Buying Stocks: Growth Investing
If you own stocks in a successful company whose earnings are projected to continue growing at an above-average rate, you own some growth stocks.
Instead of yielding a high income, growth stocks tend to increase in value. There’s a lot of hyperbole around these special and often very pricey stocks, and for good reason.
They typically have impressively high P/E ratios.
In most cases, the company would prefer to reinvest retained earnings in capital projects, so it is not common for growth stocks to pay dividends.
Growth investors tend to receive returns from capital appreciation, meaning higher prices. The return makes it worthwhile, but be prepared to pay top dollar to get into the growth stocks game.
Philip Fisher, a pioneer in growth investing with over 35 years experience, wrote a book in which he spends a chapter urging readers to purchase shares of superbly managed growth companies, specifically technology companies.
The pace of change in the technology sector creates an environment ripe for disruptive innovations.
Mr. Fisher started out as a value investor like Warren Buffett.
His style evolved following lessons learned in the Y 1929 stock crash, learning the hard way that over time, a well-selected growth stock would substantially outperform a statistical bargain.
Mr. Fisher emphasized, repeatedly throughout his career, the value of long term investing.
Brand New Technology
Brand new technologies tend to be unproven, and growth companies spend a lot of money on development and ramping up production.
Super High PE Ratios
Growth stocks typically have super high PE ratios. A company has worth beyond its earnings and its important to balance intrinsic value against the money the company makes. Future potential should also be priced in.
What often happens in the Growth Story
It is inevitable that all growth stories will eventually fade as the sizzle comes off of the issue. The market is always moving. When growth comes to a halt, a more realistic per share price for the stock settles in.
There are 2 possible outcomes here, they are: the company is becomes correctly valued because it was highlly overrated in the past, or the company is currently under-valued and poised for a strong rebound in the near future.
And then there are Growth Mutual Funds
Growth mutual funds are characterized by their laser focus on capital appreciation. As with growth stocks, dividend payout is a rarity, so if that is what you are after this issues is not for you.
There is a holding period of 5-10 years.
So, make sure your time frame allows for that.
The fund Portfolios will consist of companies with above-average growth in earnings, that of which would be reinvested into acquisitions, expansion, research and development, etc.
Growth funds are for the risk-hungry. The potential is high but the risk can be higher higher. You must have a patient stomach when investing in this kind of issue.
Growth Investing Books
Here are some must-reads if you’re serious about getting into the growth investing game.
Benjamin Graham and the Power of Growth Stocks: Lost Growth Stock Strategies from the Father of Value Investing
Remember, it is your money and so your responsibility.
Have a terrific weekend