My belief in moderation in growth investing stems from a general belief in moderation. I drive fast during my commute from Southern New Hampshire to the Cabot offices in Salem, Massachusetts, but I never want to be the fastest car on the highway. I like to watch television, but my family makes do with a 32-inch screen. And while I certainly like to eat and drink, I avoid restaurants with unlimited buffets; I can’t eat all I can eat.
The so-called Doctrine of the Mean is usually attributed to Aristotle in his Nichomachean Ethics. Aristotle saw moderation as the sensible position between two extremes. So, for example, courage looked to him like the laudable middle way between the extremes of rash action and cowardice.
And this theme of the middle way makes its way through Western thought via Marcus Aurelius (and through Chinese philosophy with strong roots in Confucian thought).
Moderation always takes a beating at the hands of young people, especially (let’s face it) young men. Extremism has, indeed, come to be seen by many as an admirable display of character. (In young men, excess in beer consumption, hazardous sports and automobile driving spring to mind.) It may or may not be a good thing that young women seem intent on narrowing the gender gap in the avoidance of moderation.
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But we can complain about that some other time. (And I will, in the interest of civility and maintaining good relations with everyone, keep my mordant thoughts on extremism in politics to myself.)
Today, what I really want to write about is the path of moderation in growth investing.
By its very nature, growth investing requires fairly high risk tolerance and at least a pinch of optimism. Growth investors are willing to bet that economies will grow, that technology will make advances and that stocks will (in the long run) increase in price. And growth stocks usually exhibit higher volatility than value or income stocks.
So how can growth investing be moderate? Let me count the ways.
Moderation in Growth Investing: Four Ways to Do It
1. It’s moderate to use all the available information. Some investors (fundamentalists) buy stocks based solely on their historic and projected revenue and earnings. Others (technicians) use only chart analysis. And still others (enthusiastic idiots) look only at the company’s story before buying. The more moderate position is to use all sources on information and require that they all give positive signals before hitting the “buy” button.
2. It’s moderate to invest in sync with the market. Bull markets are profitable; bear markets aren’t. Anyone who maintains the same amount of exposure to growth stocks in a bull market as in a bear market just isn’t listening to what the odds are telling them. If there were a little light over a roulette wheel that let you know when the odds were in your favor, sensible gamblers would wait for the green light before putting down big bets. Increasing your buying during strong market conditions and going to cash during market corrections just makes sense.
3. It’s moderate to limit your losses. Just as one or two great growth stocks can make up most of your gains for the year, one or two big losers can sink them. Of all of the standard wisdom about investing, the one that growth investors should have tattooed on their forearms is “Cut your losers short; let your winners run.”
4. It’s moderate to learn from your mistakes. Sometimes the only thing that will get people to change their behavior is to suffer through a big old loss. Often it’s a string of mistakes that begins with an impulsive stock selection and ends with a stubborn refusal to sell at a loss. Fortunately, the market is happy to teach its lessons over and over … for a fee.
I will say, finally, that part of moderation in growth investing might also be moderation in self-reliance. While there’s a great tradition of going it alone in many endeavors, it’s sometimes a good idea to have an experienced mentor to give you the benefit of experience. That’s especially true, I think, about the ups and downs of the market and its stocks.
Cabot has been guiding investors through the minefields and green pastures of the stock market for many decades. And you can find the advice you need for the current topsy-turvy environment by clicking here.
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