There’s nothing like a colossal, high-visibility screw-up to illustrate how a system works. At least that seems to be the lesson of the Best Picture debacle at the Oscars on Monday. But the lesson for growth investors will be something else entirely. (Hint: it has to do with handling losses.)
When millions of people around the world saw poor Warren Beatty freeze up while trying to figure out why the card inside his envelope said “Emma Stone, La La Land,” they may have assumed that he was just milking his moment in the spotlight. Then Faye Dunaway, perfectly impatient, just like many of her movie characters, ignored the actress’s name and announced the film title. (After all, it was an outcome that many people expected.)
The mistake just kept rolling more people in as the entire production team of La La Land started thanking their agents, stars, co-workers, parents and second-grade teachers.
Then someone showed up with the real envelope.
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To give the La La Land producers credit, they announced the mistake, congratulated the Moonlight people and melted quickly away.
So what the heck does this have to do with growth investing? Plenty!
When you buy a growth stock, you are making a bet that the stock will go up. You have evidence in the form of revenue and earnings history, the prior performance of the stock, guidance from management about future earnings, the attractiveness of the company’s products and services and analysts’ estimates of a stock’s prospects.
But after you have bought your little part of the company, you own it. And the only thing that actually matters at that point is what the stock itself does. If it goes up, the reality is that you can sell it for more money.
But the real lesson of the Oscar’s Envelope-gate dust-up is how to handle a stock that goes wrong.
For instance, here ‘s a little Chinese stock that has been on the watch list of Cabot Global Stocks Explorer for a few weeks. The company is ZTO Express (ZTO), an up-and-coming Chinese shipper that has lucrative delivery contracts with big online sellers like Alibaba (BABA).
ZTO Express reported quarterly earnings on Monday after the markets closed; the results weren’t quite what analysts had expected, and the reaction from investors was emphatic. (Note: ZTO was a high-profile IPO in late October, and the stock traded down substantially after coming public. But the chart shows a nice double bottom at 12 in December and February, and the stock had shown signs of life in February, when it lifted to 14.5.)
From the stock’s reaction, which is a drop of more than 10% on more than three times its average volume, ZTO looks like it’s going to have a rough time ahead.
Cabot Global Stocks Explorer will drop the stock from its watch list. Period. Even though we don’t own it, a big price drop on heavy volume is a strong sign that a stock is going to need an extended period to consolidate its losses and get going again.
So, like the accounting firm that handed out the wrong envelope on Oscar night, we are going to take decisive action, acknowledge our error and move on. That’s how successful growth investors handle a major downturn in a stock. Follow the rules and move on.
It’s easy for a growth investor to make the mistake of holding onto a loser. If you don’t sell, you can tell yourself that it isn’t really a loss. And you can reason that you will just be patient with the stock until it gets back on its feet. And, although it has nothing to do with reason, you can also just be stubborn and refuse to acknowledge the reality of the situation.
Buying is easy and fun. But selling is hard, unpleasant work. Successful growth investors are the ones who can do the work. If a stock hands you the wrong envelope, find the right one and move on.
And if you’d like to get investing advice from an advisory that has shown the right way to do things for many years, consider a subscription to Cabot Global Stocks Explorer.
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