This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It's normal to make more than a few flubs while investing, especially when you're new. At the same time, we owe it to ourselves to be humble and to recognise when we've made a mistake with our finances. There's no point in beating yourself up, but there's a big point to understanding what went wrong and how to do it better the next time -- after all, there's money on the line.

Not every mistake has to be a catastrophe, obviously. But it's still worth ironing out the kinks in your investing habits, especially if you plan to be investing for decades to come. With that in mind, I'd like to share three examples of less serious oversights I made in 2024 so that you can (hopefully) avoid them in your own investing life.

1. Not updating my investment thesis in a timely fashion

One of my rules is that I need to have a strong and pithy investment thesis for every investment I make, and for any that I write about, too. But an investment thesis simply can't be a monolith that stands unchanged over time, as markets are constantly changing, and businesses are constantly updating their strategies to compete more effectively both today and in the future.

The more complicated the industry and the more complicated the company, the more moving parts there are for the investor to take into account when formulating a thesis, which entails a larger responsibility to update the thesis more frequently. Even when broadly upholding that responsibility, it's still very possible to miss the forest for the trees, as I did with Pfizer.

Since roughly 2020, my investment thesis called for Pfizer to be a favorable stock to buy and hold because of its large portfolio of pharmaceuticals and its demonstrated competency in research and development (R&D), as reflected by its massive pipeline.

Nonetheless, the stock is down by 45% over the last three years, badly underperforming the market's gain of 31%. Clearly, something wasn't working, but I kept circling back to the same factors that were originally in my investment thesis, finding them to still be sound.

Then, late in 2024, an activist investing group called Starboard Value said that it had taken a $1 billion stake in Pfizer with the goal of improving the company's efficiency. The group published a report outlining many areas where it thought that the company was struggling, including specifically its R&D efficiency and its capital allocation strategy.

Reading the report, I was gobsmacked; the activist group had essentially explained to me quite fastidiously that my investment thesis was no longer accurate. I immediately changed my stance on the stock to be a bit more bearish.

One lesson here is to listen to any nagging feelings you have about a stock and its performance. If your investment thesis still seems true on the surface in the face of a company's difficulties, dig deeper into the details, and be ready to update your mental model accordingly.

2. Assuming the best outcome would occur

Another subtle investing mistake I made pertains to Costco Wholesale, which to this day remains my single most favorite investment.

In late 2023, Costco's CEO announced he would be retiring, and that he would be replaced in the following year by Ron Vachris, who was the company's president at the time and an employee for 40 years. Given Costco's tradition of successfully promoting leaders from within, I reacted positively to the news and thought nothing more of it.

But that was a mistake, even if it didn't carry negative consequences. My level of trust in the board of directors was and still is fairly high. Nothing has gone wrong with Costco under its new management. I'll buy more shares as I'm able to do so.

Still, if you don't perform any due diligence when you know there has been a major change with one of your investments, like a new CEO, it's much harder to build the conviction necessary to hold on to your shares for the longer periods of time, where you'll see the largest growth.

Think about it. Psychologically, it's much better to have a hunch about which new factor is causing things to go right -- or wrong -- than it is to look at your returns and feel confused about what's happening. Checking the details is how to become a better investor.

3. Complacency

I've held Apple (NASDAQ: AAPL) for quite some time now. Everyone knows that Apple will be selling iPhones, MacBooks, and iCloud subscriptions until the end of time, not to mention a bunch of other products and services. Its brand is most likely the most valuable on the planet, and it has an endless runway for more growth.

But does the company's actual performance bear out all of this common "knowledge" that formed the basis for my investment in the stock? In a word, no. Over the last 10 years, its quarterly revenue has risen by 63.6%, reaching $94.9 billion, and its free cash flow (FCF) has grown by 43.9%, reaching $23.9 billion.

Those figures are impressive for a gargantuan business, to be sure. But in relative terms, there are many other companies that are expanding at a much faster pace. Similarly, it is very likely that Apple is facing some headwinds due to its comprehensive penetration of its core markets like smartphones, which are also highly competitive.

My mistake here was to assume that the boom times both could and would continue forever with Apple. There is no guarantee that the stock will fall, and it's still a favorable investment.

But the only way to avoid the unanticipated consequences of complacency is to invest some effort and do the diligence even if there are not any major changes happening in any given quarter, so that's what I'll be doing from now on with this stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 subtle investing mistakes I won't repeat in 2025 and beyond appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• Should I buy the iShares Global 100 ETF (IOO) now?
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Alex Carchidi has positions in Apple and Costco Wholesale. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Apple, Costco Wholesale, and Pfizer. The Motley Fool Australia has recommended Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Given that the industry-tracking AdvisorShares Pure US Cannabis ETF (NYSEMKT: MSOS) is down by more than 60% in the last 12 months, dramatically underperforming the broader market's slump of 14.5%, it's safe to say that marijuana stock investors are likely feeling a bit down on their luck lately.

But the industry is approaching three major shifts that could create new opportunities for investors -- not to mention a few new risks. Let's explore how cannabis companies are likely to change over the next couple of years, starting with the elephant in the room: legalization.    

1. Marijuana legalization will proceed in the U.S. and the E.U., and potentially by a lot

The biggest change coming to cannabis stocks in the next couple of years is the possible advance of marijuana legalization in the U.S. and in the E.U. While the jury is still out on whether the federal government will legalize adult-use cannabis anytime soon, enterprising state legislatures are already forging ahead. Maryland and Missouri both voted in the latest election to legalize cannabis for adult use, which means that new markets will soon open in both places.

Plus, legalization is advancing in major E.U. markets, specifically in Germany, where an estimated 4 million people consumed cannabis in 2021. While there's no timeline for when recreational sales will begin, Tilray Brands (NASDAQ: TLRY) is likely the best positioned to benefit since it's currently serving the country's medical cannabis market. But if other E.U. nations follow in Germany's footsteps to adjust their own laws, there will likely be room for other operators to flourish, too.

2. The cannabis glut will (painfully) end in Canada

Since late 2020 in Canada, there's been far more supply of marijuana than there has been demand at the average sales price. In the country's adult-use market, companies like Tilray and Canopy Growth (NASDAQ: CGC) are king.  

One major impact of the glut is that the average selling price per gram of legal cannabis faces downward pressure, which results in lower sales and compressed margins. Another impact is that under Canada's marijuana regulations, companies are only allowed to retain a certain amount of cannabis in their inventories, with any excess being marked for destruction.

And to make matters worse, any business that overbuilt its cultivation and manufacturing facilities will be burning money on overhead that isn't translating into earnings.

In the next couple of years, the glut will subside. It might continue to cause growers to shut down their extraneous operations, and sales are likely to be under pressure. But when the levels of demand and supply are more in equilibrium, there will be an opportunity to buy shares of the players that are the best positioned for consistent growth.

It's too early to say which Canadian company is going to fare the best in the coming shakeout, but betting on one of the market's top dogs, like Tilray, isn't an unreasonable approach. 

3. The seeds of a cannabis glut will begin to germinate in the U.S.

The conditions that made for a glut in Canada are already appearing in the U.S. recreational market, and it'll likely humble some of the better-performing businesses of recent times. 

As more states legalize recreational marijuana in the aftermath of the 2022 election, and as the chances of a change in federal policies remain high, competitors will be scrambling to cash in on fresh demand. To do so, they'll be cranking the dial on cannabis products to 11. It's also reasonable to expect them to open up a galaxy of new retail locations to distribute their goods. And for as long as demand seems hot, they'll probably keep scaling up their operations. 

Until there's a glut of marijuana in the U.S., that is. Investors are likely to be blindsided by the symptoms of oversupply, which will be the same as they were in the Canadian market. Top-line growth will slow, stall, and then decline, leaving companies with far too many cultivation facilities and storefronts to sustain. In that situation, vertically integrated pure-play competitors like Green Thumb Industries and Curaleaf Holdings will probably be hit the hardest, though timely interventions by management could easily head off major problems. 

In contrast, diversified companies like Tilray and Canopy Growth might not have as many problems with revenue growth, assuming that the pair are competing in the U.S. at all by that point. Being able to lean on beverage sales for growth, like Tilray and Canopy both can, could help to mitigate some of the shareholder risks from a glut of cannabis. Likewise, cannabis real estate investment trusts (REITs) like Innovative Industrial Properties will be somewhat insulated from problems with oversupply since they don't directly compete by selling cannabis. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 big changes could be coming for cannabis stocks before 2024 appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has positions in Innovative Industrial Properties. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Innovative Industrial Properties. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

With the 21% drop in the market-tracking SPDR S&P 500 ETF Trust (NYSEMKT: SPY) this year so far, we're definitely in a bear market, and that means risks to your portfolio are as tangible as ever. Most investors recognize that in such a market, it's possible to lose a lot of money really quickly if you let panic take the wheel and make your investing decisions for you.    

But there's a far more insidious way to lose a lot of money in a bear market: making decisions that feel good in the moment, but which are actually kryptonite for your portfolio's long-term value. Let's get familiarized with a trio of these wolves in sheep's clothing so that you'll know what kind of ill-advised moves to avoid. 

1. Selling your stocks after a particularly bad day for returns

When you've been looking at your stocks falling for days or weeks on end during a bear market, it might not take much beyond an ordinary daily decline to trigger a strong desire to sell and cut your losses.

Selling is a move that's always available to you, and it offers the promise of getting some money back immediately while also guarding against the pain of your shares falling even further, which can often seem like an inevitable and permanent trend. It reduces your anxiety promptly, and it feels good to sell your laggards, if only so that you stop seeing the damage accumulate in your portfolio overview. And it's often a terrible financial decision, even though it might help you sleep at night.

You're not really investing for the future if you don't have your eyes on the long-term potential of your companies to appreciate in value. To be clear, if you have a strong inclination to liquidate your position in a stock, you should be able to articulate why and how your long-term investing thesis for that stock has changed before you proceed with a sale. 

For example, with a falling stock like Aurora Cannabis (NASDAQ: ACB), you might say something about how its gross margin is weakening over time despite its efforts to the contrary, which casts doubt on its ability to profitably compete. That phenomenon isn't at all related to the stock's daily gyrations, but it probably means the company won't be worth a vast amount more until at least a while after margins start to widen again, if they ever do. 

If your rationale for selling a stock is just that its share price is falling, that's just fear talking, and it isn't worth listening to.

2. Buying stocks just because they're rising when nothing else is

Another way to lose money in a bear market is to invest in stocks that are going up when most other investments are going down. It feels smart to find underappreciated businesses that are sticking it to the overall market. And if your investment sees some early success, it's a confirmation of your wiser-than-the-market feeling. 

But countertrend price movements are a poor reason to buy a company's shares, especially if they're the only data points you're using to justify your decision. There are a lot of things that can make a stock go up. Some of those things are relevant to the company's ability to generate earnings over time, and others aren't. If you can't appreciate why a business is likely to keep outperforming its peers, you probably don't have an investment thesis for it at all. 

So don't be captured by the illusion of outperformance during a bear market. It could yield some quick gains, but if you don't have any analysis to lean on when times get tougher, there's a good chance you'll just quit your position and lose your money.

3. Buying on the dip with stocks you know nothing about

During bear markets, it's perpetually tempting to buy on the dip, especially when you're thinking about household names that you expect to be around forever. Buying a stock when other people are broadly sour on it makes you feel special, and it's a particularly intoxicating brew for people with a contrarian bent.

The trouble is, there's no way of knowing that the "dip" is just a short-term inconvenience for shareholders. It's entirely possible that the stock will never recover to its prior glory. 

Take the recent dip in the generic drug manufacturer Viatris (NASDAQ: VTRS) for example:

Data by YCharts.

The fall in its share price was caused by the announcement of its fourth-quarter earnings, when it also announced that it was selling off a major division of its business. In other words, it will likely bring in less revenue for a while after the transaction closes. If you just "bought the dip" without recognizing that the company's growth potential is somewhat lower as a result of the deal, you're liable to be unhappily surprised down the line when Viatris' revenue lags your expectations.

Once again, having an investing thesis you can articulate and sticking to it is the way to guard against this money-losing tendency. When you're thinking about buying on the dip, think about what made the market dump the stock in the first place, and consider whether the company's fundamentals and long-term value proposition are still sound. If people were selling, at least some of them thought that the situation wasn't going to improve, and they could be right. But you won't know for sure what you even think until you do the due diligence yourself. 

One last thing: Don't let your friends, relatives, co-workers, favorite podcasters, pets, or anyone else cajole you into buying on the dip. Peer pressure might be tough to resist, but your financial future will be better if you do, whether there's a bear market or not. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 feel-good ways to lose lots of money in the bear market appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Viatris Inc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.         

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It's not an easy time to be a faint-of-heart investor. With the market down by more than 22% this year, we're falling deeper into the bear market, and growth stocks are leading the descent.  

Rather than panic selling some of your growth stocks or refusing to consider them altogether, it's probably in your best interest to be a net buyer, even if the market continues to drop. That idea might sound crazy, but be sure to consider these three reasons to keep investing before writing it off. 

1. The bear market can't go on forever

The market is always changing, and thus relatively short-term downward trends eventually reverse. On average, bear markets last for a year, give or take a month or so. There's no use in trying to time the market by predicting the very bottom of the bear market and investing at that precise moment, as it's highly unlikely that you'll nail the entry point, and you might lose out on growth while waiting on the sidelines for the right time to roll around. So what should you do with the information that bear markets aren't permanent?

Continuing to buy growth stocks on the way down is one move that could pay off, and it might even take less time than you'd expect. For example, consider genetics-testing business 23andMe (NASDAQ: ME). Its shares are down by nearly 65% in the past 12 months, underperforming the market significantly. But if you'd bought shares three months ago, you'd be sitting on a nice gain of around 24.5%, driven by better-than-anticipated revenue growth in its consumer genetic information subscription segment during its fiscal Q1 of 2023.

That doesn't necessarily mean it's the right move for you specifically to start buying shares of 23andMe today; after all, one quarter's results don't mean much of anything in the long term. The point is that if you buy shares during the bear market, you could be setting yourself up for the possibility of a significant gain eventually. By contrast, keeping your cash out of growth stocks ensures that you won't get the advantage of any rebounds in their prices, never mind their long-term potential to appreciate in value. 

2. Buying now means getting more bang for your buck

The second reason you shouldn't stop buying growth stocks right now is that doing so would cause you to miss out on the increasingly attractive valuations on the market right now. In 23andMe's case, its price-to-sales (P/S) multiple was 10.4 at the end of 2021, whereas it's now five.

That means if you bought one share of the stock today, you'd be getting more than twice as much revenue compared to buying a share back then. Note that getting more value per dollar compared to before doesn't mean you're necessarily getting a good value, as valuations have shifted across the market in that period. 

Still, if you're bullish on the company and you want to establish a position to hold for the long term, lower valuations are great news for you. They mean that you don't need to spend as much money to buy a portion of control of a business' earning power, and if you're actually getting a bargain, you might even be setting yourself up for outperformance once the market notices the cheapness. 

3. Recessions and inflation aren't an equal threat to every growth stock

Not all growth stocks are going to be hurt by inflation, nor are they going to be necessarily hurt by an economic recession. And while some will experience more difficulty raising capital, many won't. So if you can find the businesses that aren't very affected by the headwinds most investors are focusing on right now, you'll be setting yourself up for success. 

In 23andMe's case, some of its top line might be negatively affected as part of its business model is getting consumers to sequence their genomes with the company's kit and then offering them frequently updated profiles on some of their genetic risk factors. But it also does lead generation for drug development programs as a collaborator, and its partners are some of the most powerful pharmaceutical companies in the world, like GSK.

Even if consumers can't pay for luxuries like genome sequencing services, investors can bet on seeing giants like GSK continue to advance the clinical-stage program that it's working on with 23andMe. What's more, it'll probably continue to fund development of pre-clinical programs it thinks might be worthwhile down the line. And regardless of the economy, other pharmas might try to copy GSK's lead by working with 23andMe. 

So even if the stock isn't a shoo-in for beating the market right now, it isn't under intense pressure, and it'll almost certainly survive the macroeconomic whirlwind. In other words, if you were on board with buying its shares before 2022, you probably still should be -- and that's a lesson you can easily apply to many other growth stocks, especially those within the biopharma sector.  

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 reasons you should (still) be buying growth stocks right now appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended GSK plc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.         

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Cathie Wood's ARK Innovation ETF (NYSE: ARKK) is known for its aggressive bets on the cutting-edge companies of tomorrow. Between its holdings in lesser-known businesses with big potential, like Ginkgo Bioworks (NYSE: DNA), and its investments in more familiar names like Tesla (NASDAQ: TSLA), there's a lot to appreciate about Wood's approach to buying stocks.

While her flagship ETF is underperforming the market over the last three years, her investing style is worth learning about because it's a great contrast to other famous investors like Warren Buffett. In particular, there are three principles Wood uses to select stocks that you'll benefit from understanding, so let's dive in.

1. Look for companies developing disruptive innovations

The pillar of Cathie Wood's approach to investing with her company ARK Invest is to find businesses that are creating disruptive innovations. Disruptive innovations, in her conception, can take several forms, including technologies that significantly slash costs, technologies that change more than one industry or geographical region, and breakthroughs that enable other follow-on innovations in a handful of different product segments.

In practice, that means she invests these days in a lot of companies that are competing in artificial intelligence, robotics, autonomous vehicles, DNA sequencing, energy storage, 3D printing, and blockchain technology. Focusing on potentially disruptive innovators explicitly means not paying much attention to entrenched competitors. It means investing in players that are pioneering new business models or pioneering new fields entirely. 

Take Ginkgo Bioworks, for instance. Its idea is to use robotics and other forms of automation to streamline the process of designing and manufacturing custom-built microorganisms for use in the biotechnology, agriculture, and food industries, among others. Management claims that with its expertise in automation, it'll be able to benefit from economies of scale that drive down costs compared to other ways of accomplishing the same bioengineering and biomanufacturing tasks. 

For the moment, Ginko Bioworks is unprofitable but rapidly growing. But if it succeeds, it'll be a favorite collaborator in multiple industries, and its stock will soar over the course of years. And that's why it's a Cathie Wood favorite.

2. Seek outsized medium-term returns

Cathie Wood likes to invest in businesses that have the potential to become huge over the next three to five years or so as a result of their mastery of their markets, and enabled by disruptive innovations. In short, she doesn't much care for businesses that can make consistent and incremental progress on their earnings year after year as they're more likely to be less innovative competitors.

And exactly how big are the returns Wood is looking for? There's no single answer, but here's an example. In late August of this year, before Tesla's latest stock split, its price was near $891. A month before, in late July, Wood had set an ambitious price target: Tesla shares would be worth $4,600 by 2026. That means within three and a half years, she anticipated that shares would grow by around 416%.

Therefore, if you want to follow Cathie Wood's approach, look for businesses that could boom if their disruptive innovations are realized to their fullest potential.

3. Don't focus on valuations

It's officially part of ARK Invest's screening process to evaluate stock valuations. But evidence indicates that pricey valuations are seldom a deal breaker for Cathie Wood, and that other factors, like a company's potential to grow, are far more important when it comes to what makes the cut. 

For example, in the first quarter of 2022, she bought shares of Tesla on numerous occasions. At the time, Tesla's trailing 12-month price-to-earnings (P/E) ratio was between 343 and 219. For reference, the market's average P/E since 1990 is a little over 23, so Tesla's valuation was (and still is) on the very high side in comparison. That doesn't deter Wood, though -- with the run-up she anticipates, it makes complete sense to keep buying shares of an "overpriced" stock. 

So, if you want to invest like Cathie Wood, don't get fixated on valuations today. Tomorrow's valuations are far more important to whether your investment is profitable.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Want to invest like Cathie Wood? Use these 3 principles appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Contrarian investing isn't for everyone. Most of the time, it's easier to just buy shares of an index fund rather than develop a unique investing thesis that takes advantage of going against the grain. 

But if you know about a few of the market's tailwinds right now, you'll be in a much better position to make contrarian bets that have the possibility of large payoffs. Let's investigate three such tailwinds (as well as a couple of stocks that are likely to benefit from them) so that you'll have a few actionable ideas about how to make your own contrarian plays this year.  

1. Valuations are plummeting

By definition, contrarian investors make bets that are against the market's consensus. When they make those bets, each dollar they invest gets them a certain amount of value, whether it's measured by the price-to-earnings (P/E) ratio or the price-to-sales (P/S) ratio or another metric. Thanks to the ongoing bear market, valuations are falling sharply, meaning that investors get more bang for their buck when they buy.

Take a heavily bruised growth stock like Cresco Labs (OTC: CRLBF), for example, a cannabis cultivator whose shares fell by more than 61% so far this year. At the end of the first quarter last year, its P/S ratio was 5.5 whereas now it's 1.1. Over the last three years, its trailing 12-month revenue grew by 574%, reaching over $865.8 million.

In other words, anyone starting a contrarian position betting that Cresco's shares are going to appreciate in the long term is getting a lot more revenue for every dollar they spend than they could have previously. And if that thesis is correct, it'll reward investors who buy the shares now. 

2. Bear markets don't last forever

While it's more of a fact of life than a tailwind, contrarian investors know that bear markets can't continue on for eternity. Eventually, market sentiment improves for some reason, and growth returns. But when the market turns, it can be hard to realize in the moment, and timing the market is nearly impossible. And that's why contrarians are often comfortable with continuing to buy shares even as the market continues to fall. 

Then, perhaps years later, the market's recovery powers outsized returns for those who were daring enough to get in when others were too afraid. Of course, you'll have much better chances if you focus on companies with some competitive advantage that other investors are undervaluing or disregarding. 

3. Innovation isn't on pause

The final tailwind for contrarians is innovation. Innovation doesn't stop when a company's stock falls. Consider Intuitive Surgical (NASDAQ: ISRG), a business that develops robotic surgical suites for use in hospital operating rooms. Its shares are down by 46% over the last 12 months, but at the same time, its research and development (R&D) expenses over the past 12 months total some $767 million.

Sooner or later, its ongoing investments in developing new robotic tools and other high-tech products will likely pay off in the form of new revenue growth. It's true that investors could opt to stay on the sidelines until those hardware projects are closer to generating income than they are now. But contrarians who are willing to bet today on the company's technological progress could see superior returns to those who wait. That's doubly true in markets like Intuitive's, which are driven by disruptive innovations that steal market share from legacy products.

To be clear, you don't need to be a contrarian to get the benefit of investing in innovative companies doing their thing. It's just that contrarians tend to be the ones willing to ignore the short-term share-price movements to focus on what really matters: activities that make businesses more valuable tomorrow than they are today. For Intuitive Surgical, those activities are a perpetual process, and that's why its innovations are worth betting on, even if its stock might drop through a bear market.   

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 big tailwinds that could make contrarian investors rich in the bear market appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Cresco Labs Inc. and Intuitive Surgical. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

You might be living under a rock if you haven't heard the word "recession" being thrown around in the media over the past few months. Thanks to inflation, the Federal Reserve's efforts to control inflation, and an overflow of global problems, a worldwide economic contraction is on the table (though not guaranteed) in the near future.

And it's exactly this situation that could make well-prepared investors significantly wealthier a few years down the line. So if you want to address your anxiety while setting your portfolio up for success, here are four simple actions you can take that'll pay off.

1. Determine when you'll need your money

The first step to prepare for a recession is to think about your financial goals and clarify them. Specifically, decide when you want to withdraw your investment. Will you need the money a year from now, when it's time to pay for a large expense? Or perhaps your time frame is five years -- or maybe even 30. 

The reason why this step is important is that you probably shouldn't be investing any of your moola if you're going to need it within three years. Any investment you make has a solid chance of taking at least that long to break even, which is a key consideration given that you're buying stocks in a recessionary environment where share prices are apt to fall in the near term.

And it'd be a pity if you were forced to liquidate your position at a loss simply because you didn't plan ahead and keep your assets in cash or an equivalent instrument. 

2. Identify your vulnerable stocks

The second thing to do if you're afraid of a recession is to look at your portfolio and assess which of your investments are more vulnerable and could face harsher headwinds in the event of a recession -- and which positions may be more stable.

For example, if you own shares of Johnson & Johnson (NYSE: JNJ), you would probably mark it as being relatively sturdy in a recession. The company develops medicines and medical devices that consumers need.  Economic conditions would have to be quite dire for people to start skimping on such necessary products.

In contrast, if you own some Tesla, Inc., (NASDAQ: TSLA) you'd do well to identify it as being very vulnerable to squeezed consumer wallets. Expensive electric vehicles might well be the products of the future, but they're not high on the list of household priorities to purchase when money is tight.

Likewise, the automaker is vulnerable to all manner of fluctuations in the prices of the commodities it needs to make its vehicles, which might be an additional headwind in a recession.

3. Start stashing cash to build on your high-conviction positions

Now, it's time to review your positions still further, including your investing thesis for each one, to decide whether their challenges are temporary and caused by macroeconomic factors beyond their control, or whether a recession might usher in conditions that would ultimately be fatal to their long-term returns.

Let's say you think Tesla could be vulnerable to falling sales during a recession. But you also think that it'll survive any headwinds and be able to keep growing at a steady pace afterward. You may then want to save up cash to buy more shares -- of course, as long as it's not too large a position and is a part of a diversified portfolio. You could also do the same thing for your less vulnerable stocks, like Johnson & Johnson.

4. Bide your time patiently

The last thing to do if you're worried about a recession is to set up your watch lists and portfolio alerts to let you know when it may be time to buy more shares of the stocks you're eyeing. Then, wait patiently, preferably while continuing to save cash and continuing to build on your high-conviction positions that you don't expect to be vulnerable, like Johnson & Johnson. It's probably for the best to pause your purchases of highly vulnerable companies like Tesla if you think a recession is coming, though.

That's right, you shouldn't stop buying stocks in general if you're fearful -- just prepare to buy more shares if the conditions make it lucrative to do so. In other words, it's best to make your plans for what to do with your portfolio during a recession, then get on with your life. Most years don't feature recessions, and many of the predictions about looming recessions tend to be wrong. Once you have a strategy, it should help prepare you for whatever may happen.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Afraid of a recession? Do these 4 things today appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• ASX shares investors are getting younger and trading more often: CBA report

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Johnson & Johnson. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Between rising interest rates, a potential recession on the horizon, and a bear market in full swing, it's a fraught time to be an investor. And that's especially true for those who prefer to buy growth stocks, which have been hit significantly harder than the market as a whole. The market-tracking SPDR S&P 500 ETF Trust (NYSEMKT: SPY) is down by more than 11% over the past 12 months, while the large-cap SPDR Portfolio S&P 500 Growth ETF (NYSEMKT: SPYG) is off by around 18% in the same period. 

So should investors shy away from expansion-phase companies for a while, seeing as how conditions appear to be poor for them in the present and likely tenuous in the near future? The answer depends on your goals for investing, the riskiness of the stock you're thinking of, and -- last but not least -- your own mental fortitude, so let's break these issues down individually. 

Determine your time horizon

Before you can answer for yourself whether it's appropriate to be buying growth stocks right now, you'll need to figure out how long you want to hold your shares. Another way to frame that question is to ask when and why you'll need to take out the money from your investment. 

If you think you might need your funds back into cash within a couple of years, you probably shouldn't be buying any type of stock, as it could take longer than that to reach the price level where you bought the shares. In contrast, if you're investing for the long-term (and you should be), it could still be a good time to buy, but there's more to the story. 

By definition, growth stocks are backed by growth-phase companies that often aren't yet focused on profitability and that are too immature to consider giving capital back to shareholders. In practice, that means if you decide to sit on the sidelines instead of buying shares, you could be missing out on a significant run-up as businesses expand quickly over time. It's also possible that you could be sagely dodging a catastrophic collapse in share prices caused by any of the many headwinds in force right now. 

It isn't possible to determine which of those two outcomes are going to occur in advance, but you can improve your chances by being picky about which growth stocks you invest in and how much of your capital you choose to commit to them. And if you can do that, now's a decent time to be buying. 

Allocate your risk budget conservatively 

Being careful with your investments amid the ongoing economic uncertainty means favoring growth companies that are likely to weather the turbulence with grace and avoiding those that won't. 

For example, Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX) develops medicines for rare diseases like cystic fibrosis. It'll keep performing clinical trials and commercializing drugs regardless of a recession, and its patients will need to keep buying its therapies (or getting their insurers to pay) no matter what. Plus, rising interest rates don't threaten it much at all, because it's profitable, expanding its top line consistently, and it also generates enough free cash flow to avoid needing to habitually borrow money. And it's currently shrugging off the bear market without breaking a sweat, with its shares rising by nearly 28% so far this year in comparison to the market's fall of 19%.

So, Vertex looks to be a growth stock that's ripe for buying, even now. But with other companies, the reverse may be true.

Consider the multinational cannabis business Tilray Brands (NASDAQ: TLRY). It isn't profitable, and this year its quarterly gross margin is contracting under pressure. Its quarterly revenue growth is flat over the past year, and there are problems with oversupply in the cannabis market that are likely to force it to write down its inventory at a loss (again) or lower its selling prices. Therefore, with its performance questionable even before the headwinds of 2022, it probably isn't a good time to buy, unless you can tolerate quite a bit of additional risk beyond what's normally associated with the stock.

Can you invest and still get a good night's sleep?

Per the previous section, investing in the most resilient growth stocks is still a good decision in today's environment, even though investing in the more speculative plays could be more risky than usual. But perhaps the biggest issue is whether you can accept the risks of the growth companies you decide are worth investing in, even when the going gets tough. 

If buying shares of a risky business right now is going to have you checking on your portfolio multiple times per day, it probably isn't worthwhile. You only get the benefit of a company's gain in value over time if you are actually able to hold its shares without selling them out of fear or stress about their future worth. 

If you can tolerate your positions being underwater for a few months or years, it's a perfectly good time to buy riskier growth stocks like Tilray, assuming you're comfortable with the chance of actually losing your money -- but if that thought terrifies you, it's best to find growth investments like Vertex that are likely to have a bit more staying power regardless of the economy or the market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is now the right time to be buying growth stocks? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Vertex Pharmaceuticals. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Building up a quarterly stream of passive income through shares of dividend-paying stocks is a dream for many investors, but a lot of people approach it the wrong way. You can't expect to build up a huge amount of passive revenue overnight, and you'll need to have the right strategy to accumulate shares of dividend stocks that will be stable in the long-term.

Let's examine three passive-income secrets to bolster your dividend flows and ensure that they aren't eroded.

1. You don't have to receive your dividends now

The most important passive-income secret is that you don't need to actually accept any dividends in the form of cash if you'd prefer to make a larger amount of cash down the line. By setting up a dividend reinvestment plan (DRP), you can keep adding to your position automatically quarter after quarter, meaning that you'll have more shares producing dividend income than you would if you had spent the money rather than reinvesting it.

Let's work through an example with the pharmaceutical company AbbVie Inc. (NYSE: ABBV) to see how dividend reinvestment can boost your returns. Over the past five years, AbbVie has achieved a total return of 96.5%; however, the price of its shares alone only gained a bit more than 61%. In the same period, the company hiked its dividend by 120%, thanks to profitable sales of its ever-increasing portfolio of medicines.

If you're not familiar, the total return of a stock accounts for the impact of dividend payments as well as share price appreciation, so it's a good proxy for how much you'd make if you were reinvesting rather than spending the cash. Therefore, if you simply accept the company's payments and spend them, you'll have significantly less than if you set up a DRIP and wait the equivalent amount of time.

So when you're thinking about passive income, it makes sense to think about when you will want to spend the money. The longer you can defer spending and keep reinvesting, the larger your income will ultimately be.

2. You don't need to worry about beating the market 

But as a passive-income investor, outperformance shouldn't be your goal, nor should it be something you expect to achieve most of the time. The reason: You're invested for the cash flow, not the stock price returns. As long as the cash flow keeps rolling in at the same rate, the rest doesn't matter so much.

Everyone talks about outperforming the market with their portfolio, and much ink is spilled about which stocks are likely to grow faster than the market's long-term average of around 10% annually.

The type of companies that have highly stable cash flows to make long-term passive income tend to be more interested in returning capital to shareholders than other companies that are more focused on deploying capital to grow. Take Innovative Industrial Properties (NYSE: IIPR), a real estate investment trust (REIT), as an example. Its business model is to buy marijuana cultivation facilities, then rent them back to their former owners to capture a long trail of income. 

The company has underperformed the market over the last three years, but its dividend has risen by 124% in that time. Right now, its forward dividend yield is near 7.7%, which is quite high.

If you plan to invest in Innovative Industrial Properties expecting a certain amount in cash annually based on your initial purchase, its performance relative to the market is a moot point. You'll get your cash flow regardless of what the market does, as long as the business can support the payout. 

3. Diversify your holdings to avoid wipeouts

A third secret of passive-income investing is that you need to diversify your selection of income stocks, just as with your portfolio as a whole. It's pretty obvious why: If you derive all of your passive cash flow from a single business, and that business goes bust or faces stiff headwinds that require it to slash its payout, you're out of luck. And since dividend cuts are often a harbinger of further difficult times, you might even need to take steep losses on the price of your shares, not to mention the actual money into your account every quarter. 

So don't invest all of your passive-income capital into one stock. Try to have at least a dozen. And if possible, make sure that they're in various different industries and use different business models.

For instance, Innovative Industrial Properties and AbbVie compete in entirely different areas, and they aren't vulnerable to the same types of risk. So they'd be suitable options to buy for diversified passive income. When the economy is struggling or one of your companies hits a major stumble, you'll be grateful that only a portion of your dividend revenue takes a hit.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 passive-income stock secrets you'll wish you knew earlier appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has positions in Innovative Industrial Properties. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Innovative Industrial Properties. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

There's an old chestnut that most investors could stand to hear: If you want to succeed in investing (or hockey), skate to where the puck is going, not to where it's been.

Buying shares of yesterday's winning businesses might be a decent way to preserve your wealth by banking on their continued success, but if you want to nab big gains, you'll need to invest in companies that are working on solving tomorrow's problems today. Clocking important trends in the economy and the world is critical for guiding your search.

So let's take a look at two trends that'll likely be huge in the near future. You'll gain a few actionable ideas about investments that could pay off down the line.

1. Psychedelic therapies for mental illnesses

Psychedelic drugs like psilocybin, LSD, ketamine, and MDMA aren't legal to use recreationally in most places, but that doesn't mean they can't be powerful medicines when used appropriately.

The current standards of care for some common yet difficult-to-treat conditions like major depressive disorder are interventions like antidepressant drugs and cognitive behavioral therapy that leave many patients experiencing relapses despite treatment. But psychedelic therapies delivered by experienced therapists might not have that problem -- which could be an opportunity the businesses that make them.

Compass Pathways (NASDAQ: CMPS) and Atai Life Sciences (NASDAQ: ATAI) are two biotech stocks with pipelines chock-full of psychedelic therapies in clinical development. Per Compass' data from one of its phase 2b studies, its COMP360 psilocybin-with-talk-therapy combination leads to rapid reduction in depression symptoms that lasts for at least 12 weeks and causes few serious side effects. For some subsets of patients, the improvements appear to be long-lasting or perhaps even permanent. And Atai's equity interest in Compass means that it stands to benefit from the therapy's sales if it's eventually commercialized.

But Compass' impressive results are far from the only success story in recent clinical trials of psychedelics. Numerous third-party researchers and academic groups have shown compelling results that suggest psychedelics have the chance to reshape psychiatry as we know it, and for the better. If you want to get exposure to upside from drug development in the psychedelics space, either Atai or Compass is a suitable place to consider investing.

2. Treating or curing long COVID

As you may have heard, long COVID is an illness that features a sometimes-debilitating constellation of symptoms like fatigue, shortness of breath, and cognitive issues, all of which can occur after someone is infected with the coronavirus.

According to the Centers for Disease Control (CDC), 7.5% of adults in the U.S. are afflicted with long COVID. And an estimated 80% of people who have been infected with the coronavirus have at least one long-term symptom associated with their illness. Right now, it appears that even fully vaccinated and boosted people can experience long COVID, and even mild coronavirus infections can cause it.

To make matters worse, there are no specific treatments for it yet, and the ranks of the afflicted are, unfortunately, growing.

A few different companies are either considering or have already initiated investigations into long COVID therapies. Pfizer's (NYSE: PFE) antiviral medicine, Paxlovid, might soon be tested for that purpose, though no trials are currently ongoing. GlaxoSmithKline and other major drug manufacturers are also considering initiating new therapy programs, and a few biotechs have already tested candidates in clinical trials and struck out.

With so many millions of people suffering with long COVID, any medicines that successfully treat it will likely be big moneymakers. For now, there aren't too many places to park $2,000, but if a player like Pfizer announces that it's initiating a project, it'll be a green light for investors. Just keep in mind that there's a significant risk of failure in the clinical trial process, so it might make sense to pick a few different long COVID stocks to buy rather than just one.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 2 top trends to invest $2,000 in ahead of the crowd appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended COMPASS Pathways plc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

With the market in a jittery mood thanks to ongoing inflation, interest rate hike mania, and geopolitical instability, nobody can blame investors who are wringing their hands anxiously in anticipation of a potential market crash. Thankfully, the chances of a crash happening are too difficult to determine with any certainty, so it doesn't make much sense to worry at any particular time. 

That probably isn't very reassuring. But what will be reassuring is if you have a plan for what to do and what not to do in the event of a crash. For now, let's work on three things you definitely shouldn't do if there's chaos in the market. 

1. Sell your stocks in a panic

The first (and most important) thing you shouldn't do if the stock market crashes is to sell all of your stocks to try to avoid experiencing any further losses. The problem with panic selling is that it feels like the right move. After all, if you can cut your losses fast enough, the market's downward move to the tune of 30% might only lead to losses of 10% for you.

Selling eases the sense of anxiety you have about your lack of control over the situation and your fear of losing money. And if you hear from friends or relatives about how much they got whacked by holding on to their shares, you might even give yourself a pat on the back. 

But you'll probably end up missing out on the rebound afterward. And in many cases, that means you'll make less money than if you'd simply stayed the course. Let's examine AbbVie's (NYSE: ABBV) performance during the coronavirus crash in March 2020 as an example.

^SPX data by YCharts

As you can see, AbbVie's shares took a beating during the crash, as did the market. But as the catalyst for the crash, the pandemic, didn't actually do much to affect the company's ability to do its business of developing and commercializing drugs, its stock quickly bounced back.

Within a couple of months, it was outperforming the market, and its earlier damage was entirely reversed. The stock even ended the year significantly above where it started, and you'd have missed out on that gain if you had sold your shares. Even if you tried to restart your position, you'd struggle to time it correctly and you'd almost certainly be missing out on some upside. 

There's absolutely no guarantee that every stock will behave the same as AbbVie's did during every market crash, and many will not. In cases where the crash isn't caused by anything that fundamentally impacts a company's ability to make money as efficiently as it currently does, however, selling is likely to be a poor decision.

2. Dramatically change your investing strategy without good reason

In keeping with the above, the second thing that you shouldn't do if the stock market crashes is to switch up your game plan for investing without noodling on it for a good while. It's a fact of life that crashes are often precipitated by economic or global events. Nonetheless, if you have a properly diversified portfolio, it should be unlikely that any specific trend or happening makes all of your stocks genuinely vulnerable to further declines all at once. And that means any changes to your approach should be at the margin, even after a crash.

For example, let's say before the pandemic you held AMC Entertainment (NYSE: AMC) for exposure to the entertainment industry in the same portfolio as your AbbVie shares. The market's collapse in March was caused by fears of the coronavirus, and AMC's share price was hit plenty hard. As an intelligent and far-sighted investor, you held on to your shares at the time. But during your quarterly assessment of your positions, you decide that movie theaters are probably not going to be making a strong comeback for as long as the coronavirus is afoot, and you opt to sell your shares.

So far, so good -- it's important to make adjustments to your strategy when new information makes your original investing thesis incorrect or irrelevant.

Where many investors might go wrong, however, is to then do something like take their proceeds from the sale of AMC and invest them in a way that reduces their portfolio's level of diversification, perhaps by buying more shares of AbbVie. Such an action is a major departure from your prior approach of buying an entertainment industry stock to give yourself exposure to that industry's future growth. And by doing so, you're throwing the baby -- your well-reasoned desire for diversification -- out with the bathwater, which in this case is AMC's poorly performing stock in the wake of the crash. 

3. Stay on the sidelines

The final thing investors shouldn't do if the market crashes is to stay on the sidelines and wait for calmer waters. Instead, they should take action to buy while shares are cheaper than normal. And that's especially true if you plan to dollar-cost average to build up your positions. For those who have some capital saved up, sharp and panic-driven downturns are opportunities to shore up your holdings with deeply discounted shares -- once again, assuming that your original investing thesis about why they're worth buying is still valid. 

If you do decide to sit on the sidelines during a crash or correction, you won't be actively harming your portfolio's value, but you'll likely be missing out on growth. It's frightening to buy more shares of a stock when it's down and when it seems like the sky is falling, but famous investors like Warren Buffett do it. And for companies that pay a dividend, like AbbVie, buying rather than idling means that you'll be securing shares with higher dividend yields than you could normally get, so you'll get paid for your smart decision to take a hot bargain for years down the line.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 things you shouldn't do if the stock market crashes appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

But the company's coronavirus vaccine is still selling heavily, and it's developing updated jabs to ensure it has something effective to sell for the rest of the year and beyond. On July 29, it announced that the U.S. government had placed a purchase order for more than $1.7 billion to secure the updated shots. And it's still expecting to make around $21 billion in sales this year. Per its earnings report on August 3, that expectation looks to be fully within reach and likely to be realized.

Brace yourself, because your resolve to hold onto your stocks could get tested big time, and soon. With the S&P 500 Index dipping as low as 23% within the past couple of months, we've hit the ballpark of bear market territory. The index currently hovers around a 12% drop year to date, but there could be more pain on the horizon. 

If you sell your shares, you won't get the advantage of the market's eventual recovery, so you'll need to buckle down and prepare yourself to hold out. Let's learn about three of the most common ways that bear markets create the very powerful temptation to sell so that you can resist the temptation when it calls.

1. Destroying some of the market's recent winners

The most visible way that the bear market is likely to test investors' resolve is by demolishing the stocks of companies that were not too long ago put forward as high-flying success stories. Take Moderna (NASDAQ: MRNA), for example. Its shares are down by 53.6% over the last 12 months, despite a powerful return of more than 1,430% over the last three years.

Bear markets tend to be characterized by an all-consuming swamp of pessimism. You've probably already seen the headlines flying around. Gas prices are still high, and everything is getting more expensive. There's an ongoing parade of economists, portfolio managers, and famous investors predicting that everything is bound to get worse in the market and elsewhere. And there's endless speculation about how the Federal Reserve's rate hiking policy is bound to crater your retirement account. 

In other words, there's not much reason to suspect that the investment thesis for buying Moderna has changed by much between the start of the bear market and now. Even so, seeing its share price in the dumps is likely to make many investors question whether they should be thinking about selling. Further losses are all but guaranteed to have an even more intense effect. Inevitably, many investors will sell, and they might be missing out on significant future growth in the process. 

2. Barraging investors with bad news

If you read the above and are now wondering whether it's worth pulling your money out of the market entirely and waiting for conditions to improve, your resolve is being tested, and you should take a step back and think for a minute. For many companies, the negative headlines about the market or the economy simply aren't relevant to their ability to generate revenue and compete effectively. For others, external events do indeed matter, but it's still entirely possible that the market overreacts when it comes to adjusting share prices in response. 

In Moderna's case, there's not much in the way of ongoing relevant macroeconomic or geopolitical events that would affect its operations. It doesn't sell jabs to people directly, so trends like inflation leading to consumer wallets being under pressure don't matter. Likewise, it isn't directly subjected to rising costs from the prices of major commodities going haywire, like lumber or oil. Management is overtly optimistic about the coming quarters, even when taking the economy's issues into account.

Nor are the very general predictions of market observers likely to appreciate the unique tailwinds that it has over the next five years and beyond -- for example, its ability to rapidly develop and manufacture updated vaccines in response to viral variants.

That won't stop the bear market from peppering investors with gloom and doom about the economy and its effect on businesses, though. Tuning out the noise is a great way to keep your resolve intact.

Take the current narrative about rising interest rates being a death knell for investing in growth stocks as an example. The argument is that higher borrowing costs will make it much harder to grow. Now, think about Moderna, a company that in 2021 had free cash flow (FCF) of more than $13.3 billion, operating expenses of around $2.5 billion, and in the most recent quarter reported cash holdings of around $18 billion. It isn't a business that'll need to borrow money anytime soon.

3. Creating narratives that imply old investing rules and strategies no longer apply

Along with the regular flow of negative news, bear markets often see new and convincing narratives that explain how things in the market have changed such that investors who refuse to update their approach will be imminently devastated. It's true that successful short-term strategies need to adapt to shifting conditions. But if you're investing mostly for the long term (and you should be), the chances are very good that simply holding onto your shares is a better option than adopting a radically different approach. 

So don't get rattled by the narratives. Think about whether your original investing thesis for the stock is still true, and hang onto your shares even when the bear market is trying to tell you that it isn't a good idea.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Prediction: This bear market will test your resolve in (at least) 3 ways appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned.  The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

With inflation running high and the global economy in disarray, it doesn't exactly seem like a great time to be investing in stocks. After all, the market has already lost almost 14% of its value this year, and its near-term future is extremely uncertain. 

But if there's one thing that the smartest investors know, it's that craziness in the market isn't an excuse to sit on the sidelines. For them, it's a call to take calculated actions to support their portfolio's value in the long term. In particular, there are three things they'll be doing right now and in the coming months to make sure they come out on top.

1. Stay cool even when favorites are down

Perhaps the most important thing that the smartest investors do that average investors often don't is that they keep their wits about them when their positions aren't going their way. It's easy to say that people shouldn't panic sell, but, when you're faced with your hard-earned money trickling away, it's also quite easy to get rattled. And once that happens, they tend to start thinking about selling their shares, even when it'd be at a loss, and even when the losses might go the way of the dodo with enough patience.

To make matters worse, when investors sell their shares at a loss when the market is unstable, it's often without considering whether their investment thesis is still valid, which is also generally a poor practice.

For example, both Intuitive Surgical (NASDAQ: ISRG) and Costco Wholesale (NASDAQ: COST) have fallen this year so far, with Intuitive losing 36% and Costco dropping by 5%. But both companies are still profitable, and they've grown their trailing-12-month revenue by upwards of 40% over the last three years.

More importantly, neither has changed anything fundamental about their business model nor have their operations been directly impacted by the ongoing market volatility. Intuitive Surgical is still making robotic surgical systems, and Costco is still selling bulk consumer goods and groceries out of its warehouses. The same forces driving their growth before the bear market are still in play today, and smart investors know that there's a good chance the pair will recover over time due to consistently reporting favorable earnings, just like before. 

2. Build on high-conviction positions

In keeping with this theme, another thing that the best investors do is to buy more shares of their favorite companies even when the future is uncertain. After all, if your investment thesis still holds up, why not take advantage of dips and add to your positions? 

Take Intuitive Surgical, for example. At the core of the company's appeal to investors is that for each new da Vinci surgical suite that it installs in operating rooms worldwide, it gets a years-long stream of revenue from sales of maintenance contracts, training packages, software, spare parts, and updated surgical tools for the robots. And when its customers use their surgical suites for more procedures, they tend to need more of the services and accessories, so it also benefits from the growth of healthcare systems.

As a result of that razor-and-blade business model, around 75% of the business's revenue was from recurring sources in 2021, a proportion that is slowly increasing over time.

Does turmoil in the market affect any element of Intuitive's narrative? No. So, while the smartest investors would probably check whether any other important factors are eroding their investing thesis for the stock before buying more shares, they ultimately wouldn't be shy about adding to their position here. 

3. Buy bargains or likely future winners from watch list stocks

Most skilled investors maintain a watch list of stocks they'd like to buy. Then, during volatile periods in the market, they look for opportunities to start new positions in the stocks they're watching, either for the right price or due to positive shifting in economic phenomena. At the moment, inflation is the economic phenomenon du jour, so one thing that smart investors might be on the lookout for are businesses that stand to benefit from it.

Costco fits that bill quite well. Since the wholesaler's reputation rests on it providing its members with the lowest-cost goods around, if consumers are feeling the pain of inflation, they're unlikely to do much better than to keep buying its products. Furthermore, if other retailers end up hiking prices faster than Costco, it's plausible that it'd grow at a quicker clip than normal.

Per its June sales results for this year so far, Costco's revenue was 16.9% more than the same period in 2021, so that trend might actually be happening. In other words, if the stock were on a smart investor's watch list, they'd likely be willing to buy some shares at a somewhat higher price than usual when bargain hunting. And in the long term, that'd help them to secure strong returns, as opposed to investors who were too spooked to move into an attractive stock at a better price than last year. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 things the smartest investors do when the market is crazy appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has positions in Costco Wholesale.  The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Costco Wholesale and Intuitive Surgical. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

If your portfolio is teetering amid a turbulent bear market -- as pretty much everyone's is at the moment -- you need a plan to come out ahead, and you need to act on it.

Fruitful investments made today could have the benefit of a very long run-up once the bear market subsides, and mistakes made out of fear could have consequences for a long time, too. 

With those consequences in mind, let's look at three quick steps you can take to make the best out of the market as it is right now. 

1. Build on your high-confidence positions

The first thing to do when the market gets rough is to use it as an opportunity to gobble up shares of companies in your portfolio you think will continue to appreciate in value for a long time, even if their stock price is falling in the short term.

Think about a business like Pfizer (NYSE: PFE), which has seen its shares fall by 11% so far this year despite widespread successes with hit products like Comirnaty, its coronavirus vaccine, and Paxlovid, its antiviral pill for COVID.

If you have a position in it and the recent drop scares you off from adding more, you're missing out on a sale -- assuming that you actually believe it'll eventually recover. 

So, especially for an investment like Pfizer, which is steadily growing its sales and net income, it makes more sense to be buying shares than sitting on the sidelines. The real trick is to keep investing even when high-confidence picks get rocked.

And as long as your investing thesis is still as valid as when you started buying the shares, you'll be getting the biggest discounts when things look like they're crashing the hardest. Just be aware that you might need to wait a few years before your spending starts to pay off with outsized returns.

2. Set up a dividend reinvestment plan

Another great action to take to weather the bear market is to enable a dividend reinvestment plan (DRIP) for your dividend-paying stocks. Take the returns from AbbVie (NYSE: ABBV) over the last 10 years, for example:

ABBV data by YCharts

As the chart shows, the price returns from AbbVie shares are nowhere near the total return that's possible by retaining and reinvesting each of its quarterly dividend payments. When you reinvest your dividends instead of accepting them in cash and spending them elsewhere, your position compounds in value much faster.

And when share prices dip during a bear market, the stock's dividend yield increases accordingly, meaning that if you aren't reinvesting your dividends at that moment, you're missing out on securing some higher-yield shares for the remaining years of your long hold. 

Plus, biopharma companies like AbbVie often have significant cash flows that are enough to keep hiking their dividend even when there's a bear market, recession, or other economic issues.

That means if you don't set your shares to reinvest their dividends now, then by the time the bear market is over, you might have missed out on quite a bit of compounding at a very attractive rate. And it would be a shame to lose out on this bonus that's there for the taking. 

3. Talk yourself out of panic selling (or buying)

Perhaps the most important step to take during a bear market or market crash is to take a deep breath and talk yourself out of selling your shares in a panic. (It's also helpful to avoid frantically buying the dip on stocks you aren't fully confident in but seem priced like a bargain.)

Selling your shares locks in whatever losses you've sustained, regardless of whether there is a valid business reason for the underlying company to experience additional headwinds. 

In the current market, it's true that there are quite a few economic headwinds making things difficult, but it's also true that buying high and selling low is a losing strategy.

Eventually, the market will recover, and when it does, the stock you're itching to sell could easily come back with a vengeance. Therefore, when you get tempted to pull the plug on some of your investments, you'll regret not stepping back, especially if you don't have a need for the money you invested anytime soon.

When I get tempted to sell due to market chaos, I find that it's often helpful to simply close my browser tab displaying my portfolio and take a walk outside. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 steps you'll regret not taking during this bear market appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Motley Fool contributor Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

When you're building an income stream with dividend stocks, not all that glitters is gold. Some companies might appear to offer far more juicy payouts to investors than they actually do on a regular basis thanks to special dividends or intermittent ones, and others might be disbursing unsustainably high amounts of cash. 

If you want your passive income to be as close to fully passive as possible, you'll need to figure out how to sift out the companies that can actually continue to keep paying you quarter after quarter. So without further ado, here are three secrets that'll help your passive-income investments to be as lucrative and long-lived as possible.

1. Yield is a poor metric

The most important thing that every passive income investor should know is that dividend yield isn't a metric you need to obsess over. Take Abbott Laboratories (NYSE: ABT) for example; its forward dividend yield is just over 1.8%, and it's a member of the high-flying crew of companies known as Dividend Kings that have increased their dividend payments annually for 50 years and running. Look at this chart:

ABT total return level. Data by YCharts.

As you can see, Abbott's yield has fallen over the last five years while its dividend payments and its total return have risen. Buying shares five years ago was a great investment, even if the yield dropped, as the yield's fall was a result of the stock's price rising.

And the amount of passive income disbursed per share only went up during that period. So if you saw its relatively low forward yield today and then noticed that the yield fell, don't interpret that as a problem, because it isn't. 

Remember, the yield is just a measurement of how much of a single share of the stock you could buy with a year's worth of dividend payments in hand. Rising yields can be caused by a plummeting stock price, so treat them with suspicion. 

2. Growth wins the day

Companies that grow their cash flows consistently over time are better passive-income stocks than those that don't. And to grow regardless of the economic environment du jour, it's necessary to have an effective business model that's both adequately diversified and profitable. After all, accumulating passive income is a long game, and it's a lot harder to win when your portfolio companies hit major setbacks from which they can't easily recover. 

Making a few different types of evergreen products means that unexpected stumbles in one revenue segment are unlikely to spill over into others, and it also means that investors are less likely to pick up the tab for problems in the form of a dividend cut. 

Let's look at Abbott Labs once again:

ABT revenue (quarterly). Data by YCharts.

Abbott had no problem expanding its revenue, net income, free cash flow (FCF), and its dividend over the past five years. To accomplish that growth, it sold many of the same products that it always has: branded generic medicines, clinical diagnostics, stents and pumps for heart surgery, and baby formula, to name a few.

It also worked to develop better versions of its existing products, such as its FreeStyle Libre 2 glucose monitors, not to mention making new products altogether, like its BinaxNOW coronavirus rapid diagnostic tests. And both of those two are among the leaders in their markets.

It's true that developing new products is risky, and it can be expensive, too. But without an engine of growth, investors can't expect businesses to keep hiking their dividends, and that somewhat caps the amount of income you can make by investing in them. 

3. Patience is a virtue and so is reinvestment

The last secret is that setting up a dividend reinvestment plan (DRIP) is a good idea if you think that you'll want more passive income in the future than you could get from a dividend stock today. When you reinvest your dividends into buying more shares of a company, you're banking on the slow process of compounding to work in your favor over time. If you just spend your dividend income immediately, you won't get the benefit of what might well be decades of compound growth.

At the same time, you don't need to let your investment compound in value from the reinvestment of its dividends alone, and it's often a good strategy to increase your holdings with additional share purchases over time. The more patient you're willing to be, the more likely it is that you'll have a chance to buy shares when their yield is high relative to the level at which you first invested.

And the more you're willing to keep investing over time, the larger your income stream will be whenever you decide to stop reinvesting and start accepting quarterly cash infusions into your bank account. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 passive income secrets for dividend investors appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has positions in Abbott Laboratories. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Commentators everywhere are professing that a recession is nigh, and there's reason to believe they're right. The market is down, inflation is up, and inventories are starting to bulge with unsold goods. If you're feeling a mounting sense of doom, you're definitely not alone. 

But none of the above are good reasons to sell your biotech stocks. In fact, there's a compelling argument that recessions are exactly when you should be buying them. Let's go through a few of the paradigms that explain why.

Here's why selling might be ill-advised

The first reason to refrain from selling your biotech stocks during a recession is that the drug-development cycle is typically much longer than the duration of most recessions, and it can often take upwards of 12 years to move a candidate from early research through the entire clinical trials process. On average, recessions last 17.5 months, but the latest recession in early 2020 only lasted two months. Remember, most biotech companies can't generate much in the way of revenue until they have a medicine that's approved for sale. So if they don't have any drugs on the market and a recession occurs, nothing changes about their sales. 

Nor does much of anything change about their chance of earning future sales as a result of successfully commercializing a medicine. Only around 20.9% of drug candidates manage to make it through the entire clinical trials process and reach the market, and failures along the way are almost always due to an unacceptable safety profile or weak efficacy. Economic factors can't detract from or make up for a drug's clinical performance, though they could negatively impact sales -- but it's not a given that sales will fall. 

Even for companies that already have products on the market, recessions aren't a deal breaker because revenue can still grow when the economy is shrinking. Take Seagen's (NASDAQ: SGEN) performance during the Great Recession as an example. Its quarterly revenue grew by 62.9% from the middle of June in 2007 through the same time in 2009.

While its shares did still lose value during that period, their decline of around 6.5% was far less than the market's collapse of more than 39.7%. And if you held your shares from right before the recession officially started until a year later, you'd be sitting on significant gains compared to the market's performance -- and that was true for more than just Seagen, as shown below:

^SPX data by YCharts.

That's right: The industry-tracking SPDR S&P Biotech ETF beat the market both during and immediately after the recession. Especially for biotech investors who love to diversify within the industry, that's a strong confirmation that selling your shares in the face of economic turmoil could be a big mistake.

It might even make sense to buy

For risk-tolerant investors, recessions are actually a great time to load up on shares of attractive biotechs when they're cheaper than normal. The trick is to understand which companies have declining share prices because of events beyond their control and which are likely to struggle in a recessionary environment.  

Consider CRISPR Therapeutics (NASDAQ: CRSP) as an example; it has more than $2.2 billion in the bank but trailing 12-month operating expenses of only around $592 million. Its pipeline has a handful of mid-stage gene-editing therapies, and its share price bounced back promptly to smash the market's return after the coronavirus crash and recession. Take a look:

^SPX data by YCharts.

As you can see, if you find biotechs that fit the bill, recessions can be an appealing time to invest. Biotechs with plenty of cash, minimal expenses, and pipelines packed with late-stage programs are positioned to withstand recessions better than others. Falling share prices make issuing new stock an unattractive way to raise funds, and having a lot of cash relative to research and development (R&D) expenses and operating expenses means that management can afford to wait for better conditions before doing an offering.

At the same time, companies with a lot of late-stage programs are closer to realizing revenue than others, which means they'll also have an easier time getting debt financing if it's necessary. If you already hold shares of the sturdier contenders, know that selling might well help you avoid some short-term losses -- but there's also a good chance it'll preclude you from realizing long-term gains once the economy recovers.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should you sell biotech stocks if there's a recession? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CRISPR Therapeutics and Seagen Inc. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It's a scary time to be a growth investor. With the Federal Reserve aggressively hiking interest rates and the stock market in a steady decline, it's entirely rational to wonder whether it's a good idea to keep buying shares of growth-phase businesses. 

And (spoiler alert) for some people, it might not be. Much depends on your risk tolerance and investment time frame. Let's examine Teladoc Health (NYSE: TDOC) as an example to explore which category of investor you might fall into during the ongoing disruption in the market and the economy.  

The pro case: Why it makes sense to keep buying shares

Like many other growth stocks, Teladoc is down more than 88% over the last 12 months. This brutal decline might seem like the kind of result you'd expect from a company with shrinking revenue or severe and enduring headwinds, but neither is the case. Its quarterly revenue rose by around 25% over the last four quarters, and over the last three years, its quarterly sales increased by 334%. 

But while growth has somewhat slowed compared to prior years, it's hardly a foregone conclusion that it will slow further or start contracting. Teladoc is expanding its telehealth offerings to include chronic care management and mental healthcare, both of which are anticipated to be lucrative areas as more wellness services offer telemedicine. And there's no single telehealth provider that's as big or as well-known, another advantage that might become more relevant over time. 

Let's say that you're a relatively young investor with a high tolerance for risk and a need for aggressive stocks to deliver big growth in your portfolio. The fact that Teladoc's shares have been eating dirt recently shouldn't really influence your decision as the decline isn't associated with any detrimental changes to its competitive advantage in the market. The stock's poor performance is also not the result of consumers eschewing telehealth as a category of services. 

Though it's true that the Federal Reserve's policy of hiking interest rates will make it a bit more expensive for Teladoc to borrow money moving forward, the same is true for most growth stocks that might need to take out a loan. And as much as inflation and supply chain issues might be striking the economy, Teladoc's most critical inputs are skilled labor from its telemedicine physicians, who don't need specific supplies to continue to add value, and whose services are already on the expensive side.  

In other words, the stock market's present headwinds aren't going to stop Teladoc from continuing to do what it's best at in the long run. So if you're willing to accept a bit of turbulence in the short term, the main investing thesis for Teladoc is still sound, and you should keep buying shares.

Furthermore, there's a very high chance that quite a few other growth stocks that are currently in the dumpster still have a similar combination of financial health and enduring competitive ability. If the company's prospects haven't significantly dimmed, the recent downward price movements might just be noise or fallout from the wider market -- not a reason to avoid investing. 

The con case: Why it might be better to wait or invest in something safer

Buying shares of a formerly high-flying growth stock like Teladoc is easy to do if you know you won't need the money anytime soon, or possibly ever. On the other hand, if you're an investor who needs to skew more conservatively because of a looming financial goal like retirement or financial independence, the picture is a bit different.

While unlikely, it's entirely possible that Teladoc's shares will drop by another 88% over the next couple of years, even if its competitive abilities only become stronger. And an investment in a beaten-down growth stock that might take five or six years to recover simply won't do if you need the money before then.

Additionally, rapidly expanding businesses in new industries like telehealth will frequently face competition from new entrants to the market, who may ultimately eat their lunch. For a company like Teladoc that's presently unprofitable, the arrival of new competitors could make the march toward profits even longer and more difficult. The same might be true of other hot sectors.

Finally, if your portfolio needs less exposure to risk for any other reason, it's probably not a smart idea to invest in Teladoc or other highly hyped growth stocks. Even if the long-term future of the company and the market both look bright, by most accounts we're in for a bit more turbulence before things settle down. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should you buy growth stocks right now? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Teladoc Health. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

With the Core Consumer Price Index (CPI) rising by 8.6% over the past 12 months, inflation is the word of the year, and many portfolios aren't fully ready for it. Rising costs give way to thinner margins, and growth-stage companies are getting hit by the market's reaction particularly hard. 

But you aren't powerless in the face of inflation. Understanding how to hunt down inflation-resistant stocks is half the battle, and they're more common than you might think. Let's take a look at three things to look for when you're scouting for the stocks that'll anchor your portfolio's value during the ongoing inflationary storm. 

1. How necessary are the products for potential buyers?

The first thing to look for when you're evaluating a stock's ability to hold value through a patch of inflation is whether its products are something that buyers will be able to do without. For instance, CVS Health (NYSE: CVS) sells a huge number of consumer health items that people need no matter their cost, like contact lens fluid and antacids. That means even if prices rise, consumers will still be buying the products, though they may look for substitutes or cheaper alternatives than what CVS might carry.

Another good example of highly necessary products are many of the life-saving prescription medicines made by Pfizer (NYSE: PFE). In Pfizer's case, its customers are pharmacies like CVS as well as healthcare systems, which in the U.S. are counterparties to insurers.

If Pfizer hikes the price of a drug that it sells to hospitals to keep pace with inflation, the hospitals can then pass the additional cost on to insurers. What this means is that the company's primary customers aren't about to balk at a higher price point for the medicines they need to treat patients, so its base of revenue is unlikely to budge by much.

2. Steady cash flows over time

Stable businesses can weather different economic environments without significant negative impacts to their cash flows. The best way to find a business with steady cash flows is to look at a company with a highly needed group of products and examine its financial performance over a very long period. Take a look at this chart. 

CVS Revenue (Annual) data by YCharts

As you can see, CVS' revenue and free cash flow (FCF) smoothly and slowly increased over the last 30 years. There were a trio of recessions in that period, as indicated by the shading on the chart, and plenty of different economic forces (including inflation) affecting it over time -- but none of that stopped the company's upward march for very long. And all that needed to happen was executing on its business model of building out retail pharmacies and then selling consumer health goods to people who go there to get their prescriptions filled. 

3. Having a clever plan to deal with inflation

Companies that have an inflation strategy are better equipped to deal with rising input prices and potential softening of demand than those that don't. For many, the strategy may simply be to "increase prices as much as our customers will tolerate," but that could easily end up destroying demand and causing revenue to fall.

One innovative strategy used by Costco (NASDAQ: COST) is to keep certain prices, like the price of its hot dog and soda combo in its food court, at a fixed level that doesn't change in response to inflation, but to let other prices float as needed. Since the 1980s, the combo costs only $1.50, and there are no plans to change that amount.

While it's true that this means the business will have an ever-poorer margin on the combo, which still faces rising supplier costs, it helps to mitigate the sticker shock that customers experience when buying something familiar. And when competitors are unashamedly hiking prices by significant amounts, it makes those that don't hike 100% of their prices look all the better -- even if some products do end up being marked up. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 3 things to look for with inflation-fighting stocks appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has positions in Costco Wholesale. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Costco Wholesale. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended CVS Health. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Pharmaceutical stocks can be great tools for building wealth, provided that you understand how and why to use them -- and how not to. Like all investments, it's entirely possible to get burned by pharma stocks, so you'll want to minimize the risks.

To help you on your journey, here are three of the biggest mistakes that new pharma investors are prone to making. The road to mastery is long, but if you do your best to avoid these pitfalls, your pharma portfolio could be in much better shape over the years.

1. Disregarding the exclusivity expiration date for key medicines

When a pharmaceutical company gets a new drug approved for sale by a regulatory body, it's in a race against time to recoup development costs and turn a profit before competitors are legally allowed to copy the drug and sell their own cheaper generic version.

Investors who aren't aware of looming exclusivity expirations invest in pharma stocks at their own peril. You wouldn't want to invest in a business that's already losing revenue from one of its top moneymakers, quickly.

For most drugs developed in the US, exclusivity protections last for five years, and patent protections can last for 20 years. Not all drugs have patent protections, but exclusivity protections are the norm.

In a nutshell, that means five years after a medicine hits the market, there's a solid chance that the drugmaker's revenue from it will start to fall as generic competitors enter. For example, one of the biggest questions for investors in AbbVie (NYSE: ABBV) is whether it'll be able to successfully navigate falling revenue from its blockbuster drug Humira once its exclusivity protections expire next year.

The larger the company, the less the expiration of any individual drug's protections will impact the stock. Still, the amount of annual revenue from a product matters the most, so be sure to check a company's latest earnings report to see how much an upcoming exclusivity protection expiration will ding the top line.

2. Ignoring the valuation

As with all stocks, it's perilous to ignore the valuation of pharma companies. After all, you check the price tag before you buy something to see if it's a deal worth taking, and pharma stocks should be no different.

What's an acceptable deal for you depends on your own preferences, but take care to recognize that an overly inexpensive stock should be a red flag, just like an overly expensive one would be. If you see that the price-to-earnings multiple of AbbVie is around half that of its similarly sized competitors like Eli Lilly, try to figure out why the market is valuing it that way.

With AbbVie, the answer almost certainly relates to its looming expiring exclusivity for one of its biggest-earning medicines, so the cheap valuation is a signal that the market is expecting lower future earnings. If you buy the shares and the market is correct, you might be disappointed by languid growth. Worse yet, if you buy an overpriced stock and an economic event causes investors to flee to grounded valuations, you could be looking at substantial losses.

However, you don't need to obsess over valuations, especially not when your investing thesis for a business is strong. A stock that's on the expensive side might be that way because of anticipated fast growth that pans out. Alternatively, shares that are priced cheaply might be the result of the market judging a stock's growth potential incorrectly.

You're more likely to avoid investor's regret if you factor valuation analysis into your research process.

3. Selling too soon

Perhaps the largest mistake that new investors make when purchasing pharma stocks is selling them too soon.

The drug development cycle takes quite a while to bear fruit, with the median successful project lasting around 7.2 years from the preclinical stage through the terminal regulatory approval for commercialization. Therefore, future revenue growth needs to be planned for far ahead of time. And because only 13.8% of medicines make it through the clinical trials process, increasing income over time is far from guaranteed.

This is why many companies develop many different medicines in parallel. As a result, major players tend to have at least a couple of programs that are scheduled to launch each year. When certain programs fail, it causes an immediate and negative impact on the share price. But once approved, medicines often take a year or more from their launch to see widespread adoption, and peak sales can sometimes occur only several years after launch.

So the positive impacts on shareholder value are partially registered over time, which is one of the reasons it's so important to keep holding even when there's been a setback with an important program.

In other words, if you buy a pharma stock only to hold it for a year before selling, you probably didn't get much of the benefit of the slow march of the development process. Especially when a drug stock pays a dividend, holding it for at least three years is highly recommended. And if you commit to a multi-year holding period, you'll be better prepared to stomach the inevitable downward volatility.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Investing in pharma stocks? Avoid doing these 3 things appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Unless you've been living under a rock, you've already heard that, per the latest economic data hot off the presses, U.S. inflation rose by 7.5% in the past year. As intimidating as that figure may be, I have some good news for you. It just might be possible to protect your hard-earned cash from the detrimental impact of inflation by parking it in the right pharmaceutical stock.

Of course, many other types of stocks could also be a better move than holding your wealth in cash. But I'm of the opinion that pharmas have at least one edge against inflation that makes them a decent choice, at least in some cases. Let's investigate why inflation isn't likely to cause too much damage to the companies responsible for developing and commercializing new medicines. 

Input costs aren't exactly a problem

The biggest thing to realize about pharma stocks is that the prices of the materials they need to manufacture and sell drugs aren't necessarily tightly linked to inflation. Consider the two pharma giants, Eli Lilly (NYSE: LLY) and Merck (NYSE: MRK). Flying in the face of inflationary pressure, the quarterly cost of goods sold (COGS) as a percentage of revenue actually dropped for both companies over the past year.

LLY Cost of Goods Sold (% of Quarterly Revenues) data by YCharts

As a result, their profit margins and net income actually both increased by a bit in the same period. If inflation were a serious threat to their bottom line, the costs of their inputs would have risen and forced their margin down accordingly. There's no guarantee that further increases in the pace of inflation won't start to make life more difficult for these companies, but they also have a powerful trick up their sleeve: pricing. 

If you're skeptical that pricing is the ultimate solution to inflationary cost increases in pharma, consider the following: 

Eli Lilly makes an insulin analog called Humalog, which helps patients to control diabetes. Most people who need the drug require consistent infusions of it, and they can't go without it, as doing so is a risk to their health. Furthermore, most patients are somewhat insulated from the cost of their prescriptions for the medicine via their insurance or public healthcare scheme. 

Thus, if inflation causes Eli Lilly's costs to produce Humalog to increase, it can count on being able to hike the price per dose without losing many customers. And that's one more reason why inflation is unlikely to cause much of a dent in its profits. 

Keep an eye on the total return

The other issue with inflation is that it can erode the effective return that investors get from their holdings -- unless the value of your shares can grow by as much as inflation. Take Eli Lilly, for example. Over the past year, it had a total return of 18.4%, which is derived from its share price appreciation and dividend yield of around 1.4%. Happily, the stock appreciated in value more than the inflation rate, which is a good sign. But that's not the whole story.

Assuming inflation remains at 7.5% year over year, Eli Lilly's dividend payment needs to increase by at least the same rate in order for its contribution to the total return to remain constant in terms of its real value. Luckily, the company's dividend grew by 15.3% in the past 12 months. So it rose by significantly more than the rate of inflation, meaning that investors did actually get a positive return from holding their shares on the basis of the dividend as well as the total return. 

The same set of facts won't necessarily be true for every pharma stock. Over the past year, the total return of Merck's shares was roughly 7.5%, and its dividend increased by only 6.2%. That means the payout lost ground against inflation, and the total return barely broke even. In other words, inflation was indeed a threat to the value of investors' shares of Merck because it killed their real returns. 

In short, inflation may not be a threat to the actual operations of pharmaceutical companies, but it can be a significant concern for investors because the returns of slower-growing pharmas might not keep pace. So it may be wise to invest at least a portion of your investment portfolio in smaller and faster-growing companies, which are more likely to be able to outgrow inflation's detrimental impact on returns. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is inflation a threat for pharma stocks? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Here are the top 10 ASX 200 shares today
• Dicker Data vs Megaport: Which ASX tech share has more upside?
• ASX 200 turns higher after a rocky start. Is a recovery on the table?
• PLS shares have surged 85% in a year. So why are short sellers circling?
• ANZ shares have climbed 13% in a year. Is there still room to run?

Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.