A good friend asked me what were the lessons I learned from this volatile period, and just to be clear, by volatile I mean drawdown. Nobody really calls out volatility when stocks are rising.
It is a good question, and one worth reflecting on. Because a bull market is a terrible teacher and the hard lessons are always learned during extended drawdowns like this.
In this drawdown, there is a dichotomy occurring in my portfolio. Big cap stocks such as Facebook and Google are not suffering through large drawdowns, but hyper growth stocks are getting hit hard.
It is critical to know what your game plan is during times like these. If you are hunting for the most promising companies that have the potential to return 10x in a decade, it’s fine to sit through 50% losses. If some end up failing it’s okay too.
But if you are always selling after a 50% or 100% gain, you can’t withstand many of these 50% losses.
If your goal is to hunt for companies that can 10x, the winners will more than make up for the losers.
If you have an investment horizon of more than a decade, these ups and downs become less consequential. And there’s plenty of research showing that the biggest driver of shareholder returns is revenue growth. It makes plenty of sense to have a portfolio of hyper growth stocks with sensible unit economics and a really long growth runway.
But it’s tough to do that with your entire portfolio, with the money you would need eventually for retirement, or for your kids’ college fund.
As investors, we have to be honest with ourselves, and ask ourselves if we are able to handle the volatility that comes with hyper growth stocks? And at the risk of being too cliché, “If you don’t know who you are, the stock market is an expensive place to find out.”
There are investors who are able to hold on tightly to a handful of hyper growth stocks, or to the very extreme, hold only Tesla in their portfolio.
It is tough to stomach that extreme level of volatility—which is why, in periods like this, it feels great to be diversified between hyper growth companies that are loss-making and companies that are already gushing with cash flow. As often happens during a market drawdown, everything gets battered, but not everyone gets battered to the same degree or recovers in the same timeframe.
In addition to investment returns, I also consider peace of mind, how much time I spend researching the stock, and whether I enjoy doing so. In the end, what matters to me is that my investments are there to enhance my quality of life.