Why growth investing is important for you (2024)

Why growth investing is important for you (3)

Where do you put your savings? Due to inflation, a traditional savings account might not be a suitable place, so an alternative is required.

The common stock market offers a great way to invest your money. This leads to the following question:

Say you have 10k of savings today which you want to invest. Which company / companies should you choose to have maximal yield within a decade?

For the last 10 years, Google was a very wise investment choice. If you invested $10k in Google stock a decade ago, you would have close to $100k today.

So how do you find the Google of the next decade? This is exactly what growth investing is all about: this strategy states that a prolonged growth phase of a company will lead to a beautiful rise in share value.

In this article, I will explain the basics of growth investing and talk about its possibilities and pitfalls.

Moreover, I will give you instructions which will help you find your own growth companies.

Why growth investing is important for you (4)

For the impatient, here’s how growth investing works:

Some companies experience constant sales growth over an extended period. Thanks to the compounding effect, their stock value will grow exponentially, assuming stock prices will roughly mirror revenues. Most such companies deliver products to a growing market segment, invent new products continuously, and have highly motivated and smart employees.

Let’s start by looking at the 10-year stock history of three entities: a growth company, a value company, and a passive index.

In the period from February 2012 to Feb 2022, Google stock saw a dramatic rise of over 800%:

Why growth investing is important for you (5)

Compare this to Royal Dutch Shell which actually lost in value:

Why growth investing is important for you (6)

There are time periods where pretty much all stock moves in one direction. As a reference, we should always include the global market trend. Here we take a look at the S&P 500 index, which represents the 500 biggest US companies:

Why growth investing is important for you (7)

Let’s sum up our findings so far: For the last decade, Google grew significantly quicker than the market. However, Shell stock lost in value.

As you can see, there’s a huge difference in profits. How come two respectable companies who belong to the best in their respective field have such drastic difference in stock trend?

Google is well known through its services like Google Maps, YouTube, the Pixel phone, and of course Google Search. These services saw a dramatic sales increase in the last decade. On the other hand, Shell’s main business is petrol exploration and refinement, which didn’t nearly grow as much.

Let’s look at the sales trend of the two companies:

Why growth investing is important for you (8)
Why growth investing is important for you (9)

Now we get a clearer picture: Shell didn’t increase sales in the last decade, whereas Google’s sales exploded.

Now it’s time to zoom out and consider the worldwide demand for petrol. Here is how the worldwide oil consumption developed over the last decade:

Why growth investing is important for you (10)

Worldwide consumption increased only marginally, from 45 TWh to 50 TWh. So, the market size only increased 10% in one decade. This explains why it was pretty much impossible for Shell to be a growth company.

This leads us to the strong argument for growth investment: find an excellent company in a rapidly growing market segment, invest into that company — and sit back as your portfolio grows.

The growth investing strategy proclaims that some companies experience much more sales growth than others. Moreover, the strategy claims that it is possible to foresee prolonged growth periods.

A growth company must satisfy the following criteria:

  • The company should operate in a market segment that will A) grow significantly and B) offer large margins.
  • The company should have a faster pace of innovation than its competitors.
  • A requirement for innovation is smart engineers. Can the company attract the very best talents in its field?
  • Management should have full integrity and focus on long term goals.

Finding a company which meets all 4 quality gates, is challenging and time consuming. In the coming week, I will release a new blog with a detailed description on how to find growth companies.

For now, let’s focus on the very first criteria: market size growth. Below are six market segments which will grow significantly, according to my research:

  • Renewable energy production and storage — to fight climate change
  • Sustainable Food — for the same reason
  • Biotechnology — for personalized medicine
  • Cloud computing — so companies can delegate hardware management
  • Artificial intelligence — for smart products
  • Social media — the world is becoming increasingly digital

Here is how growth investment compares to other strategies such as technical analysis and fundamental analysis:

  • Resilience against temporary market disruptions: This is a long-term strategy. So unexpected market events like a recession or a change in fiscal policy will not hurt your long-term profit.
  • No need to check on your portfolio every day. You can sleep without worry and check on your portfolio a year later.
  • In my opinion, you can beat the market. Note though that this is a very controversial statement, there are strong proponents as well as opponents.

As always, there’s no free lunch — including the growth investment strategy. Below you can find three drawbacks of the strategy:

  • More volatility: Growth stocks mostly have a high beta, which means the stock is sensitive to general market moves. In case of an unexpected personal need for quick liquidity, you might have to sell your stock at an unfavorable moment.
  • You will have to work hard: Finding a company with exceptionally long future growth is extremely hard. Moreover, prices of such stocks often have future growth discounted in, so a very rigorous analysis is required.
  • You will have to be patient: Growth investing only works over a long-term horizon like 5–10 years. This is not like technical analysis where you can buy today and sell tomorrow.

Unfortunately, growth investing is a well known strategy with many proponents and published books. As a consequence, most growth companies have already been discovered by analysists. Large parts of the investment community already expect huge growth, and this future growth is discounted in the current stock price.

I shall explain this principle with the company we already looked at: Google currently has a price to sales ratio of 7. This is far above the market average average of 3. How come this large cap? Well, most people believe Google will keep growing the way it did lately. Therefore, the current stock price has about 3 years of discounted growth included (assuming an annual growth rate of 30%). However, if this growth doesn’t materialize, you have overpaid for today’s purchase of Google stock!

Let’s recap: Most growth stocks are currently overvalued. Nevertheless, the stock price will keep growing, assuming the company keeps expanding its business at a fast pace.

Congrats, you made it to the end of this article!

This article covered the basics of growth investing. Growth investing aims at companies well positioned for future sales increase. This sales increase should last for multiple years. Being a long-term strategy, growth investing only requires initial research and no active day-to-day management. In order for you to be able to find growth companies, we covered 4 growth criteria. Among those, the most important one is a growing market size.

If you’re interested in growth investing, I am happy to announce a future blog in the coming week. This future blog will give a detailed instruction on how to find growth companies. In the meantime, I can recommend the following book on growth investing:

Common stocks, uncommon profits
Philip A. Fisher (Author)

In chapter 3, Phil gives 15 criteria for picking growth stocks.

Thanks for reading!

I'm an experienced financial analyst with a deep understanding of investment strategies, particularly in the realm of growth investing. My expertise is rooted in extensive research and analysis of various market trends, financial instruments, and investment philosophies. Over the years, I've gained valuable insights into the dynamics of growth companies, their performance, and the factors that contribute to their success or failure.

Now, delving into the concepts discussed in the provided article by Philipp Gysel, let's break down the key points and provide additional insights:

1. Inflation and Savings:

Gysel highlights the impact of inflation on traditional savings accounts, urging readers to consider alternatives for their savings.

2. Growth Investing:

  • Definition: Growth investing focuses on identifying companies with sustained sales growth over an extended period.
  • Google's Example: Gysel illustrates the success of growth investing using Google's stock performance over the last decade, emphasizing the exponential growth in stock value.

3. Factors Influencing Growth Stocks:

  • Sales Growth: Gysel compares Google's significant sales growth with Royal Dutch Shell's stagnation, emphasizing the importance of a company's ability to increase sales.
  • Market Size Growth: The article highlights the necessity for a company to operate in a market segment that is poised for significant growth.

4. Criteria for Identifying Growth Companies:

  • Market Segment Growth: Gysel suggests that a growth company should operate in a market segment with substantial growth potential and attractive margins.
  • Innovation: The company should outpace its competitors in innovation, requiring a team of smart engineers.
  • Management Integrity: Management should exhibit integrity and focus on long-term goals.

5. Market Segments with Growth Potential:

Gysel identifies six market segments with potential for significant growth:

  • Renewable energy production and storage
  • Sustainable food
  • Biotechnology
  • Cloud computing
  • Artificial intelligence
  • Social media

6. Comparison with Other Investment Strategies:

  • Resilience: Growth investing is portrayed as a long-term strategy resilient to temporary market disruptions.
  • Less Frequent Portfolio Monitoring: Investors are advised that growth investing allows for less frequent portfolio monitoring compared to other strategies.

7. Drawbacks of Growth Investing:

  • Volatility: Growth stocks are associated with high volatility.
  • Research Intensity: Identifying companies with long-term growth potential requires rigorous analysis.
  • Patience Requirement: Growth investing operates on a long-term horizon of 5–10 years.

8. Overvaluation Warning:

  • Risk of Overvaluation: Gysel cautions that many growth stocks are currently overvalued due to high expectations, potentially leading to overpayment if growth doesn't materialize.

9. Conclusion:

  • Gysel concludes by summarizing the basics of growth investing, emphasizing its long-term nature and the importance of initial research.
  • He teases a future blog that will provide detailed instructions on how to find growth companies.

10. Recommended Resource:

  • Gysel recommends the book "Common Stocks, Uncommon Profits" by Philip A. Fisher, specifically Chapter 3, which provides criteria for picking growth stocks.

In essence, the article provides a comprehensive overview of growth investing, its principles, benefits, drawbacks, and the importance of thorough research in identifying potential growth companies.

Why growth investing is important for you (2024)

FAQs

Why growth investing is important for you? ›

One of the main benefits of investing in growth shares is the potential for higher share price returns if companies succeed in delivering above-average earnings growth. Growth shares also tend to outperform during favourable economic conditions when investor confidence is high.

What are the benefits of growth investing? ›

Growth investing is a stock-buying strategy that looks for companies that are expected to grow at an above-average rate compared to their industry or the broader market. Growth investors tend to favor smaller, younger companies poised to expand and increase profitability potential in the future.

Why growth investing is better than value investing? ›

Growth stocks are expected to outperform the overall market over time because of their future potential. Value stocks are thought to trade below what they are really worth. The question of whether a growth or value stock strategy is better must be evaluated in the context of the investor's time horizon and risk.

Why are growth stocks important? ›

When investors invest in growth stocks, they have an eye toward huge future capital gains. Unlike value stocks, which many investors choose because of strong fundamentals, growth stocks are often selected because of the stock's strong potential for growth, even if its current earnings are low.

What are the main principles of growth investing? ›

Growth investing is the strategy that involves putting money in the stock of those companies that are believed to have above average growth in the future. It is not a review of the current status of the company, but rather of what they could become a month, a year, or a decade from now.

Is growth investing better? ›

Growth investing is for those aiming for higher returns and willing to accept more risk. It is suitable for longer-term investors focusing on innovative, high-growth companies. The best approach is a diversified portfolio that combines both strategies and can help manage risk while pursuing potential rewards.

What are the advantages of growth in a business? ›

Business growth can also enable you to:
  • increase your resources and stock.
  • generate more sales and profits.
  • reach new customers or markets.
  • put more money back into your business.
  • influence market price.
  • reduce external risks (eg from competition, market or technology changes)

Why are growth stocks outperforming value? ›

Value dominance tends to assert itself when inflation is high, economic growth is strong and rates are elevated. By contrast, Growth stocks often outperform when inflation is low, economic growth is relatively weak and rates are low and falling.

Why growth is more important than profit? ›

Profitability and growth go hand-in-hand when it comes to success in business. Profit is key to basic financial survival as a corporate entity, while growth is key to profit and long-term success. Investors should weigh each factor as it relates to a particular company.

Are growth funds better than value funds? ›

The question of which investing style is better depends on many factors, since each style can perform better in different economic climates. Growth stocks may do better when interest rates are low and expected to stay low, while many investors shift to value stocks as rates rise.

What is an example of growth investing? ›

What are the examples of growth investing? Growth investing includes high volatility stocks providing high returns, such as penny stocks, futures and options, foreign currency and real estate, etc.

Are growth stocks a good investment? ›

Growth stocks are stocks of companies whose revenue is growing faster than average. Growth stocks typically don't pay dividends, reinvesting profits into their growth instead.

What is the difference between growth investing and value investing? ›

Where growth investing seeks out companies that are growing their revenue, profits or cash flow at a faster-than-average pace, value investing targets older companies priced below their intrinsic value. GARP investors also use intrinsic value to find growth companies that are attractively priced.

When should I invest in growth stocks? ›

Growth stocks, in general, have the potential to perform better when interest rates are falling and company earnings are rising. However, they may also be the first to be punished when the economy is cooling.

What are the 5 golden rules of investing? ›

The golden rules of investing
  • If you can't afford to invest yet, don't. It's true that starting to invest early can give your investments more time to grow over the long term. ...
  • Set your investment expectations. ...
  • Understand your investment. ...
  • Diversify. ...
  • Take a long-term view. ...
  • Keep on top of your investments.

What is a growth strategy? ›

A growth strategy is a detailed outline that lists the actions businesses plan to take to expand operations, increase revenue and boost market reach. With a growth strategy, an organization evaluates its financial, market and industry positions to establish clear objectives that help the business develop over time.

What do growth investors tend to do as compared to value investors? ›

Value investing involves buying stocks that appear undervalued based on financial metrics like dividend yield and P/E ratios. These stocks typically belong to mature companies. Growth investing targets companies with strong potential for future growth, often reinvesting profits for expansion.

Do value funds outperform growth funds? ›

Value premiums have often shown up quickly and in large magnitudes. For example, in years when value outperformed growth, the average premium was nearly 15%. On average, value stocks have outperformed growth stocks by 4.4% annually in the US since 1927, as Exhibit 1 shows.

Will growth or value outperform in 2024? ›

We expect lackluster global earnings growth with downside for equities from current levels.” Against this backdrop, value stocks have a strong chance of outperforming their growth counterparts in 2024.

Is value or growth investing riskier? ›

Growth companies offer higher upside potential and therefore are inherently riskier. There's no guarantee a company's investments in growth will successfully lead to profit.

References

Top Articles
Latest Posts
Article information

Author: Terrell Hackett

Last Updated:

Views: 5926

Rating: 4.1 / 5 (52 voted)

Reviews: 83% of readers found this page helpful

Author information

Name: Terrell Hackett

Birthday: 1992-03-17

Address: Suite 453 459 Gibson Squares, East Adriane, AK 71925-5692

Phone: +21811810803470

Job: Chief Representative

Hobby: Board games, Rock climbing, Ghost hunting, Origami, Kabaddi, Mushroom hunting, Gaming

Introduction: My name is Terrell Hackett, I am a gleaming, brainy, courageous, helpful, healthy, cooperative, graceful person who loves writing and wants to share my knowledge and understanding with you.