09 Feb 7 Steps You Can Take to Make the Most Out of the US Growth Stock Crash
Growth investors are taking it on the chin.
According to research by the Bank of America (NYSE: BAC), nearly five out of every 10 stocks on the NASDAQ index have lost at least a half of their value.
When shares that you own decline, it’s like being handed a report card with plenty of red ink.
But falling share prices — and yes, even those which have been cut in half — may not always indicate that you have made the wrong decision.
Understanding and figuring out the situation is important.
With that in mind, here’s seven doable steps you can take to better handle such situations.
1. Don’t panic
The first step is to leave your emotions out of investing.
But it’s easier said than done.
So, let’s talk about actions that are real and doable.
There are two things which have always kept me calm despite experiencing major stock declines:
- For every stock position, I size it to a level I am comfortable with.
- I hold a cash position that I can tap on when a huge decline happens.
These two actions, which form part of my investing process, provide built-in support for situations like these.
2. Focus on the business, not the stock price
When shares that you own start to fall, you may find it hard to take your eyes off the share price.
That’s because your money is tied to the stock.
Here’s the hard truth: focusing on the stock price will not make your pain go away.
The best way to figure out what is happening is to look at how the business is doing.
As Warren Buffett once said:
“Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”
Likewise, our interest is better served when we watch the business game, and not the scorecard (share price).
We can take comfort from the fact that whatever happens on the field will eventually turn up on the scoreboard.
Similarly, a business that consistently performs well will eventually be rewarded with a higher stock price.
3. The stock market is usually right …
Here’s an unpopular opinion: the stock market is usually right.
In the short term, that is.
When a major, one-day decline happens, there is usually a reason for the market’s displeasure.
Our job, as an investor, is to find out the source of the bad news, and what the negative development means to the business.
This is why Step 1 is mandatory.
To be able to make a good judgement, we cannot let our emotions rule.
4. Permanent or fixable
Identifying the pain point is the first step.
The next step is to figure out whether the issue is permanent or fixable.
For the most part, this area is a judgement call. A few pointers:
- Has the management identified and acknowledged the source of the problem or threat?
- Does the team have a solution they are working on to resolve the issue or push back against a threat?
- What does the track record of the management team look like? Can you trust them to resolve the matter?
To be sure …
Every business, especially the good ones, will attract competition.
Every business, even the best businesses, will stumble along the way. No company is perfect.
That should be our expectation.
The trick is to find businesses that can defend themselves and turn the situation around when there is an inevitable blip in the business.
5. Don’t forget the positives
As investors dig into the negatives, what I have found is that they often miss out on the positives.
In other words, while you should not fall in love with your stocks, you also shouldn’t fall in hate with them.
Some questions you can ask:
- Always remember why you bought the shares in the first place. And check whether those reasons still exist.
- Are there parts of the business which are still performing well?
- Is the company still generating free cash flow? What does its balance sheet look like?
Don’t be too quick to rule out a company that has turned in a bad report card.
Allow sufficient time for the management team to act, especially if they have shown in the past that they were capable of doing so.
6. Knowns and unknowns
As we piece together the full picture, we should acknowledge the areas that we know, and those we don’t know.
By understanding these two areas, you stand a better chance of making a good judgement call as to whether there is an issue with the business, and what it will take for the management to turn the situation around.
You will also gain an understanding of your blindspots.
Understand that you are not going to be perfect in every decision you make.
But you should at least understand the risks, and what you will not be able to see coming.
7. Take action. Or not.
All of the above is a gradual buildup to help us come to the best decision we can make, given what we know.
To come to a decision, I would like to provide three guidelines you can use:
- Buy because you want to own more of the stock, not because the stock price dropped. Maintaining the right allocation keeps your emotions in check which will be important for your future decision making.
- Always remember that you don’t have to pour in all of our money into one stock at one moment of time. As investors, you can always wait for the next quarter or more before deciding. Likewise, we can add a little today, and wait for more information before adding more in future.
- Don’t forget that there could be other opportunities beyond what you are looking at right now. You don’t have to do something every time a big decline happens.
The seven steps above provide a framework to digest business situations that are often complicated by emotions during market declines.
With time and practice, you’ll be able to exercise better judgement and the results will show in your investment performance.
You don’t need any hidden formulas or special criteria to uncover 10x stocks. You don’t even have to buy stocks during a market downturn. But you must possess 3 traits to maximise your chances. What traits are they? Find out in the FREE report “Your Personal Blueprint to Finding the Next 10x Stock.” Click here to download the report for free!
Disclosure: Chin Hui Leong does not own any shares mentioned.