Why You Should Never Confuse Brains With a Bull Market
It was easy to make money in 2020.
Each day, I’d walk my dog Riley.
And my neighbors would stop me and ask my opinion about some growth stock.
They didn’t really care what I had to say. Instead, they wanted me to know that they were stock market mavens.
I was cool with that. And in fact, they were making money.
Their formula was simple: Find a company that would benefit from the pandemic, and buy the stock.
It didn’t matter the price they paid for it. People I’d known for a long while were making money hand over fist — without knowing what the companies did.
Because a rising tide lifts all boats…
Sent to Spam
With the stock market moving higher, everyone thought they were the next Warren Buffett.
Investors quickly doubled their money — and that was on the low end of returns.
DocuSign soared 200%. DraftKings and Peloton were up around 400%.
Early on in my career, I learned to never confuse brains with a bull market.
But many investors didn’t get that memo.
Eventually, the bull market in growth stocks hit a wall. Investors were no longer bidding up companies that had little to no earnings.
And a few months into 2021, growth stocks started to wilt.
Reality set in, and stocks started to sell off.
Through the first two months of 2022, the sell-off picked up steam. The high-growth 2020 boom went bust.
DocuSign and DraftKings gave back more than 50%, and Peloton plunged 95%.
But it wasn’t just mom-and-pop retail investors who thought they could walk on water…
Wind Knocked Out
Some well-known hedge funds got kicked in the teeth as well.
Several of them held positions in Peloton, which was down 95% from its peak.
I’m sharing this with you because there’s a lesson here.
Paying high prices today for growth tomorrow is a very risky way to make money.
If you buy shares of stocks that have little to no profit, eventually, the fundamentals of the business will be reflected in the stock price.
And if that future growth doesn’t happen, look out below.
Because stocks that trade more on story than profits don’t have a floor. They risk going to zero once Wall Street loses interest.
Those aren’t the kinds of stocks I’d ever recommend buying.
Instead, Alpha Investors buy stocks by seeing them as pieces of a business…
Cherry on Top
We buy businesses in industries with strong tailwinds that are run by outstanding CEOs. And we buy when they trade for attractive prices.
We don’t price in a cherry future. But if it happens, it’s a cherry on the cake.
Because at the end of the day, price is what you pay, value is what you get. Nothing more complicated than that.
And in Alpha Investor, the companies in our portfolio have profits and a floor built into their stock prices.
This is especially true with my latest recommendation.
This company is in an industry that’s being pushed higher by tsunami tailwinds. It’s in the sweet spot.
It’s a leader in its field and counts major companies in the industry as customers. Alpha Investors can read all the details on it here if you haven’t already.
And if you aren’t a part of our family yet, you can find out how to join us here.
Founder, Alpha Investor