Growth stocks as a class has a striking tendency toward wide swings in market price (II)

Growth stocks as a class has a striking tendency toward wide swings in market price (II)

https://myinvestingnotes.blogspot.com/2010/02/growth-stocks-as-class-has-striking.html

The striking thing about growth stocks as a class is their tendency toward wide swings in market price. But is it not true, that the really big fortunes from common stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value? The answer is "Yes." But the big fortunes from single company investments are almost always realised by persons who have a close relationship with the particular company - through employment, family connection, etc. - which justifies them in placing a large part of their resources in one medium and holding on to this commitment through all vicissitudes, despite numerous temptations to sell out at apparently high prices along the way. An investor without such close personal contact will constantly be faced with the question of whether too large a portion of his funds are in this one medium. Each decline - however temporary it proves in the sequel - will accentuate his problem; and internal and external pressures are likely to force him to take what seems to be a good profit.

Based on the provided text, here is a summary:

The passage makes a key distinction between two types of successful growth stock investing:

1. The Reality of Growth Stocks: As a category, growth stocks are inherently volatile and prone to wide price swings.

2. The Source of "Big Fortunes": Truly large fortunes from single-company investments are almost exclusively made by insiders (e.g., employees, founders, family) who:

   • Have an intimate, justified confidence in the company.

   • Can commit a large portion of their wealth to it.

   • Hold their shares unwaveringly through all market fluctuations and temptations to sell.

3. The Challenge for the Outside Investor: An investor without this close personal connection faces significant psychological and practical pressures:

   • They will constantly worry about having too much concentrated in one risky asset.

   • Every price decline, even a temporary one, will intensify this doubt.

   • These pressures will likely force them to sell for a "good profit" long before the stock achieves its maximum, multi-fold growth potential.

In essence: While holding a single growth stock through immense volatility is how vast fortunes are built, this strategy is sustainable practically only for insiders. The typical outside investor is psychologically and rationally compelled to diversify and sell early, missing the largest gains.

Summary

In conclusion, the provided text highlights the core paradox of growth investing:

• As a class, growth stocks are characterized by high volatility ("wide swings in market price") due to their dependence on uncertain future prospects.

• However, the only way to capture the legendary, life-changing returns from the stock market is to identify specific companies from within this volatile class, invest meaningfully in them early, and possess the rare combination of foresight and fortitude to hold them through extreme market fluctuations until they multiply in value many times over.

The critical takeaway is that the second path, while true and proven by historical examples, is far more difficult, risky, and rare than the romantic narrative suggests. It is the exception, not the rule. For every investor who achieves a 100-bagger return, countless others see their early-stage "conviction" bets evaporate. Therefore, while the strategy of buying and holding growth stocks is a valid path to extreme wealth, it should be pursued with a clear understanding of the immense risks, the powerful role of luck, and the psychological challenges involved. For most, a diversified approach that acknowledges the "striking tendency" of growth stocks to be volatile may be a more prudent long-term strategy.

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There is a fundamental tension in growth investing. While the only proven way to achieve extraordinary wealth from stocks is to make a concentrated, early bet on a specific high-growth company and hold it through extreme volatility, this path is exceptionally rare and risky.

It emphasizes that for every legendary success, there are many failures. Therefore, while valid, this high-stakes strategy requires acknowledging immense risk, luck, and psychological fortitude. For most investors, a diversified approach is a more prudent and realistic alternative to chasing outsized returns from volatile growth stocks.