Choosing A Stock Part 5: Growth Investing

This article originally appeared on DriveWealth.

Welcome to the 5th and final installment of the “Choosing A Stock” mini-series. So far in the series we have covered basic strategies, fundamental valuation, value investing, and income investing. If you have missed Parts 1- 4, I encourage you to go back, check them out, and give them a read. In part 5, we will be focusing on a stock picking strategy that can best be described by contrasting it to another strategy we have already covered. This new strategy is called growth investing.

As pointed out above, one of the most straight forward ways to explain growth investing is to compare it to another strategy, value investing. Now, if you have made it to this point in the article but still have not read Part 3 of the “Choosing A Stock” mini-series where we dive into value investing, I recommend you go back and do so before continuing! For those who are ready to learn about growth investing, let’s keep moving. We know that value investors are mainly concerned with the present with regard to stock prices. Further, they search for stocks that, in the here and now, are trading for less them their intrinsic value. Growth investors, however, center their attention on the future potential of a company, focusing much less on its current trading price. Essentially, the key difference between the two types of investors is that the growth investors would also buy stocks that are trading at any price (higher, on par with, or lower than their current intrinsic values), but hold the belief that the price will grow over time, and therefore surpass their current intrinsic value estimations.

In general, stocks that can be considered “good growth stocks” are companies that grow at a rate significantly faster than most. Because of this, growth investors usually focus their attention on relatively young companies. The thought process behind doing so is that younger companies have a higher potential for growth in earnings, which will be directly correlated to an increase in the company’s stock price. By this same reasoning, it is also logical that growth investors explore investment opportunities in expanding industries as the companies that make up those industries are growing, too. In recent years, industries related to new technology have been popular choices for growth investors, as well. That should not be surprising, though, since technology is changing and advancing at an incredible rate and dragging many other industries along for the ride. Additionally, due to the nature of growth investing, profits are predominately made through capital gains, rather than dividends. This is because a large majority of companies that are a good fit for a growth investing model reinvest their earnings (to continue promoting growth) instead of paying dividends. In a sense, being a good growth investor is about being good at “riding the wave” of a positive trend.

There are many real-life examples of investors achieving great financial success using a growth investing strategy, but perhaps the most impactful was Philip Fischer and the influence he has left on others. Fischer founded his small investment counseling firm in Northern California during the year 1931, but really made a name for himself in 1958 when his book Common Stocks and Uncommon Profits became the first investment book to ever make The New York Times bestseller list. In fact, the book, which explained Fischer’s 15-point strategy for finding great long-term growth stocks, even became part of the curriculum for an investments class at Stanford’s Graduate School of Business. Fischer also influenced another famous investor that you have almost certainly heard of, Warren Buffet. As a younger man, Warren Buffet met with Fischer and ended up incorporating a considerable portion of his strategy into his own stock picking process. Buffet even once described his investment strategy as 15% Philip Fischer and 85% Benjamin Graham! 15% might not seem like a ton, but with regard to Warren Buffet, it is quite impressive and shows how strong a growth investing strategy can be.

My hope is that this mini-series has been helpful in breaking down some of the most widely practiced investing strategies, especially for those of you who are newer to investing or even investing for the first time. Moving forward, I encourage you to consider doing more research and focus on making informed investing decisions when using your DriveWealth App. Thank you for reading and best of luck with your investments!