Growth investing is another popular investment strategy that involves picking growth stocks or stocks issued by companies that have high growth potential. Growth investors aim to receive gains that outperform the gains from benchmarks or stock indices.
What exactly is growth investing? How does it work? What are the investment goals and objectives of growth investors? How does it differ from other investment strategies such as value investing? This article list and explains the core principles of growth investing.
Core Principles of Growth Investing
Thomas Rowe Price Hr., the founder of the United States-based multinational investment firm T. Rowe Price, has been attributed as the father of growth investing because of his contributions in defining and promoting this style of investment. American investor Phil Fisher was also influential in shaping growth investing with his 1958 book “Common Stocks and Uncommon Profits” extensively used as a reference for determining companies with high growth potential. The following are the principles of growth investing:
1. Particular Focus on Picking and Holding Growth Stocks
Growth stocks are at the heart of growth investing. These stocks are generally defined as shares in companies that have the potential to provide substantial amounts of investment gains in the long term. A particular stock portfolio composed of these stocks should outperform the overall stock market or the common stock indices.
2. Choosing Companies that Have Yet to Achieve Their Full Potential
Another core principle of growth investing is picking and investing in companies that have high growth potential. This fundamentally entails finding companies that have not achieved their full potential but are on track to do so. Most growth stocks are small-cap stocks. Note that the largest companies today such as Apple and Toyota were once startups. Several mid-cap stocks and large-cap stocks can also be considered growth stocks.
3. Dependent on Capital Appreciation Over Dividends for Gains
Growth investors do not look for dividends. Most growth stocks do not pay dividends because the companies that issue and trade them prefer reinvesting their profits to accelerate and maximize their growth potential. The gains that these investors intend to attain in the future are in the form of capital appreciation or a substantial increase in stock prices.
4. Long-Term Mindset and Buy-and-Hold Investing Strategy
A major disadvantage of growth stocks is that short-term gains are negligible. However, when held for a longer period of between 10 years and more, the gains are substantial compared to other types of stocks. Imagine investing in companies such as Amazon and Microsoft during their early years. A key principle of growth investing is to practice a buy-and-hold investment strategy or a passive investing strategy.
5. Keen Attention to the Specific Traits of Growth Companies
What sets growth companies apart from other companies are several traits that make them attractive for investments. These include strong management and leadership, operation in a promising market or industry, a large target market or a commanding market share, capabilities to innovate and market innovative products, and strong sales growth.
Comparing with Value Investing
Growth investing is often compared with value investing. Warren Buffet has a different opinion. He has argued that the principles of value investing are theoretically similar to the principles of growth investing because growth is always a component in the calculation of value. American investor and billionaire Charlie Munger shares the same opinion.
There are those who see growth investing as something that focuses on overvalued stocks most while value investing primarily focuses on undervalued stocks that are considered value stocks. Some observers have also noted that growth stocks and value stocks go through bear and bull markets in relation to each other. Hence, in several instances, when value stocks underperform, growth stocks tend to overperform.