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.
- 42 Years of Europe Small Cap Value Premium over MSCI Europe. - March 29, 2023
- 98 Years of US Small Cap Value Premium Over S&P 500 - March 28, 2023
- The Story of My Dad’s Caregiver Mar Re (and a little about Active Global Caregivers) - March 26, 2023
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.
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.