It definitely hurts to see a lot of our favorite Big Board growth stocks down big today. We’re seeing a rotation out of technology and back into value, industrials and return-from-home stocks. It’s very clearly a blanket market rotation, with names pumping or tanking based on merely their industries.
I sure hope you’ve been following the Target Allocations, as one-third of our stocks are now “value” stocks, which should be buttressing your portfolio on days like this. For the growth portion of the portfolio, we’ve clearly avoided some of the biggest losers like Zoom ($ZM), AMD ($AMD), Nvidia ($NVDA), but definitely still feeling some pain today on two-thirds of our portfolio.
Should we go chase value stocks today? No, check the Target Allocation chart for changes today. I’ve used a chunk of our cash and sold a little bit of our value stocks in order to pick up more of our highest conviction compounders and growth stocks while they’re down. That means our three-star stocks, and possibly some high-conviction two-star ones, that we don’t believe to be fundamentally affected by the pandemic.
Do we believe in 20%+ growth long-term regardless of the pandemic or back-to-work environment? If so, then this rotation is a good chance to increase position sizing. For example, many of our favorite names like Salesforce ($CRM), Microsoft ($MSFT), and Amazon ($AMZN) should be relatively unaffected by whether a vaccine is distributed in 2021.
When we invest behind 5-10 years of 20%+ compounding growth, we can afford to buy too expensive and dollar cost average in. Even though I like value stocks, which now compose 1/3 of our portfolio, their potential long-term upside might be 30% plus normal equity returns, whereas transformational compounders or growth companies with long-term secular growth trends can provide 2-5x+ over the same period. But only if we’re willing to deal with the volatility.
I’ll leave you with this. If I could tell you back in the summer that we’d be up 35% on Spotify ($SPOT) and 70% on Peloton ($PTON), but we’d have to deal with some crashes downward, would you take it? I’m pretty sure I would. If you’re a trend chaser, downtrends can ruin you. But if you’re a confident long-term business owner, downtrends that don’t affect the underlying business are buying opportunities.