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These past weeks have been difficult for growth investors. Most of the growth stocks that lead the way during 2020 are heavily down from ATH and investors are seeing their portfolios drop up to 40% from their highs.
As much as this might seem worrying, there is no reason to panic if you have a long term mindset.
Is a re-opening economy bad for growth stocks?
Many investors think that a re-opening economy is going to be very bad for growth stocks. Just in case you don’t know what I am talking about, this is the rationale that many of them are following to arrive to this conclusion:
Vaccine rollout
COVID ends
Economy strengthens with end of pandemic and inflation skyrockets due to continued stimulus
FED pushes interest rates up to counter inflation
Tech stocks suffer with interest rate spike because their cash flows are further away in the future so they are discounted more
I will not make any particular comment on the inflation data that came out last week but I’ll leave here this thread that argues that the inflation spike might be transitory:
Is a re-opening economy a real threat to growth stocks? Maybe in the short term but absolutely not in the long term. Although the market drop might seem concerning, quality companies are performing better than ever, showing continued strength even with the vaccine rolling out. This week I posted a small thread about my thoughts with a re-opening of the economy and the performance of growth stocks:
I really can’t understand this debate to be honest, a re-opening economy must come in the best interest of anyone interested in the welfare of the global economy in the long run. COVID may leave with the vaccine rollout but digital transformation is here to stay and quality tech/growth companies show no sign of slowing down.
Some advice here: Sometimes investing is easier than what people try to make it appear so apply some common sense and avoid falling in technicalities.
Why is the market correcting?
I don’t know why the market is correcting but the truth is that some stocks did seem to trade at pricey valuations and seemed to have run a bit ahead of fundamentals so this might just be a normal multiple contraction cycle. Never forget that growth stock valuation is a very difficult topic and there are many different views on this topic. I collected views on valuation by many Fintwit growth investors:
The drop could also be caused by investors selling their positions to invest in crypto (one of the most evident bubbles in my opinion). This does not make any sense if you think rationally. People are selling quality companies to invest in meme coins but always remember that the market is incredibly irrational and you should take advantage of this.
This said, when the market corrects, it normally goes too far caused by stop losses, algos and panic selling and provides some incredible opportunities for long-term investors. Some growth stocks are being priced as if the vaccine had suddenly destroyed the runways ahead but the truth is that the pandemic just got these companies started. Take the case of Pinterest ($PINS):
Trailing Twelve Month P/S ratio: 19.4x
Forward 2021 P/S ratio: 14.3x
Forward 2022 P/S ratio: 10.7x
Forward 2023 P/S ratio: 7.8x
My opinion is that Pinterest will still have a considerable growth opportunity by 2023 so I find this stock to be trading at a quite interesting multiple today, even if it appears to be pricey. You can find many opportunities like these now in the market but to facilitate your search I also put together a thread with some NTM P/S ratios for tech companies:
As you can see in the thread, there also appears to be an opportunity in big tech companies which have even decreased in price after reporting record quarters. I personally hold $FB and $AMZN.
Predicting tops and bottoms, is it possible?
Quick answer: No, it’s not possible or at least it’s not possible to do it with enough precision so that it’s worth your time.
The market is very volatile and unpredictable so you should take this volatility as an opportunity rather than a risk because, if you are here for the long term, volatility is NOT a risk. Accept and take advantage of volatility, don’t fear it.
The other argument against timing the market is that it will probably be time consuming. Why spend your time predicting the market if you can spend that time studying great quality companies that will end up outperforming over the long run regardless of current market situation? If you dollar cost average into your positions you will avoid entering the market in the worst moment (beginning of a bear market) and you will minimize your downside.
This is what I think about the market being a rollercoaster:
Avoid the noise
If you scroll through Twitter you can clearly see that we are surrounded by market geniuses! Many people knew that growth was going to go through a strong correction so they obviously sold at the top and bought crypto at the bottom to benefit from the crypto trend (can you feel the sarcasm too?)
My advice is: Never believe what “gurus” say and avoid the noise. History suggests that predicting market tops and bottoms with high precision is almost impossible. If you want to listen to “gurus” you might as well listen to real gurus such as Peter Lynch. Here is what he has to say about timing the market:
“If timing the market is such a great strategy, why haven't we seen the names of any market timers at the top of the Forbes list of richest Americans?”
If you take a look at Warren Buffett’s 3 worst years you can see that he also sticks with his companies all the way down:
1974: (48.7%)
2008: (31.8%)
1990: (23.1%)
What am I doing now?
I am currently doing what I do in every market correction, very slowly adding to my highest conviction positions and spending a big amount of time thoroughly studying companies that I am interested in. I have not sold any of my high conviction positions and I don’t plan to do so, why would I? They are performing better than ever! Focus on the company, not the stock.
Remember that market sentiment may be very negative now but it can change to positive in just a matter of days, it never ceases to amaze me how price changes sentiment. This is a great edge for investors who are able to focus on fundamentals and remain emotionless against stock price changes. Whenever you are having trouble just use this sentence (insert whatever you want where I write “xx”):
“If I liked company xx at $xx price and fundamentals are improving, why should I like it less when it is $xx lower?” I should like it more, it’s on sale!”
I think that there are three important things any investor should work on to avoid selling during market drawdowns:
Be long term oriented
Invest only money that you don’t need in the short term
Build your portfolio so that it mirrors your conviction on a cost basis
If these conditions are fulfilled, chances are that you will be able to hold to your positions during market turbulence without price changes affecting your conviction.
Draw your own conclusions
I’m just a regular guy posting stock market related content on Twitter and Substack so you should not take my word for anything that I post the same way I don’t make investment decisions based solely on third party information. Doing your own due diligence is key to hold through market drops. Conviction can’t be bought, it must be built over time.
Hope you have a great weak regardless of what the market chooses to do. If you are here for the long term don’t let the market determine your short term mood!
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Stay well!
Disclaimer: I’m long $PINS, $FB and $AMZN