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Hi everyone,
It’s hard to believe the year is winding down. I’ll be spending some much-needed time with family and friends for the Christmas season. I hope you’re all doing the same.
First off, I want to wish you a Merry Christmas if you celebrate it, a happy holiday if you don’t, and to everyone, a Happy New Year.
But I also want to leave you with some thoughts…
Spotting the Volatility
As of this writing, the December stock market and crypto action have been wild. The volatility has been heavy. Yet when we look at the S&P 500, we don’t see much more than a small pullback in recent weeks:
That’s due largely to the strength of huge-cap stocks like Amazon (AMZN), Microsoft (MSFT), Google (GOOGL), and Apple (AAPL).
While we may not see the volatility too clearly on the surface of the stock market, though, it’s there.
When we strip out the large-cap stocks and look at small-caps, we see a very different picture. Here we look at the iShares Russell 2000 ETF (IWM), which tracks the Russell 2000 small-cap index:
That was a 12% drop from the November 8 peak to the December 1 trough. Stock selling hit tech stocks hard, and software took a notable punishing. Growth stocks were getting hurt too. For those of you who know me, you know I tend to traffic in growth stocks.
So what can we take away from this kind of undesirable price action? Should we be worried? What should we focus on?
The first thing you should know is that I am not worried.
I have seen the pain in stocks I hold many times before. But invariably, they come back stronger than before. It reminds me of “crypto winters” of the past, where digital assets suffer deep drawdowns. Only months later, those drawdowns are looked back on at as great opportunities.
Some heady stocks of last year are feeling the burn. But if you know what to look for, that’s where opportunity can lie in wait.
I typically look for stocks with phenomenal sales and earnings growth and healthy profit margins with reasonable debt. This simple profile tends to weed out a lot of junk in the stock market.
Focus on What Really Matters
For those who don’t own growth stocks, buying when no one wants them is a great opportunity for the future. But for those who do own them and are feeling pain, you might wonder what to do.
I can tell you that in my personal accounts, I fall firmly into both camps. Some stocks (not in my Outlier Investor service) are down substantially from their highs. But like I said, I’m not worried.
Here’s what I am focusing on…
If I have any cash on hand, I am adding to my positions on down days with any stocks below my buy-up-to prices.
I invest and do not really trade. That means I look for longer-term investments where I can measure progress over time. This is typically where outlier stocks shine: on a long horizon.
One real-world example in my Outlier Investor service is a stock that has risen as much as 1,100% in about three years. I am still looking for those opportunities – and great ones tend to come in periods of market pullbacks
If I am fully invested, though, there is not much to do but sit and wait. Staring at negative price action, without the ability to act, can feel very deflating. It’s hard to watch paper profits erode. It tends to also erode confidence and make it hard to enjoy a cheerful holiday season.
So that is when I must remember that long-term investments are long term. As for the stocks that I’ve chosen – ones that could potentially change the future while executing today – well, they’re businesses.
And even though a company’s value may fluctuate each day on the open market of the stock ticker tape, we should remember that their values shouldn’t really gyrate as they do.
Imagine if there were a big red LED sign on the front of your house. One day, your house’s value is up 2%. One day, it’s down 10%. Silly, right? But that’s what happens in stocks every day. Even outliers can jump about day-to-day.
In fact, they often jump more than other stocks – both up and down. But outliers are the 4% of stocks that accounted for all gains in the S&P 500 above bonds for the past 100 years. All others couldn’t even match bonds.
So when I’m locked into my stocks… and there is nothing to do but wait… that’s when I focus on what really matters – and it does not blip on a screen.
The process of investing should enhance our lives. So we should focus on the time we have with our friends and family.
We should do things that are good for our souls.
So take this time and enjoy the season.
I wish you all a happy holiday,
Jason Bodner
Editor, Outlier Investor
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