It’s not so easy.
Picking growth companies that can benefit from social or technological trends isn’t like going to the grocery store and buying a gallon of milk.
A case in point is Amazon. That company would seem to epitomize a growth stock. They’ve expanded from selling books online to selling pretty much everything; they’ve designed and delivered a powerful e-reader that’s re-making the publishing industry; and their web-site hosts hundreds of other companies that want to pursue e-commerce. Their sales have increased from $7 billion to $75 billion per year over the last 7 years.
And their price has grown, too, increasing an average of 35% per year—much faster than the rest of the market. But there’s the problem. High performance leads to high prices; high prices mean high risk. So when they announced last month that they didn’t meet analysts’ expectations, the stock took a serious tumble, falling over 20% in a few days. Yikes!
It’s easy to be wrong in this business. Folks who avoided Amazon because it was an expensive stock five years ago missed out on the way up—and if they capitulated and bought in recently, they’re riding the roller coaster down. That’s why diversification is so important. There are a lot of e-commerce companies—Amazon, eBay, Netflix, Apple—and each offers a bumpy ride. But together they’re less volatile than any one of them.
We don’t know the future. But through hard work and insight we can see some major trends. The problem is, millions of other investors are trying to do the same thing, and prices get expensive. By diversifying, we may not see our portfolios quadruple in five years, but we can smooth out some bumps along the way.
Douglas R. Tengdin, CFA
Chief Investment Officer