bought stocks, selling covered call options etc. I am taking small wins, a little at a time…they all add up.
If one of my stock holdings has lost close to 50% in value, then it has to double in value for me to get back to even. That’s just math. So what are the chances that PTON or TDOC or ZM or ROKU is going to to double in price in say the next 12 months? Likely not, imo. All of them have serious headwinds and they will have to demonstrate blow-me-out-the-water new product plans if they are to rekindle my investor interest.
Re-evaluate one’s conviction thesis in one’s largest holdings and reconfirm their business health…IN A RISING INTEREST RATE ENVIRONMENT. If you are not taking these macro conditions into account for your growth stocks, you are being stubborn, my friend.
Stay away from distractions like Elon’s antics, Twitter’s woes, political debates on bills that have not yet been passed (it’s just sausage making if it has not become law). These stories are distractions and only good for entertainment while one is on the pot.
And finally, just as we like to share positive historical, data points, tech-bull analyses and investor success stories (He bought NFLX for $1 and held on for 20 years!), it is equally important to read and digest negative stories, bearish points-of-view, real market data and watch for down trends.
Here is the bottomline: Many growth investors had fabulous returns in 2020 and some repeated that performance in 2021. I am seeing many of these same investors being stubborn now, trying to replicate the past two years by sticking with their “favorite” growth stocks. This is not a formula for success in 2022-2023, especially if you are not considering your time horizon and broader macro conditions.
GM all, sorry for the delay in responding. Was busy yesterday with Good Friday and NotSoGood Taxday activities. This post seems to have hit the spot and generated a lot of questions, feedback and ideas too. As it should!
Here is a bit more context to why I am cautious...
1. The Ukraine-Russia war is not going to end soon. Probably will go on for a few months longer. A peaceful conclusion needs both parties to think rationally and we know that one side is not of that mindset.
2. Even if the actual conflict ends sooner, the sanctions will stay in place for at least 1 year or more. Russia will remain a global pariah. Economically, they will be shunned. War crimes will be investigated - this will be in the news for a while.
3. Due to sanctions, energy prices (oil, natural gas, coal etc) will stay elevated, however it will find a new base that will stay elevated. Russia has to sell their energy to survive. Europe has to buy from them in the short to medium term. China and India are somewhat forced to buy from them because they have large populations and cannot afford to pay premium $ for energy from the rest of OPEC+.
4. Regarding inflation, I am most concerned about food prices. So many "fires" burning in the agricultural and food sectors - wheat shortage, fertilizer shortage, avian flu, beef prices, droughts etc. Even if the CPI comes down, which it should starting next month due to comps against last year, food prices will stay hot for a while leading to continued depressed consumer sentiment. Families see gas prices, bread and milk prices every week....this takes a toll on one's wallet as well as on one's psyche.
5. Consumers around the world are already slowing down their spending. The US consumer, the biggest spender in the world, is cutting back. Europe is in the doldrums too (war, inflation etc.). China is in lockdown, there is general unrest due to higher COVID deaths (amongst the unvaccinated elderly), COVID restrictions, crashing real estate market etc. India is probably the one bright spot in terms of consumer sentiment, but that could shift quickly too.
6. I would not be surprised if we see a mild recession in H2 2022. I don't think the US Fed will allow it to get too deep. A recession of sorts hits sectors like materials, real estate, consumer discretionary, energy, industrials. It will also impact small and medium sized businesses along with companies with lopsided balance sheets and negative cash flows.
7. Sectors with pent up demand could do well even in these conditions - travel, leisure, entertainment, auto (new and used).
8. When a recession comes along, the consumer get hit first. SMBs next. Unhealthy companies after that. Everyone looks at their budget and identifies options for cutting spending. In the corporate world, top-line projects are prime candidates for the chopping block. Cost cutting projects are given preference. Non-revenue generating functions such as Sales, Market, HR, Communications, Finance, Product Development etc are the first to be trimmed. So any stocks that support these functions (e.g. ZI, AMPL, BRZE, etc.) could face future growth cuts. Then comes vendor consolidation within the must-have spend categories. e.g. Why do we need two cybersecurity vendors when we can go with one? Why have two data analytics platforms when we can use the better one?
9. Don't forget about the US mid-term elections coming up in Nov 2022. Its going to be an ugly, negative one. This country is very divided and our dear politicians will do all they can to exploit this. Starting Sept 2022, be ready for a barage of negative news stories, political ads etc.
I realize that this paints a very grim overall picture for the rest of 2022 and possibly H1 2023 and I hope that this does not come to fruition. However, think though these points above and tell me what you think is overly outlandish in terms of possibilities.
Given this landscape, here is what I am doing with my portfolio:
1. I am staying at about 20% cash. I want to have dry powder to buy my preferred stocks at basement level prices when we get the opportunity.
2. I am staying 80% invested in the market because I dont want to be caught on the wrong foot in case we get a bullish bump up. I am not looking to catch falling knives or time the bottom. 80-20 gives me options on boths sides of the bull-bear case.
3. I am out of any stocks that are tied to consumer discretionary, SMB etc. This includes SHOP, SE, BILL etc. I might trade in and out of these stocks if I get a chance, but I am not holding onto them for too long.
4. I am sticking to my best scoring companies in each sector that I like. e.g. CRWD is my preferred holding in cybersecurity...nothing else. NVDA and AMD for semis.
5. I am keeping my barbell hedges (UNH and AAPL) in place and adding to them as opportunity arises. They are both acting very strongly this year and don't give me buy-in chances very often.
6. Of course, anything that did not score well, in my process, post Q4 earnings has been cut...this includes TWLO, ROKU, ZM etc. Coincidentally, they are all tied to consumer spending and SMB in one way or the other.
7. It is painful to take large losses on stocks that tanked since Nov 2021. However the way I see it, most of them will not rise by 100% to get me to even, especially if they did not score well in my process. I dont want to stick around to find out which ones turn around and which don't - why play the lottery that way when times are so unsure? I have a better chance of recovering my money by putting the funds into stronger stocks like DDOG, NVDA etc.
8. Even though I am retired now, I have 3-5 years spending funds outside the market. So I have time to weather these economic upheavals for a while. This allows me to sleep at night. I realize that not everyone is this fortunate.
Yes, for those of us (and I am in my 70's) who are new to the high and hyper growth investment community, these are trying times. I haven't been in it long enough to form a real thesis; just seeing lots of red at the present with no end in sight. Fortunately I only have a portion of my portfolio in growth and a larger part of my net worth in other investment classes, mainly RE. The fact remains, however, that being down hundreds of thousands of dollars since mid November is worrisome. I have made an effort to sell my low conviction stocks, but I still have positions that are 30-40% in the red. I will continue to trim to get to a group of high conviction core stocks, and raise cash, taking the losses as necessary, but one wonders if a person is 'throwing the baby out with the bath water'. I imagine there are many like me...