Growth investing implies to the process of investing in industries, sectors and companies that are growing currently, and are likely to continue their expansion over a significant period of time. As Kavan Choksi UK says, growth investing is often considered to be an offensive investment strategy rather than being a defensive one. This means that growth investing involves an active attempt to build up the investment portfolio and generate a higher return on the invested capital.
Kavan Choksi UK offers an overview of growth investing
Many growth investors opt to invest in mutual funds, ETFs and stocks on the basis of specific industries and sectors. The success of businesses in varying sectors tends to change over time. However, it is quite easy to identify sectors that are “hot” in terms of producing above-average returns for companies that are publicly traded.
Two sectors that have especially been hot for the last couple of decades or so are technology and healthcare. Growth investors are able to simplify sector investing by making use of investment vehicles like mutual funds and ETFs that contain a basket of stocks linked to particular sectors. ETFs or Exchange-Traded Funds have especially emerged as a prominent investment option owing to their lower trading expense and higher liquidity in comparison to mutual funds.
Growth investors who want to invest in stocks should especially have a good understanding of the net earnings of the relevant company. This does not imply to just knowing their current earnings. A high earnings performance in the given quarter or year might represent a one-time anomaly in the performance of the company or a continuing trend. It may also imply to a specific point in an earnings cycle that the company continues to repeat over time. Hence, growth investors also must take the historical earnings of the company into account. This would allow the investor to effectively evaluate current earnings relative to the past performance of the company. Reviewing the earnings history of a company offers a clear indication of the probability of the firm generating higher earnings down the line.
As Kavan Choksi UK says, growth investors must know that companies with low earnings can also be a good pick at times. Earnings are basically what is left subsequent to subtracting the costs associated with labor, marketing, production, operations, tax, and more from the revenue of a company. In several instances, smaller firms try to make a breakthrough by funnelling more capital towards their business growth. This may negatively impact their earnings in the short run. However, it does generate higher returns and greater profits for investors in the long run. In such situations, it would be prudent to consider factors like the quality of the management of the company in order to evaluate the true growth potential of the enterprise.
The price/earnings (P/E) ratio is a tool widely used by growth investors to select the stocks to invest in. This tool especially helps in comparing companies that operate in the same industry. In established industries and sectors, there are typically average P/E ratios specific to each area. Being aware of these industry or sector averages provides valuable context, making a company’s P/E ratio far more informative than simply comparing it to the broader market.
