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 $40 billion per year over the last 5 years.
And their price has grown, too, increasing an average of 35% per year when the general market has been flat. But there’s the problem. High prices mean high risk—so when they announced yesterday that they didn’t meet analysts’ expectations last quarter, the stock took a serious tumble, falling over 20% in after-hours trading. Yikes!
It’s easy to be wrong in this business. Folks who thought Amazon was an expensive stock five years ago missed out on the way up—and if you capitulated and bought in recently, you may be riding the roller coaster down right now. 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 might be.
We don’t know the future. But through hard work and insight we can see some of the 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 portfolio quadruple in five years, but we can smooth out some the bumps along the way.
Douglas R. Tengdin, CFA
Chief Investment Officer
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