Famous investor Benjamin Graham once said that a stock market is a voting machine in the short run but a weighing machine in the long run.
I think here Mr. Graham is talking about the emotional tendencies that short-term stock prices are affected by – primarily those of fear and greed. Fear and greed are two powerful human emotions that too often rule our decision making when it comes to money.
And the area we see this most evident is in growth investing. Growth investing involves finding shares that are pumping out high rates of growth in revenue, earnings and/or profitability (even all three if you're lucky).
That's all fine and dandy. But growth investing also attracts a lot of momentum traders – investors who jump on board a rising stock and try to bank a quick profit before selling out at 'the top' (that's the idea, anyway).
This combination causes growth shares to typically become highly volatile – meaning that their share prices will typically outperform the market in a bull market, but also underperform in a bear market.
You can see evidence of this during the market correction we saw around Christmas last year. Between August and December, the S&P/ASX200 (ASX: XJO) corrected about 13%, yet we saw CSL Limited (ASX: CSL) lose about 22%. WiseTech Global Ltd (ASX: WTC) shares corrected over 29% during the same period, while the Afterpay Touch Group Ltd (ASX: APT) share price was down over 40%.
You get the idea – your bull market winners quickly become bear market losers.
So I'm suggesting that at this current time of rising markets and new 52-week highs seemingly being booked every day, it might be a good time to take some profits off the table.
Foolish Takeaway
Don't let greed cloud your judgement of your growth shares– if you know one of your stocks is overvalued, perhaps consider the risk of keeping your capital in the market over banking your gains.
As the ASX 200 barrels toward its all-time high, it is growth investors who have the most to lose.
