I hope you are safe and sound wherever you are on this planet. The market has been really shaky in the past few weeks, with growth stocks taking a beating, again, while value stocks kept, more or less, their ascension to the top. If you wonder what growth or value stocks are, I suggest you read this article.
My portfolio got hit pretty bad by this "growth stocks correction", as I am long on some of the most affected companies, such as Fastly (FSLY), The Trade Desk (TTD) and Fiverr (FVRR). Each saw their market cap trimmed by 64%, 47% and 47% compared to their high of the last 6 months. Yes, I know, it doesn't sound good if you look it that way, which is what we usually do, but it's a common mistake. Now let's take a step back and look at the big picture. These stocks are back to where there were in November, 6 months ago. Where will they be 6 months from now? I have no clue. 5 years from now, very likely a lot higher than today. This is why you better have a clear plan when the market go through a sell-off. My plan is a long-term one.
Why do I prefer the long-term game?
First reason: I have a clear objective, which is to retire by the age of 50, 15 years from now.
Second reason: I don't want to spend my time watching stocks going up or down, worrying about inflation one day, bond yields the day after, or any other of the hundreds of other macro metrics we have no control over. It's no fun. There are just too many variables that go into a stock price, but it gets clearer when you take the long view and ultimately comes down to buying good companies.
Third reason: my portfolio somehow auto-optimizes itself over longer periods. For example, I am a lot less exposed to growth stocks than value stocks "thanks" to last week's correction.
Fourth reason: forcing you to look at more extended periods instead of day to day, or month to month, movements make you avoid letting your emotions do the talk. When the market crashed back in March 2020, investors who did not sell during that crash are mostly happy now, but it was a hard thing to do if you look at your short-term metrics.
Fifth reason: Pricing a stock is probably the most challenging part of investing in the stock market. However, it is more forgiving when you look at 5 years periods. It doesn't matter what year you bought Amazon in the 2000's you would just be glad you did.
Can you lose all your money during a market crash?
Yes, but only if you get emotional. If you bought USD 1.000 of Amazon´s shares in 1999 you would be down 90% 2 years later. Yes, 90%. If you could endure losing 90% of your investment and keep invested up to now, you would now enjoy a 3.300% yield. Same story with Netflix, its shareholders had to see it shrink by 75% in 2011, and by about 40% in 2018. The ones that endured and did not sell are now about 1200% up from their initial investment right before its 2011 sell-off. When the company you invested in see that kind of sell-off, you need to ask yourself if the reason you bought in the first place remains true. In the case of Fastly, The Trade Desk and Fiverr, the reasons are intact, so I am not selling.
How would I secure my investments from a stock market crash?
I hope I knew what the market would do, but I don't. This is why I will focus on what I can control: consistency and patience.
Consistency: I trust my system to invest in great companies, which I borrowed from great(er) investors and automated to about 70% to make it more scalable and always fresh. If you want to know more about that, I explain it in detail here. I made an update to my system back in December 2020 to raise the weight I give to value-oriented metrics (such as historical profit and return on invested capital) and better reflect the market shift toward value stocks. Without this shift, my portfolio would be bleeding even more.
"The stock market is a device for transferring money from the impatient to the patient." - Warren Buffett
Patience: Once you identify a set of great companies, patience lets you build a cash position over time instead of investing right away. Let the opportunities come to you, like Amazon in 2001, Netflix in 2011, The Trade Desk in 2021 etc. Market sell-offs are great buying opportunities for the long-term patient investor, but when half of your watchlist is down more than 25%, it's hard to choose where to invest, which is why I use another signal to show me where to look: insiders buying.
Insiders are still my most significant source of inspiration.
One of Fastly´s owners bought more stocks after the February sell-off, then again this month. It means the person, part of the company board, has a lot of confidence in its future. I do too (13 points on my scorecard), as the "edge" part of the cloud is a nascent but key aspect of the economy "cloudification". Double-check; I added to my Fastly position.
The latest Cloud computing darling, Snowflake, a company that makes it easier to use multiple cloud providers instead of getting trapped with one, is now cheaper than it´s IPO day price after shrinking by about half from its February high. I calculate it is a great company (15.5 points on my scorecard), and so does an insider with a lot of skin in the game (owns more than 10%) who bought more stocks a few weeks ago. Double-check; I opened a position.
Masimo Corporation is down 25% from its February high. It is a play for the future of health care. A future where it is cheaper to monitor patients from their home than hospitalizing, or risking hospitalizing, if you do not monitor them closely. It fits my definition of great companies too (scores 20.5 on my scorecard, making it one of my top 3 together with Nvidia and Microsoft). Guess what? Yes, an insider, one of its VP, bought stocks 3 times in May. Double-check; I added to my position.
The Rookie investor conducts this kind of scoring every day for a shortlist of 200 promising stocks. If you want to find the score for other stocks you can now search it here. If you want to receive notification when there is insider action on one of our favorite stock, join our Slack.
The bottom line: how you make money in a stock market sell-off
Many insiders bought stocks from great companies this month, such as Fastly, Snowflake, Masimo Corporation, Oracle, Activision and Intel, as they seem to see the latest sell-off as an excellent buying window. If you prepare and have a long-term plan have, you probably should too. If you did not prepare, now is the time to do it for the next market decline, which could happen in what remains of 2021. How do you prepare? Have a plan (check mine), define your system (check mine), and build a cash position of at least 10% of your total portfolio. The first sell-offs are no fun, but you will eventually get used to it, happy investing evertone.
The author of this post owns shares of FSLY, SNOW, MASI. The Rookie Investor recommends FSLY, MASI, SNOW. The Rookie Investor has a disclosure policy. This article by The Rookie Investor is not a financial advice as it does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets. Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
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