Don't be stubborn...be like water
FinHabits: Listen to the market and adjust accordingly
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.