Buying aggressive stocks is often considered the best way to make money in the stock market, especially by the general public. Often, these are the types of stocks that the average investor DOES make money buying in the short term, and will tell others about.
In this post I’m going to talk about about a particular brand of aggressive investments: growth stocks.
And while there’s truth to the statements above, it doesn’t mean that these are the types of stocks that the average investor should be looking into.
You can take many aggressive growth stocks from the past as proof.
The 1990s had lots of examples of this.
There was a headline by Investor’s Business Daily saying “Overvalued? Not if the Stock Keeps Rising.” It was talking about a company called Just for Feet Inc, that once traded at a trailing P/E of 396. A growth stock that IBD was arguing wasn’t overvalued.
The justification was that although the stock “might have looked pricey by some standards”, they countered that “investors who limit themselves to common measures of value, such as trailing P/E’s, would have missed Just for Feet– and just about every other leading growth stock”.
Well IBD, that’s the whole point.
The stock went from $4 at a P/E of 396 and grew earnings enough to trade at a 58 P/E at $28, only to crash down to less than $1 in 3 years.
To make money on a trade like that, you’d have to time your entry and exit points. Which means you’re not investing like an owner…
Take another example, which I talked about in the podcast previously.
I have an S&P 500 booklet from the 1970s with two stocks lists.
One list: Bank America Corp, General Electric, General Motors, Gillette, Goodyear, Johnson & Johnson.
The other list: Capital Cities Broadcasting, Sanko Instruments, Dublin Core, Fleetwood Enterprises, General Portland Cement, and Gimble Brothers.
I don’t know about you, but one of those lists has lots of stocks that are big companies today that I recognize– while the other list has stocks I’ve never heard of.
That first list was labeled in the booklet as “Conservative Stocks”.
The other on that list was something like “Aggressive Growth Stocks”.
One list would’ve have made for a much better diversified portfolio than the other.
I’m sure the growth stocks did really well in short periods of time. But when it comes to being an investor for the long term, you’re looking to buy into businesses that will grow in value over the long term. And if you can buy-in at great prices, then your returns will be that much better.
It’s not about buying “every other leading growth stock”.
It is exactly about using “common measures of value”, because those have proven time and time again to crash much less drastically than growth stocks. And, it seems, to help identify stocks more geared to last long term.
An Example of Why Aggressive Stocks Fail
Putting too much on your financial plate is a common trap many of us can fall into. How many of you spend your bonus check before you even get it? Or if a raise is incoming, you’ve already planned out your next big purchases before it’s even in your hands…
I’m guilty of it too.
I have a “to do” list of things to buy. My Amazon “save later” in my cart always has something in it.
But though we have these tendencies, we don’t have to be slave to them. It’s one thing to desire, it’s another thing to act on that desire.
For example, having an emergency fund vs. not allows you to pay for an unexpected expense without going into debt. This frees up what would’ve been a monthly payment, which lets you build up an emergency fund again much quicker. Being debt free is a huge asset.
But always running with debt and having no savings makes it harder and harder, until it has the potential to spiral out of control.
Does it surprise you that companies on Wall Street do this too?
Some executives are very short term focused. They are aggressive with their decision making, and it results in extreme results. This attracts aggressive (and naive) investors.
Knowing this, management may make financial decisions to pump that stock price up in the short term, so they can collect higher stock options now, at the sacrifice of the long term. When the long term hits, those executives are gone anyways.
A common way to do this is to load up on debt to increase earnings.
Of course, this can spiral out of control just like it can with your personal finances. But again, some executives just don’t care… and the investors follow them into the slaughterhouse.
The Bottom Line
Sure investors may make money by getting out in time–
But by definition the majority can’t.
While the majority of investors CAN make money with a company together as it grows long term, the majority of investors CAN’T make money with a company that sacrifices the long term. The stock price eventually crashes, which by definition means the majority loses.
I’m all for believing I can do better than the majority, but I’m not betting my life savings on it. I’d rather buy stocks that are sustainably winning in the long term.
To find stocks like that, I’ve taught myself how to look at a company’s financials with a long term perspective, and have taught many readers to do the same.
When you know how to interpret the entire 10-k, you can spot companies that are propping up financials on one side at the expense of another.
It simply shows up in the numbers.
If you’re ready to take the next step, to save your portfolio from the dangers of buying aggressive stocks at expensive prices, then go ahead and check out the blog series I did on how to read a 10-k annual report.
Knowing how to read a company’s financials through the 10-k is a powerful tool that will make you way more money than a list of aggressive stocks.