Coppleson: Tech, growth stocks must “tread water” a bit longer
Retail investors thought they’d found a one-way ticket to the moon. But then reality hit. Those who thought the market could only go up – which it has for many of them, having only first entered the market in April 2020 or May 2020 – have finally suffered an initial and very bloody setback.
A few months ago, this cohort of investors was stuffing their pockets with “upside momentum” stocks, thinking valuations for everything they bought could only climb. That may work for a while but eventually the market wants its “pound of flesh” – just as it has always been, and always will be, it’s only ever a matter of when.
The tech/growth names have had their much needed “wash out”. You can sense that many retail punters are feeling stock market pain for the first time – something most of us have experienced various times over the years. For many, this experience will be completely bewildering.
The problem for many was their laser-like focus on the high-octane parts of the market and shunning of the well-known stable (or some you could even call “boring”) companies that actually have revenue, profit and dividends.
If you can’t handle 30% to 40% volatility - then these growth stocks, many of which are tech firms, are not for you. It’s all great and fine when the momentum is upward but horrifying when – as we’ve seen in the last six weeks – it goes straight down like an elevator dropping 25 floors very quickly.
They can be highly rewarding sectors if you pick the right stocks, but even if you do, you must be able to sustain incredible volatility along the way. And by that, I mean declines of -30% or even -50%.
Investing takes “patience”
In my 35 years in the markets, one thing I have learnt is that investing is not easy. It’s hard, takes patience, and the market always has a way of humbling you. The market has an amazing ability to crush the hubris of those who claim an ability to “time the market” or who maintain that buy-and-hold is for losers – they often then suffer a period of getting it unbearably wrong soon after professing such things.
- A hero one day can be a zero not long after. You must always respect the market
- And more importantly, listen to what “the market is telling you”
Too many professional investors said over the last 12 months - as the market rallied – that “the market is wrong” and thought they were far cleverer backing a bearish scenario. Instead of being right, we now know they weren’t, getting some 95% of their crash calls horribly wrong.
But this new army of retail investors bought into the hype and ignored these same experts who were getting it wrong. In a way, they believed they were now better than the professionals – and they were, for a while anyway. They were “kings for a day” (or about 11 months).
With all investing, if you think it can only go one way then it suddenly turns – and you believe you’ll be able to get out before it goes south – you’re in a delusional fantasy land.
You only learn the hard way
Stocks and markets go both up and down. It takes years of experience – including many good but more cruel experiences (and nerves of steel) – to learn to ride out the volatility.
In 2007, the retail army was in full throttle – making money was “easy”. But after the devastation of the GFC, many publicly declared they would never invest in the stock market again, such was the pain they suffered.
Right now, all that has been forgotten. This new retail army is like a group of cadets not long out of basic training. They’ve had a remarkable blitzkrieg (lightning war) over the last 11 months – with major victories in every battle they fought. But in the last month, it has faced its bloodiest battle – from which many are battered, bruised and a little unsure.
For some, all the easy money they made has been wiped out in a matter of a few weeks. Some will retreat and lick their wounds, while others will ride out the storm and come back stronger.
This tech / growth stock market rout is very important, as it takes out much of the “frothiness” that was prevalent and tames the euphoria that was pushing many stocks up too quickly. It has also taught these new recruits their first real investing lesson.
When it gets too easy (and everyone is making money – especially those “new” to the stock market) then it’s getting close to a much-needed shake-up.
We always know if, but we never know when
We never know when a ‘correction’ is due, but they are a certainty. One hint (sometimes) that it’s coming can be when stocks double very quickly - like ZIP Co (ASX: Z1P), which went from $5 to $14.70 in just a few months. This was just too fast, and as I said when it hit $14, it was close to a big pullback. Back in December when the stock was trading at $5.20 and it looked terrible, I pushed as a BUY for the first time ever.From here we will see many who have had their confidence rocked and will be looking to now sell on any bounce in their tech/growth stocks.
Some who bought higher will wait until they get back to their entry level and then sell – and they’ll be happy to get their money back before moving on. But it means that with every rally from now on, there will be walls of selling that will slow the rebounds.
Don't expect a V-shaped recovery from here
After this route, most stocks will not bounce back in a “V” but will hopefully rise very slowly, so slowly that they may look boring.
I have owned Afterpay (ASX: APT) for many years and have seen many selloffs. But as I have a long-term vision for the company, I have been able to absorb the body blows that come with these stocks and have withstood many -30% selloffs along the way.
If you hold long-term then you learn to ‘ride out’ short term movements
Many of these long-duration growth stocks will go up sharply and then inevitably suffer nasty corrections on the way. If you’re a buy-and-hold investor, the rallies are satisfying to see, but the selloffs are also tolerated as just being part of the voyage that you are on.
In the world of investing, nothing goes up in a straight line – something many first-time retail investors across the globe are now learning for the first time.
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This article is an excerpt from The Coppo Report contributed to Livewire by Richard Coppleson, Director - Institutional Sales and Trading, Bell Potter. You can find out more by clicking here.
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Richard authors “The Coppo Report”, a highly regarded market newsletter. He has over 30 years’ experience in financial markets, beginning his career at Ord Minnett where he worked for 15 years, before moving to Goldman Sachs.