Ah, the traditional pleasures of September. Summer's heat starts to fade. Pumpkin-spice-flavored everything begins to appear on menus. People get in their first complaints of the year at seeing retailers roll out the Christmas marketing before they've even picked out their Halloween costumes. And, of course, the month would not be complete without a mailbag show from Motley Fool Answers hosts Alison Southwick and Robert Brokamp. To help them address all your autumnal financial conundrums, Sean Gates, a financial planner with Motley Fool Wealth Management, returns to the studio.
In this segment, they consider a question that reflects a practically universal dream among investors: What's the best way to invest in stocks with the potential to deliver life-changing returns -- and get in before their massive multibagger run-ups? Well, Brian, that requires some broad strategy...and accepting some risk.
A full transcript follows the video.
This video was recorded on Sept 25, 2018.
Alison Southwick: The next question comes from [Brian]. "As a relatively new investor at 30, I've adopted a moderately aggressive portfolio strategy consisting mostly of stocks vs. mutual funds, bonds, and index funds. For an apparently more stable base, I've invested in stocks like Apple, Google, Amazon, and a few others, figuring these companies would have to experience a massive meltdown to fail. That said, I can't help but be disappointed that I couldn't have invested in these companies in the '80s, '90s, and early 2000s. This leaves me searching for the next big thing in the hopes that I could buy 50 shares of an Amazon for $30 and reap the benefits in 35 years."
Robert Brokamp: Amazon, by the way, is now trading for $2,000. That's what this guy is shooting for.
Southwick: "On the other hand, I look at those companies and think they have a pretty good thing going. I don't see anyone reinventing the wheel and taking over their semi-monopolized hold on our world. What strategies do you advise young investors to take in order to find those budding companies, or is it just as smart and lucrative to jump onboard of these already proven stocks assuming that no one is going to rise up and do it better?" Ah, the eternal question!
Sean Gates: It's an excellent question and it brings in so many pieces of the investment universe. The first thing that I wrote down in response to this question was asset allocation and the reason that I wrote that down is because ultimately what you're describing is the difference between large, well established businesses like Google and Apple that have already established their dominance in the market, and smaller companies that are trying to be the next Amazon.
And so, one way to get exposure to those next up-and-coming companies is to invest in small-capitalization or medium-size companies with the hope that they grow into the large-capitalization companies.
But then the other component that's crystal clear is, "But Amazon's doing awesome and there's stability in that." That's the risk conversation. You don't want to risk your money in those next up-and-coming Amazons because there's a chance that they don't become the next Amazon. They could fail and then you might lose value in that investment.
That's why it circles back to asset allocation. As a young person you can certainly consider investing in small-and-medium-size companies potentially with a large percentage of your overall portfolio, betting that there's some next Amazon in that mix of stocks.
Southwick: That's a very David Gardner approach. The idea that if you're going to go for the rule breakers, you've got to get a large basket of them and you've got to have the stomach for it, too. It's not for everyone.
Brokamp: Given that [Brian] pointed out that he is a relatively new investor and he listed these stocks as apparently more stable [Apple, Google, and Amazon], I just want to make sure he's aware of the fact that these could definitely go down 50% or more just like each one of them have done in the past, and there are many stocks [in an upcoming question GE will come up] that people thought would be companies that will do well forever, and they often don't. You just never know. You always have to factor that into your plan.