What to Do if Something on Your “Buy List” has Already Run up 100%… Or More
I got a great question recently from Barbara P. who wants to know…
…what do I do if a stock you’ve recommended has already run up 100%?
That’s a far more common situation than most people think.
Every $10,000 invested in the former when it went public is now worth a staggering $285,690 while every $10,000 invested in the latter when it first traded is now worth a jaw-dropping $9.49 million.
What they’re really wondering when they ask this question, though, is something slightly different.
I’ve talked with tens of thousands of investors over the years and what they’re really asking most of the time is some variation of the following trifecta:
- Isn’t XYZ too expensive?
- Did I miss the boat?
- Can I still profit?
Let’s talk about that today.
Myth: It’s Too Expensive
First, just because a stock like Amazon is trading at $1,870 a share doesn’t mean it’s expensive.
Case in point, many folks thought Amazon was expensive at $286 a share in 2015. And again in 2016 when shares were trading at $498.
Now, that looks cheap.
Quality stocks are always making new highs and some pretty smart people will perpetually caution you that they can’t go any higher – that’s the way financial markets work.
Take Dr. Nouriel “Dr. Doom” Roubini, for example.
He began calling for a massive market crash in 2005 and he got one three years later… which means, by implication, he missed the run up and all the profits that went with it.
The late author and economist Howard Ruff published a bestseller called How to Prosper During the Coming Bad Years, and published it in 1979 … immediately before one of the biggest bull runs in recorded history.
Ruff surfaced again in 2009 with more alarmingly bearish commentary… exactly one month before the markets began what is now the single longest bull run in recorded history.
Thing is, great stocks are never expensive because they can grow into earnings… at the click of a mouse, over long periods of time… by doing things the market thinks are impossible… when customers “must have” the products and services they make.
No doubt you see the magic here!
Myth: You Missed the Boat
We aren’t fishing or water skiing, so no, you didn’t miss the boat.
In fact, investing in the world’s best companies after they’ve “tested the waters” could benefit you in the long run.
Take Apple Inc. (NasdaqGS:AAPL), for example.
I was one of the first analysts – and may have, in fact, be the first – to latch on to the company’s medical pivot, several years ago. I saw profit potential that the market had not yet recognized and counselled you to invest accordingly.
The stock has more than doubled since.
My point is not that I was right. I got lucky; this is a tough business and I simply put two and two together.
Apple’s insurmountable success is far deeper than just a pivot into medical devices, or switching to a service-based business approach.
What’s important to understand – something most investors fail to recognize – is that a $500 stock can double to become a $1,000 stock just as easily as a $5 stock. Perhaps, dare I say it, even easier, because those same companies have a rock-solid groundwork to build upon and a consistent and steady revenue stream powered by scores of customers who cannot live without the products and services they produce.
Unlike many of the Johnny-come-latelies, they’re not digging themselves into debt just to get themselves off the ground nor are they reliant on a public offering powered by smoke and mirrors.
In fact, value creation is a significant profit producer, a case I’ve made in the latest Money Map Report via my 2020 Outlook.
Myth: I Won’t Be Able to Profit
Yes… you can still profit.
In fact, you can always still profit… as long as you make the business case for that happening.
The math works at $10 a share, just like it works at $1,000 a share. A double is a double is a double.
This is where most investors go off the rails. They confuse percentages with profits and, in doing so, forget to ask “why” they’re buying.
Apple, for example, hasn’t even begun to value half a dozen things it’s working on including cars, AI, medical devices and information, including patient portals.
I think the stock hits $400 a share very quickly now that it’s smashed through the $300 price tag I slapped on it last January. That’s another 50% higher than its trading today… after a 120.1% run up from last January’s low of $142.19.
You get the idea.
Could Apple fall?
Sure, that’s always a possibility. However, that’s really a related question about risk management not profit potential.
Think about that for a second.
The world’s best companies can add a million customers at the click of a button or merely by releasing a few lines of code. A high PE Ratio – price to earnings ratio – doesn’t mean diddly if the company you’re interested in can grow into P – Price – while expanding E – earnings.
Be “in to win” or you won’t.
Until next time,