Growth Investors are constantly trying to find tomorrow’s strongest stocks. They seek out companies that are at the beginning of their growth cycle which already show signs of dominance. When they spot an intriguing stock that is worth investing in, they purchase it even though it has witnessed a dramatic price rise hoping to ride through the waves as the company grows and attracts more and more investors. There’s not a lot of analysis that goes into growth investing, as it’s a criteria based strategy. When I say criteria-based means, I’m referring to Growth Investors are much more focused on whether a company is showing signs that suggest that it is one of the leaders of tomorrow as they are about the technical or fundamental aspects of a company’s stock.
The criteria used to select growth stocks differs widely and in general Growth Investors are looking for companies with the potential to lead their market and grow revenue and profits exponentially over the next few years. The majority of growth stocks have an distinct advantage, such as cutting-edge new technology ( early Microsoft… Bill almost took the entire world) Visionary leadership ( Steve Jobs at Apple… Innovations which begin at “I”), a competitive advantage ( e-Bay… will they ever be able to compete with competition?), or an innovative marketing approach ( Starbucks… do you sell beverages or coffee?).
Investment Selection Methods
There’s a bit of fundamental analysis and occasionally a technical analysis to be considered when evaluating potential growth stocks, however for the majority of the time, Growth Investors are trying to determine a stock’s position on the market. They won’t be scared away because of weak fundamentals so they are sure their growth requirements are met. As an example, suppose you have a startup with patents on a new technology, they’re the first mover in a hot new industry, and they have a chief executive with several successful ventures that he has managed, many Growth Investors will buy it even if it is with debt and is losing money.
One of the fundamental indicators that Growth Investors talk about a lot is the Price to Earnings Ratio or P/E Ratio. This simple calculation is the earning per share multiplied by Price of the stock and the reason why they are so fond of this measurement is it tells you today what the market thinks that the stock will be performing tomorrow. Some strategies may interpret a high P/E ratio as indicating that a company is currently overvalued but an analyst who is a Growth Investor interprets this to be a sign that the company will make more money in the future and people are simply betting on those future earnings.
There’s no set of guidelines to follow when identifying growth stocks, but there are some rules of thumb for growth investing that the majority Growth Investors adhere to. I mentioned that a growth company needs to be an innovator in a brand new field which means that growth companies need to maintain a competitive advantage. This can come in the forms of patents, new technologies, deep pockets or the first mover advantage. It is also known that the P/E ratio is important and this tells you that rapidly increasing earnings is an essential part of the plan. A key element that is connected to increasing revenue quickly is cost management. If revenue is good, but expenses are rising faster, profit margins begin to decline, a typical pitfall for many would-be growth stocks. In the end, if a company is going to survive the competitive early stages of an economic cycle and emerge as the clear winner, it has to have great management. Growth Investors constantly evaluate who is running the show. They seek out executives with a track record of success, visionaries who are the most effective in their field, or innovative and new business strategies.
It’s a bit off topic Have you noticed the fact that Growth Investing and Value Investing are basically two different strategies? What would a Value Investor would consider a fantastic stock, could be a Growth Investor would consider trash and vice versa. Does this mean one strategy is better than the other while the other one is not? It’s not true, both strategies have been proven to beat the market for long periods of time for investors who are adept in implementing their strategies. However, this certainly strengthens my recommendation to not mix strategies. Can you imagine that you are a Growth/Value investor? Yikes.
Growth investors can expect higher levels of risk than other strategies and the market. What does this mean? This means that their stocks fall first and they drop the fastest during bearish periods. This is due to the nature of growth stocks, many are young companies with large P/E Ratios. They are considered to be overvalued during recessions and market corrections. Growth investors must be prepared to take on loss until the stock market becomes positive again.
While Growth Investing is not as technically or analytically demanding as an approach like Value Investing, it is still a rigorous research strategy. Growth investors must keep up with more than just the market. They need to know what industries, geographical regions, and stocks are hot and be aware of new technologies products, services, and services quickly. Successful Growth Investors are constantly switching to various kinds of stocks to ensure they are investing in areas in areas where there’s lots of excitement and new ideas. There is an enormous amount of information available if you’re trying to figure out what’s “hot” in the market right now. Every newspaper, website and magazine offers a different opinion. Growth investors must be able to sort through all of this information and find the stocks that will be tomorrow’s leaders.
Risk management is a tricky but essential aspect to Growth Investing. Many Growth Investors use buy limits and sell limits in order to remain focused and assist in the constantly shifting balance. Set buy limits correctly will prevent the risk of investing in stocks that have seen the majority of their upswing and also indicate when they can take a profit. A well-planned sell limit will tell them when to withdraw their cash from stocks that have lost as much as they’re willing to put their money into this particular investment. While this is a good thing, it reduces the risk of being exposed to poor stocks, but it could be devastating if you do not set the right limits as growth investors can lose significant amounts of their capital in cash during a bull market. Growth Stocks can significantly outperform the market during period of bullishness, but not if your portfolio is in the sand.
This isn’t a hold-and-buy strategy, you will trade frequently, which means that the transaction costs could add up very quickly. A well-designed risk management strategy may require you to buy as well as sell the exact stock a few times depending on the fluctuation of your limits for selling or buying.
Growth stocks grow much faster than other stocks. This means you are likely to outperform the market in bull markets. This is the aim, Growth Investors know that If they are investing in growth stocks that are good during rallies, their huge gains are more than enough to make up the losses they face in bear markets.
Growth investors who are good at risk management are more likely to sell out near the top of a stock’s expansion cycle. Avoid investing the stock when it’s too late to take advantage of the opportunity, and then to sell the stock once it no longer appears to be a growth stock. The best risk managers be protected from loss, and they’ll have most of their money invested during market rallies.
Everyone wishes they had bought companies like Google, Microsoft, or Apple. Growing Investing is the strategy that offers the highest chance of hitting the home run. This is one of those strategies which is looking for the next great stock and the one that will expand from a small business to becoming a Blue Chip. This aspect draws more people into Growth Investing than any other investment strategy. A lot of investors look to purchase businesses which make them feel they have won the lottery.
Growth investing isn’t going away It’s a highly sought-after strategy that attracts huge numbers of investors looking for big gains during bull markets. Great Growth Investors will outperform investors who employ just about every other strategy. Most strategies are less conservative and provide much more protection against losses in bear markets but can’t keep up with the rapid growth in bull markets simply because they’re not willing to risk the risks required.
One disadvantage for Growth Investing is that you are likely to have to alter your strategies as you near to retirement. As your portfolio gets much bigger, and you get closer to the close of your career, conserving capital becomes more important than capital growth. Why? As an example, suppose that you’re just 3 years away from retirement, and then a recession hits. As a growth investor your portfolio falls more rapidly than the market, and you’ll lose up to 40 percent from your investment portfolio. If you’re only 15 years away past retirement, great there’s plenty of time to recuperate However, as you’re only three years away , you’re not likely to make up the losses, and are very unlikely to gain ground before the date of your retirement. Then you must decide if you’d rather be working longer or adhere to an economized budget in retirement. Lose-loss decisions are not fun the smarter investors choose an investment strategy that is more balanced when they reach retirement.
If you decide to take this route take a few hours of study per week during the first few years or so to help you more quickly master the art of the identification of high-growth stocks early in their growth cycle. Research the past, it will tell you a lot about how great companies behaved and were judged by the market early on. Research is a must and ethics of work enough. There’s a lot of buzz in the media regarding which industries and stocks have become “hot”, and successful Growth Investors are able to avoid all the hype and locate great businesses hidden in the midst of the garbage. You’ll need put in a lot of effort to improve your criteria for selection and to develop the ability to do this.
You’ll need steely stomach to be a Growth Investor because you are guaranteed to take losses usually very quickly during bear markets. Growth investors who are successful accept this volatility as a necessary risk and take it on until they can wait for the next market rally to make up for their losses. Risk management helps but remember that the management of risk for Growth Investors Growth Investor is geared more to coordinating the buying and selling for your high-growth stocks to maximize profits than for protecting yourself in times of market down. If you’re invested in stocks with high risk when a bearish market strikes, you’ll have to admit that you will experience some bumps. The speedy and sometimes massive losses make it difficult for anyone, not even the most experienced Growth Investors to avoid making foolish investment mistakes, such as buying too much and selling too low.
The objective of a growth investor is to determine tomorrow’s top businesses. Sometimes, it can feel like trying to find a needle in a haystack It is inevitable that you’ll pick winners, particularly as a beginner. The only way to stop this is to keep refining your risk-management methods to ensure that you select the fewer and fewer winners and then exit these more quickly as you gain experience.