Growth Investing is a style of
investment strategy that puts the emphasis on capital appreciation. A
Growth company could be expensive looking at the Price Earnings Ratio or
Price to Book Ratio, but yet, the shares could still be a buy as they
are in an expansion mode.
is another strategy, called Value Investing, that identifies companies
that are cheap (i.e. low Price Earnings Ratios, and low Price to Book
Ratios) and which the market has not yet appreciated the value of them.
Warren Buffett invests in both types.
Although he splits his portfolio roughly into 70% Value Investing, 20% Growth Investing, and 10% cash.
is a third type of investment strategy called Momentum Investing.
Warren Buffett is not a great fan of this type of strategy but we give
it space for a small percentage of our own portfolio (we like to be a little bit different).
Warren Buffett says:
"It's far better to buy a wonderful company at a fair price
than a fair company at a wonderful price"
Growth Investors look for companies that exhibit growth potential. The type of companies they look for may even look expensive when viewing their Price to Earnings or their Price to Book ratios, but ...
...by definition, their is value in a growth company. If, you can uncover them.
There seems to be a bit of confusion about who is "The Father of Growth Investing." Some say Philip Fisher, and others credit Thomas Rowe Price, Jnr with the title.
So what? We don't care who gets the gong. We only care if it's of any use to us.
"Growth and Value Investing
Are Joined At The Hip"
Growth Investing differs from Value Investing in that a company identified as a growth company has yet to reach its full potential.
And Value Investing is where the investor thinks that a share price is below what it should be, i.e. undervalued by the market.
In order to identify a Growth Company the investor has to do a considerable amount of research in order to find companies that might grow rapidly enough to compete with already established companies.
Investors therefore need to take a higher risk than they would ordinarily do, say with, Value Investing.
That's why Warren Buffett splits his portfolio 70% to 20% in favour of Value Investing.
A lot of companies pay dividends to their shareholders whereas a growth company will often pay no dividends but re-invest that money back into the company.
They are commonly identified by having a unique product that is superior to their competitors. Competitors that may be long, established companies.
Prior to the "dot-com" bubble around year 2000 a lot of "growth" companies faded away. It is, however, not surprising that a lot of growth companies are in the technology sector.
Other potential growth companies are in the healthcare sector.
Nearly all growth companies are smaller capitalised companies. That is, companies that are likely to be valued by the market somewhere between £100 Million and £2 Billion.
In our opinion, we are not looking at micro stock - those with capitalisations of under £100 Million. Sure, some of them will make it to the big time, but out of 100 such companies, only a few will make it.
"Penny Stocks" as they are called, are definitely not on the agenda for the type of growth stock we are searching for.
It is unfortunate that a lot of "potential" growth companies never make it into the big time.
But there has to be a word of caution when seaching for growth companies - the next value companies you might say. And the caution is this - they can be a risk. They can also be volatile.
Analysts will look for Earnings Per Share (EPS) to be increasing. Typical Growth companies may be as young as 2 or 3 years. But the longer the company has been public, the better.
Observing EPS over a period shows a trend of rising earnings. 10 years of increasing earnings is good, five years is also O.K. But companies with less then five years of earnings it is difficult to assess.
They will also pay close attention to the Chairman's Statement at annual meetings. Every word of these statements needs to be listened to very carefully. Often it is what the Chairman has to say that can be interpreted one way or another.
Analysts will also pay close attention to a company's Return of Equity (ROE). This will reveal the company's efficiency. Everybody likes to see a well run company.
A close study of Fundamental Analysis is time well spent. Look at all the company financials. The Fiancial Ratios, the Balance Sheet, The Cash Flow Statements, and The Income Statement. What are the company Profit Margins?
It's no co-incidence that Warren Buffet only allocates 20% of his portfolio to Growth Shares. It's because it's much more risky than investing in Value Shares. By definition, you will be buying Value Shares at low, and cheap, prices.
Growth Shares can be a risk. Research is vital.
One final word on Growth Investing. Keep your eye on companies recently admitted to the market. Initial Public Offerings or IPOs, you will find a lot of Growth Companies coming to market. But, not all of them will indeed grow. A detailed study of IPOs is therefore necessary.
Buffett - Beyond Value by Prem C. Jain
Reserve your copy by clicking the link below:
Benjamin Graham and The Power of Growth Stocks by Frederick K. Martin
Get your copy of this great man's work right here:
The Little Book That Makes You Rich by Louis Navellier
The author has created, and proven, an easy-to-follow approach to growth investing that offers a rare opportunity to outperform the market without taking any unnecessary risk.
He shows how his approach can be used to find stocks that are poised for rapid price increases, regardless of the overall market direction.
Within the book he describes a proven formula for finding growth stocks that beat the market by combining 8 powerful fundamentals.
This series of books are worth their weight in gold, and this one is no exception, click the link below to order it now:
Common Stocks and Uncommon Profits by Philip Fisher
Philip Fisher is one of Warren Buffett's go-to guys. This paperback version retains all the wisdom of the original edition published in 1958 and includes Fisher's 15 stock-picking criteria and his 10 "don'ts."
Warren Buffett has gone on record saying that he is 85% Graham and 15% Fisher. With Graham being hailed as the Father of Value Investing and Fisher the Father of Growth Investing.
This book is known s "The Bible" on Growth Investing written by one of Warren Buffett's favourites. Get your copy by clicking on the link just below:
To be honest, there is a reason why Value Investing and Growth Investing are unequally balanced in our portfolio.
We follow Warren Buffett, at least for the most part. He advocates 70% in Value Shares, 20% in Growth Shares and 10% in cash.
With Value Shares you know you are buying well because you don't invest unless your intended share purchase is below its book value. So you inherently have value built in.
With a Growth Share you have to research long and hard - or get someone to do it for you. It can be a risk. You don't know for sure that you have found a compay that is going to grow as fast as you think.
We think Warren Buffett has probably got it about right with his 70/20 split. A wise man.
If you want to be super-conservative - then don't bother with Growth Shares at all. Just go for Value Shares. It's your money. But you do have time on your side.