Timing the Growth Stocks

When it comes to investing in ETFs, you just want to be in the market for as long as you can – don’t try and wait for a big crash, just get in as early and frequently as you can. However, when it comes to investing in growth stocks, it’s a different story. Let’s take a look at two types of growth stocks – those with a brand, and those with a network effect. If you’re investing in a growth stock because its protection from competition is its brand, too often investors get too excited too early. A new company comes out with a new brand but not much competition, but investors just see the high growth numbers and all want a piece of the action. Not too long after that, a bunch of competition comes in and eats away at the brand and the stock get punished. So if you’re investing in a new company because of its brand, it’s often a good idea to wait a while for the competition to come in, because it’s only then that you can see how strong the brand really is. Juul is a great example, whereby it had a valuation of nearly $40B in 2018 because investors prematurely believed its brand would dominate the vaping industry. But their success drew intense competition, and only then was it clear that the Juul brand wasn’t as strong as initially thought. Fast-forward two years later and the company is now worth just $4.5B today. When it comes to investing in a growth stock with a network effect – online marketplaces, social media – it’s a little different. Network effects create an exponential growth pattern – it’s a positive feedback loop that doesn’t stop until the market is saturated. With these companies, you don’t need to use a ‘wait and see’ approach like you do with brands – you ideally just want to get in as early as possible, because that growth will continue to compound relentlessly. However, because these companies are so adored by investors, they’re often prohibitively expensive. So do your valuation, wait for the right price, and when it gets near to your price target, make sure you go big, because the opportunity to buy a growth stock with a network effect at a decent price, will only come about once in the entire life of the company.