Investment Strategies for Growth Stocks

I talked to several friends over the past weeks. They are at the beginning of their investing journeys and I recognize a pattern of bad investing behaviors. They could explain why people can’t get ahead.

Why Most People Struggle in Investing

Most people are trapped in a mindset that will prevent them from making a fortune.

Firstly, they don’t take investing seriously at all. Not a bit. They think it’s gambling and if you hit it big, they think you just got lucky. People seem to always think of themselves smarter than they actually are.

Secondly, they are permanently thinking too small. They are attached to their savings so badly that every tiny blip of red is seen as threat against their financial well-being. They see minus $100 and completely freak out.

A friend chatted me up just yesterday about wanting to close a position that had been in the red for a little too long. He wished to get out as soon as the price hits break-even.

I don’t want to spoil friendships and I reserved my comments, but inside my head I was thinking, “Really? You went through all the stress just to chicken out at break-even? Why didn’t you do your due diligence in the first place so you have some conviction to hold onto it?” He looks at stock prices in a completely wrong way.

I had another call with a friend who keeps asking me what to buy. I told her this company is great, and that company is great. Do you know what she replied? “They are too expensive now. My sister recommended a similar stock which is only $20.” Seriously? Your sole assessment is the stock price? So you rather listen to your sister than to someone who has already made it.

Why to Focus on the Market Cap

Forget about the money, please. Yes, you’ve read it right. It’s paradox when all we care about is the money but here’s the mental strategy:

Look at what’s behind the stock price. Think about it. You’re buying a piece of a company here. What matters is the market cap (short for market capitalization). It’s the total dollar market value of a company’s outstanding shares of stock.

If it was me, I would completely abandon stock prices and feature companies by their market caps only. Stock prices are a fetish and a dangerous allure that invites gambling. That’s why all those penny stock day-trading ‘gurus’ get so much attention. People want fast, people want thrills. I can already tell you that day-trading won’t get you anywhere, though. You have it much easier by following big, sustainable trends.

Your money has to be sent to war! It’s a tool you deploy somewhere so that it comes back with even more. Obviously you aggressively plow it into assets that will increase rapidly in value. Things that rise rapidly in value are also pretty volatile. You’ve got to live with that. Volatility is the price you pay for your returns.

You have to trust the process that stock prices gyrate somewhere around an underlying fair valuation and that the power of compounding will do its magic over time. It’s a similar concept to the parabolic curves I wrote about previously.

The debate about whether to close at break-even will become entirely obsolete. As the power of compounding runs its course, the price drifts further and further away from your entry price. It will stay volatile but that’s simply the nature of the stock market.

How to Buy Compounders Early

I did the due diligence and bought into a handful of companies with strong conviction. I want to be absolutely certain that I buy tomorrow’s megabrands early. Those are the companies that will increase rapidly in value. They grow 20x in 5 to 10 years and are what I dub generational compounders.

These are the dimensions you have to think in. You only need a handful of those in your portfolio, and you should close holdings for which you don’t have conviction.

If the company has the right products, raving customers, the right management to execute, great team culture and somewhat predictable revenue growth, things will eventually work out spectacularly. You will detect them early when customers rave about a product. Once you invest, you have to hold onto them through thick and thin. With Tesla, I was in the red for 5 years — five years! I held on because I witnessed how the company progressed and trusted that the market will eventually catch on. It’s up 20x now.

You obviously don’t buy Coca-Cola or Chevron which are already established megabrands. You won’t make any meaningful money with those. You need to have foresight and that’s where your conviction comes into play. You take the current market cap and multiply it by 20x. Then you judge with your best common sense thinking whether that price is worth paying for 5 years down the road.

I didn’t do any complex calculations or compared various greek letters. Throw it all out of the window. That kind of analysis doesn’t work (and I say that as a former Securities Analyst). We want to ride a company’s growth story all the way up.

You want to become rich alongside the company founders so you need to find out what makes it get onto an exponential growth trajectory.

Use Trend Following to Hedge Market Crashes

Once you have a solid portfolio set up, we can talk hedging strategies to protect against downturns. Here’s where trend following systems will help you outperform in bull and bear markets.

If you want to start with a simple trend following strategy, read up on the moving average bounce trading strategy.