Is it time to buy (beaten down) stocks?
Read this before you buy.
It’s a massacre out there. Despite S&P500 achieving an all time best performance in 2021, popular high growth stocks are struggling to find a bottom; more than one-third of the NASDAQ stocks have slumped 50%.
If we go down the list above, I am sure you can recognise most of these names — their growth stories were spreading like wildfire. The tailwinds that exist in 2020 are gradually being weaned off, coupled with inflation fears, these stocks can be bottomless pits.
Opportunists argue that the selloff is overdone or that this is a healthy correction due to over the top valuations. Whatever it is, you got to ensure that you are not catching a falling knife.
I follow two simple rules when investing in beaten down (high growth) stocks:
Firstly, I try to stay away from stocks with over the top valuations, especially if they are falling. For these fast and high growth stocks, fundamental analysis plays a small part in stock prices moving up or down (i.e. their stock prices usually driven by irrational investors’ sentiment). This means that nothing is going to stop the prices from crashing.
However, as a long term investor, if I truly believe in the company’s growth story, this is the time I would use the DCA method. I will load up my positions accordingly as they fall.
Secondly, if I do invest, I do not expect these stocks to rise up in a short period of time, like how they did in the last two years. Be wise and more selective of your investments. It is not going to be easy money. I’ll monitor them closely — if their growth story changes, I have to cut my losses. Do not hold the bag.
High growth stocks are meant to crash — this is what they do. In the early stages of Apple, Amazon, Facebook and every other successful growth stock, they have all crashed multiple times. For long term investors, bear in mind that this is what you signed up for. Stocks may go lower even when you think it’s impossible.
