Investors have many different strategies that they can follow to build wealth in the stock market. Income investors tend to prize dividends above all else. Value investors seek to buy stocks that trade below their intrinsic value. Growth investors, on the other hand, aim to buy businesses that hold the greatest upside potential and tend to de-emphasize traditional valuation metrics that generally show a growth stock to be expensive compared with the company’s current earnings.
Growth investing is highly attractive to many investors because buying the right companies early can lead to life-changing returns. However, companies that promise huge upside potential usually trade at lofty valuations. That amps up the risk that they will fail in spectacular fashion if they don’t meet expectations.
So how can investors increase their odds of buying the next Amazon.com (NASDAQ:AMZN) instead of a Fitbit (NASDAQ: FITB)? While there’s no bullet-proof solution to this conundrum, I’ve found that buying companies with the following traits can greatly increase the odds of success:
- A large and expanding market opportunity
- A durable competitive advantage
- Financial resilience
- Repeat purchase business model
- Strong past price appreciation
- Great corporate culture
- Talented leadership with skin in the game
Let’s dig into each of these principles in detail to see why they work.
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Big gains can be hard to find in the financial markets. Nowadays, though, they seem to be everywhere — and that could change how you feel about taking risks.
As of Nov. 16, the S&P 500 is up 359% since the bull market began March 9, 2009, counting dividends, according to S&P Dow Jones Indices. This year alone through Nov. 16, Alphabet (the parent company of Google) has returned 32%, Amazon.com 52%, Apple 50% and Facebook 56%, including dividends. Bitcoin, the digital currency, has gained more than 700% so far this year.
Against that backdrop, even what investors used to regard as a generous annual gain — say, 10% — starts to feel paltry. New research into a mental process called “contrast effects” shows how that works and how it can alter your behavior.
Finance professors Samuel Hartzmark of the University of Chicago Booth School of Business and Kelly Shue of Yale University’s School of Management analyzed nearly 76,000 earnings announcements from 1984 through 2013 in which companies earned either more or less than investors were expecting.
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Bull markets seem like they should be easier than the alternative but even dealing with gains can be challenging as an investor. Research shows that investors trade more often during bull markets because we don’t know what to do with gains, it’s difficult to hold winners, and there are constant temptations with even bigger winners elsewhere. This piece I wrote for Bloomberg looks at how to deal with big gainers in your portfolio.
*******Major stock indexes are hitting new highs almost daily, adding to the huge gains many securities have posted in recent years. For example, Nvidia Corp. has gained almost 1,800 percent since the start of 2013. Over the past five years or so, Netflix is up 1,375 percent; Tesla is up 835 percent; Facebook is up 590 percent, and Amazon has risen 380 percent. Bitcoin is up more than 900 percent in 2017 alone.If you’ve been fortunate enough to be involved in any of these equities or other market stars, you made the right choice. But investors would be wise to work through their options on how to handle these stocks. Large gains in your portfolio are a good problem to have, but the good news also comes with psychological baggage. Continue Reading →
A Chinese philosopher, Lao Tzu (not Confucius) so rightly said, “A journey of a thousand miles begins with a single step”.
Somewhere in 2010, what started as just another idea, soon developed into a web portal. A portal where people could get real-time views of the people who matter and about the scripts they wanted to gather information about.
Just last week, we hit 15000 users! And as we write, the number has already crossed 15200. While we would like to thank each one of you personally, this, honestly, is a herculean task. This post is our effort to reach out to each one of you and say thank you. We are well and truly humbled by your support, without which, we would not have been able to reach this milestone.
From the team at StockArchitect, here’s to more information, ideas and investing in the years to come. Exciting times ahead as we are bringing in new features including a complete revamp of the website. Should you have any suggestions, please send them to us online. Rest assured, we are listening.
Please follow us on other channels to get the information and a dash of investing humour too.
Thank you once again.
The StockArchitect Team
