Earlier this week, I posted on Stocktwits that boring businesses could have incredibly successful stock stories. I gave an example of Costco ($COST), which is up 2000% in the past 20 years. One of the comments on my tweet was – “So buy & hold could be a winning strategy?”. My reply at the time – sure, if u pick the right stocks and don’t mind 50% to 80% drawdowns along the way.
Now, it is a good time to elaborate on my answer. Yes, buy and hold could be very lucrative, but only if you hold your winners and have an exit strategy. All stocks are price-cyclical. All trends eventually end. Yes, there are stocks like $COST, which keep bouncing and hitting all-time highs, but the majority of today’s big winners won’t recover from their deep pullbacks.
Buy and hold forever rarely works. The market graveyard is full of trends that last only a few quarters.
$YELP went from 20 to 100 in 2013; then it declined 50%. They just hit new 52wk lows last week.
$GPRO went from 30 to 100 in about 3 months last year. It is down 50% from its highs.
$LNKD reached new all-time highs yesterday. It is up about 200% since its opening print in 2011, but it had a 40% pullback along the way. Not an easy stock to hold.
$P went from 10 to 37 in 2013 – early 2014. Today, it is trading around $15.
The biggest winners tend to be very volatile and they are not for the faint of heart. It is typical for story/momentum stocks to go up several hundred % in a short period of time and then give back >50% of their move.
Not every hot stock today will turn into a long-term winner. Most will turn out to be short-term fads. With some basic risk management skills, you could still make a lot of money in them. We don’t know how long a trend will last, but we know when it starts and when it is over for the time frame we operate in. This is all we need to know.
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