There are more risks, but there can be better rewards.
Growth stocks have become a bit more volatile recently. We believe many of them, particularly our holdings are reasonably valued.
Growth stocks’ returns come from earnings growth and valuation changes. Sometimes, their valuations get ahead of their growth and stocks need to correct or trade sideways before they resume their upward trends. It seems that recent market action may be the beginning of such a period. Many market participants believe inflation is a concern, which could cause interest rates to rise and the rates at which growth companies’ future prospects are discounted to similarly increase, disproportionately affecting their valuations relative to the rest of the market. However, we believe for many reasons that these inflation concerns are likely temporary and so also will be the pressure on growth stocks.
As the seasonally more volatile period of the year from May through October gets underway, we will be keeping our shopping list ready, re-evaluating existing holdings, and looking for sale prices on our favorite merchandise.
We are mainly looking for companies that trade at reasonable valuations relative to their growth rate. We’re also looking for predictability of growth and to determine roughly how long into the future a company’s growth could be predictable since it’s not so much how a company performs over the next quarter or year that determines what it’s worth—it’s how it performs over the next 3 to 5 years and decade and beyond.
Good investors stick with a consistent process and philosophy that they know works over time even when it temporarily does not. If one process or approach always worked, everyone would always follow it to the point where it would no longer work because too many people were doing the same at once. In order for any process or philosophy to be successful, there must inherently be times when it doesn’t work. It is during these times that the followers of that philosophy prove their worth in how they keep their composure and rationally react or decide not to react.
“ If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too:
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated don't give way to hating,
And yet don't look too good, nor talk too wise;
If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim,
If you can meet with Triumph and Disaster And treat those two impostors just the same:
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools…
If you can talk with crowds and keep your virtue,
Or walk with Kings—nor lose the common touch,
If neither foes nor loving friends can hurt you,
If all men count with you, but none too much:
If you can fill the unforgiving minute With sixty seconds' worth of distance run,
Yours is the Earth and everything that’s in it,
And—which is more—you’ll be a Man, my son!”