You might think the greatest gift the COVID-19 pandemic has offered growth stock investors are superb returns. I wouldn't blame you: Shares of popular growth stocks like Tesla and Fastly have more than tripled this year alone. The pandemic has caused five years of digital evolution to take place in just five months.
But over the long run, that's not it. The more important gift is this: the first real opportunity in more than a decade for you to test whether growth stock investing is really for you.
Read below to see what I mean, and why it's so important for your financial -- and emotional -- health.
Image source: Getty Images.
An investor's trip in time
Join me for a moment. We're stepping in a time machine. Don't worry, we aren't going back far -- roughly eight months, to be exact. Our destination: Jan. 1, 2020.
Remember how innocent we all were back then? "Social" and "distancing" seemed like an odd pairing, and college hoops fans were looking forward to March Madness.
Many of us have resolutions. And if you're an investor in growth stocks -- as I am -- you've likely gotten very familiar with a Warren Buffett mantra: Be greedy when others are fearful, and fearful when others are greedy.
Simple enough, right? A great resolution for the year ahead. If other people are scared, I won't be. If other people are greedy, I'll be conservative. "If only I could go back to March 9, 2009," we tell ourselves, "I'd make a killing!"
We need take the next step: consider what it is that's making everyone else greedy or fearful. That's kind of important. It covers things like entire financial industries falling apart (2009) or a global pandemic spreading like wildfire and overwhelming medical facilities (2020). This isn't child's play.
Sure, our Jan. 1 selves would say we could do this. But could we back that up with action?
The first real test for growth stock investors in more than a decade
Between 2009 and 2020, there have been exactly zero opportunities for growth stock investors to see if our theory on greed and fear can match reality. Sure, we've had the Euro Debt Crisis, Brexit, and the U.S. debt downgrade. But those seem like child's play compared to COVID-19 -- the first force to push us into a bear market in over a decade.
So now that we've got some perspective, it's time to analyze our actions: Were you able to be greedy when others were fearful? If not, were you at least able to not panic sell?
Truth be told, this applies to all stripes of investors, not just growth investors. But because growth stocks have high expectations built into them, they tend to be more volatile -- making such a test all the more important.
Evaluating my own actions
To offer a template for self-evaluation, I'll talk about what I did in March and April.
- I sold out of four stocks entirely. Each were very small positions (less than 2% of my portfolio, each), and my conviction wasn't high on any of them.
- I added to four different stocks. My conviction in each is high.
All told, I invested much more into the market than I took out of it. That's a pretty good sign, right?
At the same time, it makes me wonder: What's the point of tiny starter positions where my conviction isn't high if I'm just going to sell when fear arises?
Things get murky
But viewed through a different lens, my own performance gets much harder to evaluate. Case in point: On March 12, I published an article on why -- after refusing to put any new money into the market -- I was changing my stance. The country was finally taking the COVID-19 threat seriously.
Since then, the Nasdaq is up 45%, and my three largest holdings -- Shopify, Amazon, and Mercadolibre -- have, on average, doubled!
Not bad, right?
Well, it isn't quite that simple. On March 24, the Dow Jones Industrial Average jumped a whopping 11.4%. That's a year's worth of growth in a single day!
You'd think that would make perfect sense to me -- the writer who talked about how investing in the stock market once again made sense. You'd be wrong. Here's the tweet I put out to the world.
IMHO— Brian Stoffel (@TMFStoffel) March 24, 2020
This is the sucker-ist of rallies.
A real one will come
This isn't it
I could not have been more wrong. The market has simply continued its march upwards. The sucker wasn't the rally -- it was me.
In the end, however, I didn't suffer from it. Why? By taking the long view, I hadn't sold any major positions, and had continued to add to others both before and after the recovery started. Because I wasn't trying to time the market, it was my ego (for making such a public proclamation) that suffered, but not my portfolio.
More than anything, I was trying to manage my own expectations -- and there's nothing wrong with that.
The most important takeaway: Know thyself!
Thus far, it might seem like I believe the only "good" investor is the one who can stomach huge swings. Let me unequivocally say: That's not true. The only "good" investor is the one who is honest with themselves and makes decisions based on that self-knowledge.
Maximizing returns at all costs is a terrible goal. Living our life the way we want is a much better one. When investing serves us -- and not the other way around -- we can take an approach that matches our temperament.
If you found the past six months to be far more volatile than you can handle, don't be ashamed. In fact, rejoice! You've now found that growth stock investing isn't for you. That's good news, because there are so many other options out there to choose from. It's a gift your future self will thank you for -- profusely!
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Brian Stoffel owns shares of Amazon, MercadoLibre, and Shopify. The Motley Fool owns shares of and recommends Amazon, Fastly, MercadoLibre, Shopify, and Tesla and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.