The market has seen some extreme volatility since Nov 2021. First we saw the US high growth stocks getting punished with the fear of rate hikes and many have made 50% decline or more. Then we saw Chinese stocks plunged to new lows even after a year of lacklustre performance.
It is painful for investors seeing their investment values evaporate quickly. It is during such times that investors realised they have invested at much higher prices than they should – buying stocks when the future looked rosy, results were good and news were favourable.
And now the drop looks relentless and wondering how low could it get. Even if they knew they have made a mistake, a stock that has dropped 50% is too cheap to sell and too painful to realise the loss. To cope with this, investors tell themselves that they are long-term investors.
They might be thinking that holding long-term means the price will eventually recover to the level they bought. Not really.
There is a difference between an investor who think long-term first versus an investor who is forced to hold long-term.
An investor who thinks long-term would be buying stocks that they think are able to compound their value over a long period of time. These are growth stocks that will keep growing sustainably for the next few decades, not just grow for a few years and plateau. Compounding effect needs time.
It applies to an investor who seeks dividends and look to receive dividends sustainably for many years to come. He has to think long-term.
Few stocks would make the cut if investors truly think long-term.
Investors who don’t think long-term first would find themselves jumping into hot stocks from time to time. They are the most exciting stocks that others are talking about. Given the high demand for these stocks, it should not be surprising that they are priced at high premiums.
Initially they just wanted to get in to make a quick profit because others have proven to made those kind of money they wished for over a short span of time. They believe they could be the next beneficiaries and they need to get in now or never.
Or it could be investors who missed a fantastic bull run and now the price correction presented a great entry point thinking ‘I could buy at the price similar to last year!’ But this time, they might be just buying the dip where there are lower dips in the future, resulting in a big loss instead.
When these losses become too big, investors resign to long-term investors thinking “as long as I hold long enough, the price will go back up”. Deep down they just want to sell theses stocks when they return to the prices they bought.
Unfortunately not all stocks can recover to their heights because most stocks do not perform well given enough time and hence should not be held long term.
Investors lose their objectivity and hope is what they are left with.
Instead, investors should acknowledge their mistakes – which stocks cannot stand the test of time and were bought rashly? At the same time identify other better stocks that are able to compound overtime. Sell the mistakes and buy the better ones for the portfolio. Make the switch no matter how big the losses are. Correct the mistakes and move on.
