Yesterday was a big day for all-time highs in the market. Here’s why potential investors shouldn’t be put off by stocks reaching new heights.
It was a day for all-time highs yesterday, as the two biggest companies by market cap on the U.S. stock market, Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), led the way with new record peaks. Nasdaq (NASDAQ:QQQ) joined them in clearing a new summit, unsurprising considering the weight the two companies have on the index. However, these were not the only stocks to reach new milestones. The stay-at-home darlings of Zoom (NASDAQ:ZM), Netflix (NASDAQ:NFLX), and Peloton (NASDAQ:PTON) also hit their all-time-highs yesterday, as well as payments processor Square (NYSE:SQ), and the unexpected stock of the pandemic, e-commerce furniture provider Wayfair (NYSE:W), which has seen a whopping 650% increase since its March lows.
This swath of new record highs got me thinking about how investors approach stocks, in particular, our attitude toward growth stocks. We are peppered with so many catchphrases, cliches, and flat-out warnings that we never stop to think if some of this axiomatic advice may actually be conflicting with each other. In particular, two commandments that seem as old as time:
Buy low, sell high.
And
Never try to time the market.
Buy high, sell never
At MyWallSt, our ethos is to buy great businesses and hold for the long-term. Which brings us back to the point of all-time highs. While they are amazing for investors of a company and landmarks for the business, many potential suitors will be put off when they see a stock at its peak. Buy low, not high right?
By trying to buy low and sell high, essentially all you are doing is attempting to time the market. It’s an amazing feeling buying a great business at a discount and watching it run back up to its former highs, but there will be some businesses that may never dip to an ‘acceptable’ price. In the past decade, Amazon’s (NASDAQ:AMZN) run-up has been accompanied every step of the way with grumblings of how overpriced it was and that investors will be paying over the odds for a business that isn’t even profitable.
The truth is some businesses will always be overpriced according to traditional metrics and investors can become paralyzed with this notion of refusing to pay a premium. I wrote recently about the growing chasm between growth and value investing and the most basic reason why certain stocks become so expensive: because people want to buy them. True growth investors should be able to look past the current valuation and instead take into account the size of the opportunity, whether the business is future relevant, where they see the business in 10 years, the solution it brings to future problems, its management team, its scalability, its total addressable market, and I could go on and on. If all these boxes are ticked, of course the stock is going to be traded at a premium. Who wouldn’t want to own such a great business?
I’m going to sign off with my biggest investing mistake (so far I must add, I’ve got plenty of road to run yet!). When I started working in MyWallSt, I was given $100 by the company to buy my first share. I researched quite a few companies on the MyWallSt shortlist but couldn’t ignore Shopify (NYSE:SHOP), which was our best performing stock at the time. I knew customers who raved about it, employees who waxed lyrical, as well as half the office who were very satisfied investors to boot. However, I didn’t invest because it had just hit its all-time high and was very overpriced. In my head, I thought I could wait on the sidelines for it to come back down to a more ‘reasonable’ valuation. The stock has more than tripled since. That pricey valuation at the time looks pretty cheap right now!
Great businesses of Shopify’s caliber are always going to come at a premium, being able to see past a high valuation to the growth story behind it is what makes a great growth investor.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.