Why You Keep Getting Killed in Growth Stocks – The Eternal Error

If the stock exchange has an eternal myth it is that the best way to get rich quick on the sector is by buying growth stocks or even better super stocks. Everything seems so plausible. Except for the curious and always denied fact that you continue getting your head handed to you on a silver platter each single time you invest in these whiplash babies eleven stocks.

Stocks

I would estimate that most growth investors have a career that doesn’t exceed three decades. Those who survive learn to modify their investment strategy to a more balanced strategy.

The very first thing the newbie growth stock investor quickly learns is that the corrections on the super stocks he thinks are likely to make him rich are horrific. After getting killed a couple of times,a smart old hand introduces him to the charms of the stop-loss order. He’s ecstatic. This is the reply to his prayers. The grim truth is that this is similar to progressing from marijuana to heroin.

A stop-loss order is an automated order given to your broker to sell your position if the stock falls to a predetermined price. The stop loss-order is nearly always set at one of three price points. It’s set at either 5%, 7.5% or 10% under the present market price. The most typical price point by a country mile is 10% under the present market price. A price point of 5% or 7.5% beneath the market results in your being stopped out each single time you turn around. This is regarded as being intolerable by the majority of investors. There’s a theoretical problem with the stop-loss order which most users never discover. The issue is they become an addictive crutch and slowly destroy the judgment of the investor.

Let’s now have a look at both alternatives that the super stock investor has available to him. After all why klutz around with mere growth stocks as soon as you can get rich quicker with super stocks.

Or so it’s now widely assumed. That leaves us with only 1 tool in our tool box, the stop-loss order.

Let’s take a peek at the five-year performance of $10,000 invested in some of today’s most highly regarded super stocks.

1 thing that’s immediately apparent is that these super stocks delivered the goods in comparison to the break even performance of the S&P 500 Index. Other super stocks did not meet their reputation. Such as Cisco, Intel and Dell and Aren’t included in the above list.

Keep in mind however, that this performance was only available to the now despised buy and hold investor.

In the previous five decades, Amazon has had 14 corrections of 10% or more.

Eleven corrections of 10% plus, two corrections of 20% plus, 1 correction of 30% plus and one brutal correction of 40% plus.

Research In Motion is of specific interest. It’s ranked number one in the magazine’s top 100 list of the fastest growing stocks over the previous 3 decades, Not just in the United States but in the world. Three corrections of 10% plus and four corrections of 20% plus, 1 correction of 30% plus and one horrific correction of 70% plus.

How about that, select the number one stock and find a 70% loss for your effort! Of course this was quickly followed by a potent snap back rally of 65%.

The S&P 500 Index did the job it was created for. It had only four corrections greater t 10% plus. Two corrections of 10% plus, 1 loss of 20% plus and one loss of 30% plus.

I believe it’s safe to say that these brutal corrections on proven, high performing, super stocks isn’t exactly what the normal growth investor was expecting. Bear in mind these stocks were selected because thay had gone up from two to ten times in value in the previous five decades. Compared to breakeven on the S&P 500 Index. These stocks are the holly grail of growth investing. They’re proven winners.

According to growth investor stock lore, the wise investors in these stocks should have been rewarded with fabulous profits. The buy and hold investor who stuck it through to the end was indeed rewarded handsomely. I have grave doubts however, in regards to the functioning of the dancing slick investor with his stop-loss orders and his easy assumption that there’s some rational way of timing stock swings. In more than forty decades of looking, I never found any method that out performed a coin toss over the long term. Though I grant you that there are lots of procedures that seem to work in the brief term. Until they blow up in your face.

I submit to you that the normal dancing slick, growth investor with his stop-loss orders does not find rich in super stocks. His normal experience is to repeatedly get blown out of his positions every time his stop-loss orders are triggered. Taking a 10% loss every time. In due course his mangled body is dragged from the arena floor feet first. The shell-shocked victim of one too many 10% losses. After all how many 10% losses can you take? Consider it!

At least that was my experience until my conversion.

The astute reader will recall that there is 1 strategy that does work. Buy and hold. The issue with purchasing and holding super stocks is that you need nerves of steel. I doubt if more than 10% of the investing public has what is needed to make this strategy work in the growth stock arena.

There is of course an alternate strategy. The strategy, which I advocate. Conviction investing with a long-term bias in contrarian-value plays. In more than four decades of speculating in the blood-splattered battleground they call a stock market. It’s the only strategy I have ever found that works consistently, but only in the event that you hold on for at least two decades. Nothing works if the holding period is less than two decades and I have the battle scars to prove it.

The basis of this strategy is that you’re buying stocks which are living in the gutter. That are current bargains based on today’s price and not on tomorrow’s price. When you purchase growth, you’re paying a premium, many times a huge premium over its current intrinsic value. A premium that’s based on the always-chancy assumption that the current superior growth rate will be maintained. A growth rate that oftentimes have to be maintained for five or ten years to justify today’s extraordinary price
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