Growth Investing
A growth investor typically buys cheaper stocks than their intrinsic value, which will become apparent as the company grows more quickly than its peers over time. If you wonder, “what is growth investing?” Well, it is a process of investing that focuses on companies that are expected to grow their earnings at a faster rate than the overall economy. It is also called growth at a reasonable price (GARP) or value-growth investing. In this article, you shall look at 6 rules for successful growth investing.
Focus on the Revenue, not the Earnings
The first rule is to focus on the revenue, not the earnings. Why? Because revenue growth provides a clearer picture of the company’s future performance, it’s more likely to lead to future stock price growth. Revenue can grow because of increased sales volume or price increases, while earnings can increase as long as they don’t fall too far behind inflation.
Invest in the Leaders
The most important rule of growth investing is to invest in companies that are leaders in their industry. The reason is simple: they have a competitive advantage. Companies with real leadership can make future investments that they would not be able to make otherwise (like buying back stock or paying dividends). They also tend to have stronger brands and loyal customers because they stand out from their competition.
Look for Companies With a Sustainable Competitive Advantage
A competitive advantage is a company’s ability to generate high returns on capital consistently. It results from a company’s competitive position in the market and is not just about being better than the competition. It is about being better than the competition for a long time.
As an investor, you want to find companies with sustainable competitive advantages because they can sustain high margins over time and grow their earnings at higher rates than their competitors.
Hold for Long-Term Growth
As with any investment, it’s important to hold long-term. You should never sell a stock because it has increased in value; the goal is always to hold it for at least five years. This is one of the most critical rules, and it can be difficult to follow when you see your stocks rising or falling.
You might be tempted to buy more shares when your stock price increases, but don’t be tempted by this—only buy shares when they are cheap! And if they’re not cheap? Don’t sell them because they’ve increased in value, either. Your goal as an investor is capital growth over time, which means you’ll want your money working hard so you can reinvest once earnings start growing again.
Don’t Fall for Fads
Fads are short-lived. They are the opposite of a long-term investment. Fads can be driven by marketing, but they don’t have sustainable competitive advantages and typically overprice themselves when they first come on the scene. If you want to grow your money, avoid fads at all costs!
Avoid Consumer Stocks with Limited Pricing Power
Consumer stocks are more vulnerable to economic downturns and have limited pricing power, making them less likely to be able to raise prices when demand goes down. They also tend to be more exposed to competition, meaning that they may not be able to increase their prices as much in response to increases in input costs.
Conclusion
This article may help you to understand what growth investing is. There are many ways for growth investors to ensure success. But the most important thing is to remember that it’s about patience and discipline. You must have a long-term plan, stick with it, and rebalance it regularly.
