Value stocks and Growth stocks are joined at the hip. We try to learn to value stocks that are matured with predictable growth rates and buy them below what its worth. We also try to learn how to value stocks that are in the growth stage with somewhat unpredictable growth rates.
The latter looks appealing because get that right in the infant or early stage, a $10,000 investment may turned to $200,000 when it goes ballistic for a 2000% move.
That is why everyone wants to buy the next Apple or Priceline.
People call these outlier companies UNICORNS.
However could you ever hold on to this mad bull?
Micheal Batnick, provides an outstanding quantitative data on some of the famous USA Unicorns.
Take a look at the maximum drawdowns, it is one thing to see the numbers it is another to feel it when your money goes down by so much.
The last column shows the percentage of time the stock have been down by at least 20%.
Suffice to say they have been quite a roller coaster.
You have to have balls of steel to take a 75% draw down.
The other consideration is your POSITION SIZING.
If I put in $3000 out of a $60,000 portfolio, these outliers will boost your portfolio, yet the % is small enough that a 75% drawdown will not freak you out.
If you don’t understand that out of 10 stocks perhaps only 1 will be a winner, and you concentrate your portfolio with 6 of these stocks, you might be in for a lot of hurt.
Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith's current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
You can read more about Kyith here.
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Tacomob
Tuesday 15th of December 2015
Thank you Kyith for another excellent post to bring the stock-pickers among us a reality check in these times of XMas Wishlists. I really do believe that the secret formula of ones 'system' must contain good rules on 'position sizing'. Sadly not many investment or stock market gurus talk about this important topic.
Kyith
Wednesday 16th of December 2015
Thanks Tacomob, i felt its difficult to talk about because we area all amateurs still. its an inverse relationship between conviction and position sizing.