Thoughts on Long-Term Investment Strategies and Stock Predictions for 2020
Investing is about more than just hitting the next big gain; it's about building a portfolio that can weather the ups and downs and deliver solid returns over a decade or more. The predictive approach to stock investing, focusing solely on the highest-performing stock for the coming year, is a short-sighted strategy that disregards the broader context of long-term market trends and investor sentiment.
Why Predictions Are Often Misleading
At best, predicting the best-performing stock for a single year is a game of chance, and at worst, it can be a risky gambit based on overhyped theories. A prime example is the Velocity Shares 3x Long Natural Gas ETN (UGAZ). This ETN experienced a dramatic fall from a value of over $70,000 to just $7 per share, a decline that is both shocking and historically rare. Had a magic wand reversed this loss, investors would see a staggering 500,000% return. However, such a recovery is both theoretically and practically impossible.
Understanding Market Behavior and Investor Experience
The principles of market behavior, particularly the cycle of boom and bust, make it nearly impossible for a stock that has plummeted to regain its lost value to the extent suggested by such predictions. UGAZ, despite its significant decrease, would not grow to a value comparable to Apple if it did. More importantly, the fact that it has lost so much value implies that the market and investor sentiment are adverse to its underlying assets. Given that almost every investor has experienced losses on UGAZ, it stands to reason that a similar experience might be in store for those betting on its recovery.
Steady Growth Over Stability
Instead of chasing the highest-performing stock, a more prudent approach is to focus on stocks that have demonstrated consistent growth, particularly in both favorable and unfavorable market conditions. While stocks that have dropped substantial amounts might appear attractive due to the potential for a significant recovery, such strategies often overlook the inherent risks associated with market volatility.
Market volatility, whether driven by economic shifts, geopolitical events, or industry-specific factors, can wreak havoc on stock prices. A stock that has seen a steep decline is likely to have underlying issues that may not be easily resolved. Such stocks often experience extended periods of low performance, and the prospect that they will bounce back quickly is often overly optimistic.
The better approach is to identify companies that have robust fundamentals, strong management, and a track record of consistent performance, even during downturns. These companies are more likely to navigate market fluctuations and maintain their value over time, making them more reliable long-term investments.
Conclusion
Long-term success in the stock market does not rely on short-term gains or chasing the highest-performing stock of the year. Rather, it requires a strategic focus on companies with enduring strength and a track record of stable returns. The dramatic fall of stocks like UGAZ serves as a reminder of the unpredictability of market volatility and the importance of considering both the fundamentals and the broader market context in investment strategies.
Investing wisely involves patience, understanding, and a long-term perspective. By concentrating on steady growth and stability, investors can build portfolios that weather economic storms and deliver consistent returns over multiple years.