Investing In Volatile Times

Investing In Volatile Times

Morning folks,

One of the most frequent questions we’ve been getting recently is “would you invest in X after its recent run?”

It’s an entirely fair question. Let’s look at some year-to-date returns for stocks in the MyWallSt shortlist.

FB +44%
MSFT +46%
AAPL +77%
AMZN +90%

What’s going on? These are some of the biggest companies in the world. They’re supposed to be growing slow and steady.

Let’s take a look at some smaller (or used to be smaller at least) businesses.

PTON +88%
COUP +131%
SHOP +175%
ETSY +174%
DOCU +260%
SE +291%
TSLA +478%
ZM +525%

Let’s also keep in mind that these results are year-to-date i.e. this is the return from before the outbreak of COVID-19. If you were to look at the returns these companies have generated from the lows experienced in March, the numbers are even more outrageous.

It’s understandable then that many investors are pretty spooked about investing right now, believing we may be in some new tech-bubble. And they very well may be correct. However, here are some points to think about before you make the decision to invest or forego investing for the time being.

I, personally, have probably lost far more money waiting for a stock to pullback than I have from buying at the top. So often I’ve been eager to invest in a company but chose not to simply because it had been on a big run. I then had to watch as StoneCo, Tesla, Amazon, The Trade Desk all increase by 100%+.

If you feel uncomfortable investing after a big run, understand that it's an emotional response. It may feel like a rational one — “surely it can’t keep going up?” — but it’s not. A rational response is to look at the business, try to understand why the stock has had such a strong performance, and analyze whether you think it was justified or not.

You might think Zoom going up 500% so far this year is completely insane. It is. But so are Zoom’s numbers. Revenue was up 355% this quarter. It’s become one of the most important tools for businesses all over the world. That is always going to be reflected in the stock price.

You should also consider not investing in a full position right away. We all have an idea in our head about how much we want to invest in a business. You don’t have to do it all at one time. You can edge into positions over a period of months, or even years. With fractional shares and minimal fees, you can buy as little as $10 of a stock today, and $10 next week. Some days you will be buying more, some days you will be buying less, but it will even out over the long term. The money you don’t put directly into a stock can sit in your portfolio as cash, and if there is a strong pull back, you can deploy it effectively.

An important element of investing is staying in a position where you’re comfortable. That doesn’t mean you shouldn’t take risks. Risk is the price you pay for returns. But never invest outside your risk tolerance. You can own small stakes in highly volatile businesses and still sleep at night. 

If it’s the next big thing, you only need a small amount. If it’s not the next big thing, you only want a small amount. (I can’t remember who I stole this gem off).


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