When you were young, your grandmother will likely have told you to eat all your vegetables so you can grow up big and strong. But what does eating all our vegetables have to do with investing you may ask? Well, your grandmothers’ hopes for you being big and strong aren’t too far off from Growth Investing. She was just investing in your growth, and not that of a company on the stock market.
Growth Investing (not in grandchildren, but in the markets) is a strategy focussed on capital appreciation - an increase in price and assets. By this, we mean that it is a strategy that focuses on companies that have the greatest potential to expand in both size and prominence within their sector.
Some notable investors have said that there is no theoretical difference between Value Investing and Growth Investing. Warren Buffet for example, said: “Growth and Value Investing are joined at the hip”. Related they may be, but they are slightly different beasts.
As we know from the What is… Value Investing article published last month, a Value Investor picks stocks that appear to trade at a lower value than their intrinsic value. A Growth Investor however, picks a company that has yet to reach its full potential to invest in. Growth Investors aren’t looking for a deal now, they’re looking for companies with high earnings potential for the future.
But how is it done? And before you ask, no, a crystal ball is not involved. As always, it’s all about the research. It’s not always easy to find companies that have the potential to grow rapidly, whilst competing with more established and often larger companies within their industry or sector, but the Growth Investor is the one who seeks them out!
A Growth Investor purposely focuses on stocks that provide a long-term outlook - and by long-term we’re looking up to a decade or more into the future - patience is key! This future prediction may seem a little reckless, but this strategy isn’t just a random speculative stab in the dark, it involves an exhaustive evaluation of the health of the stock now, and then its potential to grow. This is done by carefully and thoroughly considering the prospects for the industry and sector as a whole; you have to roll up your sleeves and get immersive.
When looking at current market performance, a Growth Investor must be able to see that there is evidence of an extensive and strong appetite for the company's services or products. To understand appetite, a Growth Investor looks at a company's recent history.
As the name suggests, a growth stock should be growing, if there is a consistent trend of strong earnings and revenue, this signifies the company’s capacity to deliver as a growth stock.
The companies Growth Investors look at, typically use all of their resources and profits to grow the business further, therefore growth stocks tend to not distribute earnings to shareholders in the form of dividends.
So if you want to join the ranks of Thomas Rowe Price, Jr. or Peter Lynch you’re going to have to get excited about research, and lots of it, you’re going to have to think long term, and you're going to have to be patient (with few, if any, dividends). Much like a grandmother has to be when you secretly feed your unwanted veggies to the dog.
Even your grandmother knows there's a science to being right.