What caught my eye this week.
For the past few years, being an investor in disruptive growth companies has been easy.
There’s been the odd hiccup – a tantrum in late 2018, and of course March 2020 when everything not nailed-down was sold in a panic.
But mostly, you just got richer every week.
Bull markets don’t just make everyone (seem like) a genius.
They make greedy geniuses, too.
But investing in shares on ever-higher valuations is a game of chicken.
Even if you’re a fundamentals-based investor (like me, la-di-da) who buys into businesses, not stock charts, the market will eventually call your bluff.
You may own firms with fabulous futures, but one day they’re going to look about as appetizing as chlorinated chicken sounds. They will be tossed overboard indiscriminately.
The greatest multi-bagging companies – Tesla, Amazon, Apple – saw their value plunge 50-90% on their way to trillion dollar valuations.
It’s a matter of when, not if.
Friday was one such day. Which was remarkable, because Thursday had already seemed like one such day.
I’d actually messaged The Accumulator a screenshot from my portfolio tracking spreadsheet on Thursday showing how much the growth portion of my sprawling portfolio had been roiled.
But then came Friday, which guffawed: hold my beer.
Not one but two of my shares fell more than 25% on Friday. The worst was down 40%. Many of the rest were down at least 5%.
And we’re not talking tiny fly-by-night stocks. My biggest plunger, Docusign, was worth more than $50 billion a month ago.
Here’s how a random selection of growth companies fared last week:
Of course all of these companies – with the arguable exception of Meta (nee Facebook – have looked super-pricey for the past couple of years.
And there’s a definite ‘de-digitalization’ theme among the companies that have been faring especially badly.
Even as Omicron has loomed, the so-called work from home stocks that were winners in the locked-down world have proven too pricey for some tastes. Especially with higher interest rates on the way.
I wrote last month about how inflation expectations have been getting stickier all year. That had suggested Central Banks will need to tighten financial conditions sooner or more severely – or both. And that’s potentially bad for growth stocks because of the impact on discounted cash flows that I flagged up a few years ago in discussing the problems with low interest rates.
Twelve months ago, fanciful commentators were opining that paying multiples of 50-times a company’s sales (that’s revenue, not profit) was the new normal.
And it was – in that everyone was doing it.
Until they weren’t.
Another one bites the dust
Obviously I can’t sound too smug. As I say, a good part of my portfolio was pummeled this week.
I’ve been trimming growth exposure for much of 2021 on the back of re-openings and scary multiples.
But clearly in hindsight I kept too much and – hilariously – I’d even bought back some fallen high-flyers because they had begun to look tempting.
However this is not my first rodeo. I know shares in growth companies can look too expensive for years in a bull market, and I was happy to book the gains in the good times. A kicking was coming someday. The snag was I didn’t know when.
But will the legions of new investors who only began trading in 2020 and have never seen a bear market be so sanguine?
Thursday and Friday felt like a panicked liquidation – of traders on margin, if not of actual funds – but at the index level prices only dipped a little. This was a very localized earthquake.
There’s a lot more selling to come if people truly get the fear.
Of course, as I alluded to above much of the fastest money has moved onto trading cryptocurrencies.
Doubling your money in a growth stock in a year was a snooze-fest for Boomers by comparison to alt-coins and the like.
I wonder what such traders made of the past 24 hours in crypto prices on checking their screens this morning:
Come back plunging growth stocks – all is forgiven!
It sure looks like the euphoria is over.
Don’t stop me now
If you’re a passive index fund investor then you’re entitled to feel pretty good about all this.
For UK investors, the Vanguard World Index Fund was down less than 1% in the week.
It actually rose on Friday!
The mega-tech companies that dominate the market (Alphabet, Microsoft, Amazon and the like, though not Meta) have barely wobbled so far.
Passive investors also save themselves a lot of grey hairs by avoiding days like Friday – albeit at the cost of rarely being able to brag about your returns on Twitter.
Most people will do much better with index funds than stock picking, which is why we recommend passive investing so much on Monevator.
But I wouldn’t get too complacent.
An interesting feature of the recent sell-off is that it’s occurred while the all-important US ten-year yield has actually been softening.
Indeed market expectations for US interest rates are flattening across all maturities recently.
Basically, as of recent days, the market is seemingly expecting US interest rates to rise less in the future.
That could be because it foresees another recession, maybe virus-driven.
It could be because it’s thinking that inflation is more transitory, after all.
Or it could be that bond investors are growing increasingly fearful in general, perhaps due to the same flight to safety instinct that drove the mass dumping of expensive growth stocks this week.
After all, if you expected Omicron to lock us all inside again, then the likes of Zoom Video should perhaps be rising.
So there’s some circles to be squared here.
I could speculate about this all day but it’s not really our beat.
Suffice to say we’re potentially in one of those periods of dislocation for the markets, where things change and it only looks obvious how in hindsight.
It had seemed like stock markets were getting ‘healthier’ in 2021.
Last year’s returns were dominated by the biggest companies. But the spoils had been shared more evenly recently, as Morningstar reported:
Will this continue?Maybe the recent sell-off is evidence of investors coming to their senses, as value investors might put it, and dumping their growth shares for solidly profitable companies?
Or is a new bear market coming – taking out the easy targets before moving on to the biggest prey?
Who knows. Anyone being too defensive has made a mistake for most of the past ten years.
I was too exposed to growth stocks in partly because the end of the year is usually so strong, and the outlook seemed favourable until a fortnight ago. Things can change quickly.
Who wants to live forever
We’re all playing a long-term game. As an active investor, I believe I can outperform the market by discerning the best companies that will prosper over the next 5-10 years (albeit I shuffle my cards continually, which is heresy in the circles I hail from).
I even bought some growth shares on Friday – buying into boutique cloud provider Digital Ocean and adding to old favourite Mercadolibre (the so-called ‘Amazon of Latin America’, only not that Amazon…)
These still look like long-term winners to me. But in the short-term anything can happen.
Meanwhile for passive investors, the best defense is and always will be diversification. Even steep crashes will eventually look like blips provided you’re properly diversified and can hold and add through such declines.
Because a time will come – maybe next week, maybe next decade – when the sort of falls growth stocks ‘enjoyed’ on Friday will occur at the index level.
The S&P 500 will be down 8% in a day. The FTSE 100 will be off double-digits.
It’s always inconceivable until it happens. But it does happen.
Maybe this week was the market re-calibrating for a long expansion ahead. Perhaps the old companies that burn and bash stuff are due some time in the sun.
The bull market is dead – long live the bull market!
Perhaps, but I fancy it still isn’t a bad time to make sure you’ve got the right balance in your portfolio for navigating whatever comes next.
Have a great weekend.
Buy the rumour, sell the news – Monevator
What your retirement could look like – Monevator
From the archive-ator: Bonds are for pessimists, shares are for optimists – Monevator
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UK shelves proposals to raise capital gains tax rates and cut allowance [Search result] – FT
New rules for London Stock Exchange aimed at attracting IPOs – ThisIsMoney
Economic uncertainty as Omicron cancels the Christmas office party – BBC
Zog Energy becomes 25th UK supplier to go bust in three months – Guardian
One British family’s experience of the soaring cost of living – Guardian
Products and services
The best deals for first-time buyers on a 90% or 95% mortgage – Which
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
American Express’ Shop Small cashback scheme returns this month – Which
The duo-oligopoly of ETF/index providers – Klement on Investing
Doing the sums on 40-year fixed rate mortgages – ThisIsMoney
Cosy cottages for Christmas, in pictures – Guardian
Comment and opinion
How to avoid another lost decade… – Compound Advisors
…starts with avoiding investment manias – Compound Advisors
Read before selling – Humble Dollar
Healthy, wealthy, and wise – Klement on Investing
Fear Of Losing Big – Humble Dollar
How can couples make peace over money? [Podcast] – Morningstar
The pros and cons of borrowing to buy stocks – MarketWatch
For the bond market, this time might be different… – Morningstar
…but for now you can’t escape the hard truth about TIPS [US but relevant, nerdy] – ThinkAdvisor
Crypt o’ crypto
We built a crypto index – The Irrelevant Investor
Fleshing out a crypto investment strategy – Banker on FIRE
Bitcoin and electricity – Marginal Revolution
How to meme a Banksy painting via an NFT – Felix Salmon
The DAO of DeFi Index funds [Podcast] – A Wealth of Common Sense
Naughty corner: Active antics
A deep dive into Disney [Podcast/transcript] – Telescope Investing
Interview with fund manager Terry Smith [Video] – I.C. via YouTube
The importance of execution – The Undercover Fund Manager
What are the odds of success for a US seed funded start-up? – Crunchbase
Oh Omicron! From panic to possibility – Investing Caffeine
Can prospect theory explain anomalies like the momentum factor? – Alpha Architect
Remote work should be (mostly) asynchronous – Harvard Business Review
How leisure time became work – The Atlantic
For many US workers, leaving their jobs has been exhilarating – Guardian
First data points to Omicron reinfection risk… – BBC
…with more than half the UK cases in double-jabbed – Guardian
Variant driving record infection rates in South African province – Guardian
Why firm answers about Omicron could be weeks away – Stat
The inside story of the Pfizer vaccine: ‘a once-in-an-epoch windfall’ [Search result] – FT
Kindle book bargains
Economy Gastronomy by Allegra McVedy and Paul Merrett – £0.99 on Kindle
How Will You Measure Your Life? by Clayton Christensen- £0.99 on Kindle
Anthro-vision: How Anthropology Can Explain Business and Life by Gillian Tett – £0.99 on Kindle
Alchemy: The Surprising History of Ideas That Don’t Make Sense by Rory Sutherland – £0.99 on Kindle
Ten million a year [On air pollution] – London Review of Books
This is what it sounds like, when bugs cry – BBC
Carbon-cutting app aims to ease Londoners into net zero future – Guardian
Off our beat
Assured misery – Morgan Housel
Predicting with ‘superforecasters’ [Podcast] – The Ezra Klein Show
“Never invest in any idea you can’t illustrate with a crayon.”
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