Are we talking personal growth or portfolio growth?
Stocks that collapse in price were once known as dogs and cats. Brokers started calling them value stocks and were able to peddle them to individuals and mutual fund managers. Unfortunately, value stocks are highly unstable. Many are troubled companies headed for bankruptcy. Others are turning around. In today’s markets, value stocks can quickly become overpriced.
Then value fund managers sell them to growth managers. Investors looking to value stocks for low volatility will not find it. Growth stocks are overpriced stocks that are hyped as having huge earnings potential. Growth investors are gullible sorts who believe a few years of fabulous growth will be repeated for decades. They are willing to pay any price for this dream.
The tech mania of 1999 was an extreme example of this magical thinking. Growth investors convinced themselves that untested Internet companies would take over the American economy in a few years. Tech mania has a long and sad history in stock investing. Tech mania generally ends badly. Railroad stocks got up a full head f steam and then jumped the track in the late 1800s. Electricity plays and auto stocks had huge booms and busts in the early 1900s. Long-term studies show that tech stocks do no better than the overall market. However, they are subject to periods of extreme volatility. Tech stocks, when the mania is on, double and triple in a few months. Then they lose 95 percent of their value in the crash. Tech stocks are for dreamers and speculators, not investors. People who do not mind losing a few thousand dollars for the potential of extreme wealth are comfortable with tech stocks. Investors with low self-esteem, who may throw good money after bad, should stay away from tech stocks and other growth stocks.