The Tech Wreck: 5 Steps to Keep Your Cool as a High-Growth Investor
Don’t get eaten by the bear. Tame it.
What a year! It has certainly been a tough one for investors, particularly for those invested in high-growth companies.
Our portfolios are down 70% on the worst days, and negative things continue to emerge:
Negative news that the market reacts to immediately, e.g. the SVIB bankruptcy
Interest rate hikes (who would have expected that just a few months ago?)
Tight supply chains, which were partially responsible for point 6
The war in Ukraine
All of these unsettling (and hardly foreseeable) events happened at the same time, spooking the market and taking a major toll on our performance.
So, how can you stay calm and avoid panic selling during times like this?
Here's my approach.
Step 1: Take a Breath. Keep a Long-term Perspective
As frustrating as the short-term outlook may be, the more comforting the long-term perspective.
As a growth investor, it's important to remind yourself that markets will inevitably be subject to fluctuations. In the high-growth segment, this is even more true.
So instead of getting worked up about the ups and downs, FUD events, and other noise, I prefer to think about why I invest the way I do.
I believe that long-term secular tailwinds are important. They give our businesses an extra boost and predict a bright future for a particular sector.
Remember: The (long-term) trend is your friend.
Are technology and SaaS dead?
I find that hard to believe. Automation, data insights, and rapid, customer-centric, agile new product development are not going away. As more companies and products embrace software as an indispensable component, I see digitization only growing stronger in the coming years and even decades.
Risk-averse market sentiment will not change this fundamental shift.
➔ Action Items:
Which trends do you want to invest in?
Are these long-term trends viable?
Mute the noise. Don’t scroll through social too much. Filter question: Does this [insert event] move the needle in the next 1 - 3 years?
Step 2: Prioritize Quality in Your Investments
During a market downturn, it's critical to prioritize quality.
Well, it always is. But particularly during a bear market.
To avoid panic selling and remain committed to your investments, you must know what you own and why you own it.
In short: you need to feel confident about it.
Seek out companies with robust cash flow, strong growth potential, and a competitive edge in their industry. Avoid chasing high-risk, short-term gambles and investing in low-quality businesses.
➔ Action Items:
Look for businesses with
with a quality management and business model that can weather the storm
powerful competitive positioning and strong moats
long-term secular tailwinds (see step 1)
strong cash flow and profitability
Companies with these attributes will be able to handle the turmoil and come out stronger on the other side.
Other businesses will fail or have a very long road to recovery, so it is crucial to be extra picky in down-turn times.
Step 3: Reassess your portfolio allocations
Almost as important as what you own is how much of it you own in your portfolio. Therefore, a down-market is a great opportunity to reassess your portfolio allocations.
It is crucial to feel comfortable with the allocations and companies you hold; otherwise, you may be inclined to panic sell.
Consider adjusting your portfolio to reduce risk and focus on companies with strong fundamentals that are likely to weather the storm.
However, you don’t need to sell all your growth stocks and start buying Procter & Gamble.
You can remain a growth investor while optimizing your portfolio for peace of mind, e.g. by slightly increasing your exposure to cashflow-positive companies, while reducing your allocation in high-growth, yet no profitability stocks.
➔ Action Items:
Check in with your conviction about your portfolio allocations
Invest only the portion of your portfolio in growth, that you can handle in terms of volatility. There is no right or wrong
Avoid completely oversized positions (even, if you run a concentrated portfolio)
Emphasize allocations in companies with strong fundamentals, especially Cashflow
Step 4: Find the opportunities in the haze
Opportunity is missed by most people because it is dressed in overalls and looks like work. - Thomas Edison.
I like this quote. It also fits for investing in bear markets, slightly adjusted:
Opportunity is missed by most people because it is disguised by negative noise and sentiment.
Also, while money and investing are great, it sometimes helps to get some distance, take a step back and be thankful for what you’ve got:
Health, your loved ones, a job, the opportunity to even invest your money in the first place, and having a roof above your head.
These thoughts of gratefulness certainly make all investing hurdles appear insignificant and keep your perspective grounded.
Pair that with looking for interesting opportunities and you are set up for success.
➔ Action Items & Potential Opportunities:
Down markets make some of the best buying opportunities
“Clean the House”:
Be picky about your portfolio and clean out anything that makes you feel uncomfortable
Step 5: Be Flexible, but Stick With Your Investment Style
This is arguably a bit of a controversial opinion.
However, I believe it is better to stick to one style of investment and tweak portfolio allocations, rather than the entire investing style. Stick to your investment plan and avoid making impulsive decisions based on short-term market fluctuations.
Remember that staying the course is often the best strategy for long-term growth.
Why is this important?
Consider two growth investors, Peter and Petra. They both like the hype around software and bought stocks at an all-time high. Then, the market turns sour and enters a bear phase. They start to panic and shift their money into value stocks, taking a 60% loss. After some time, the market recovers and FOMO hits. They begin chasing growth companies again, once the stock prices start rising. This cycle can be detrimental to their long-term investment goals.
➔ Action Items:
Choose one investment style that suits you
Stick with it
Avoid impulse decisions
Look for your crowd to stay informed with like-minded people
Tweak your portfolio for strong fundamentals and quality, but remain true to your style
And that’s it.
No magic. Just plain old due diligence, consistency, and a grain of gratefulness during tough times.
Ultimately, the key to success as a high-growth investor is to stay the course and remain committed to your investment style and relentless focus on investing in the best businesses out there.
Good luck everyone and thanks so much for reading!
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*Disclaimer: This text is for entertainment purposes only and does not represent any investment advice, stock buying or selling recommendation, or any other financial advice. Please see our disclaimer for more details.