Look up and thank Jesus for all you’ve been given!

Let’s turn our attention to growth investing. Every investor has day dreams of one day sailing off into the sunset riding comfortably into their golden years on those Microsoft shares they picked up in 1982. I’m no different and likely neither are you. We invest with the hope one day our diligence will pay off. In this post I’m going to uncover a few nooks and cranny’s that should be considered as you start eye-balling that new boat.

It’s my opinion, growth investing should be the very foundation with which an investment plan is built. Assuming of course you have time still to invest. If you’re already nearing retirement, it certainly isn’t ever too late but their may be additional considerations beforehand. Afterall, investing long term at 63 only to encounter a 2008 style crisis might not be the most enjoyable experience.

In any case, let’s walk through the concepts underpinning successfully investing for growth.

As always, this post isn’t a recommendation but merely a jumping off point as you navigate the always uncertain investment waters.

Post Contents

What is Growth Investing?

Of the great many investment philosophies in existence, I would argue growth investing should be near the top of that list. Behind only those ideals necessary to meet a specific investment goal. That said, on a foundational level growth investing can be simplified down to, an investment into a company experiencing rapid growth. Likewise, rapid share price appreciation.

Every company in existence is or once was a “growth” prospect. New companies bring new ideas, better products & services, or disruptive technologies that impact the fabric of our current economic engine. While they may struggle initially with profitability, a key lynch pin to investing for growth is in these companies ability to re-invest and, you guessed it, grow!

Revenue Growth

The lifeline to a growing business is revenue generation. Profitability is indeed a fundamental criteria over the long term but many growth companies forgo short term profitability on their quest for expansion. In doing so, they roll every available dollar, including debt, back into the company as they attempt to scale.

A company experiencing rapid revenue growth is also gaining market share as their products or services gain popularity among consumers. Consider Netflix as it rose in popularity, taking market share from Blockbuster and virtually every other media outlet. Netflix was a growth machine, churning out revenue and subscribers by the millions. A $1,000 dollar investment in Netflix 20 years ago would be a staggering $206,000 dollars today. A classic example of a growth company but also a template for the type of revenue growth investors should seek for future growth investments.

Quality companies offering products or solutions to consumers will inevitably grow. By identifying above average revenue growth an investor can maintain confidence that consumers enjoy their offering. However, revenue growth alone isn’t enough. The company would have to execute a violent and often volatile growth plan as they attempt in-roads in existing markets. Or I suppose, make roads to new markets.

In any case, an effective growth plan and an unwavering management team combined with explosive revenue growth is more than worth consideration. That said, its worth mentioning that the investment landscape is awash with stories of the next great growth company. Every one of which has done an excellent job of marketing their story to the general public as the next Netflix of their respective industry.

Growth Investing Rewards

The rewards for growth investors are plain to see. Investing in growth companies has the ability to 10x, 20x, 0r even much much more as we saw was the case with Netflix. The financial reward from identifying these market unicorns is truly unbelievable. However, I’ve heard it said that the probability of winning the lottery is higher than finding, investing, and holding onto shares of such a company.

Outsized returns, rapid corporate growth, and a trajectory nearing the stratosphere are all key identifiers to a successful growth investment. Identifying and investing early could be the difference in setting sail into the sunset or just sitting on the dock. Either is probably great but catch the next Netflix and you’ll see what I mean.

Quintessential Growth Stocks

While it isn’t easy to find the next great growth investment there are a few characteristics these companies share. They may serve as useful tools in an investors attempt at finding that next great investment.

  • Operate in a new or innovative market.
  • Products or services that solve real problems.
  • Extraordinary revenue growth.
  • Outsized spending on research, development, or marketing.

I would encourage you to notice that the most successful companies aren’t built on greed, which is ever present in corporations today. No, success is built on progress. Companies experiencing these characteristics are not by accident, collectively they’ve decided this is the way. They consistently seek and scale new avenues into the market. Bringing with them the products and services we may not even yet know we need.

Before we move on, I thought it would be great to see a few of the most notable growth stocks of all time and what a $1,000 dollar investment 20 years ago might look like today. We’ve already considered Netflix but there are plenty of other success stories. Additionally, here is a cool calculator that let’s you examine these companies based on another amount or year.

  1. Netflix – $206,000
  2. Microsoft – $23,413
  3. Nvidia – $745,177
  4. Apple – $353,070
  5. Amazon – $89,630

Almost surprising to see how low Microsoft is on that list. I guess they experienced the bulk of their growth during the personal PC boom of the 90’s. Still, any of these investments are way above average and finding just one is likely to alter your financial future immeasurably.

Modern Growth Stocks

I’d be remiss if I moved on without discussing the current investing landscape. While the last section may be fun to look at an consider what life would be like had we corralled one of these whales. The reality is finding the next Amazon is not an easy task. Right now, there are teams of people scouring every conceivable data point(or having the latest ChatGPT iteration do it) to find that next big mover.

In reality, these companies themselves have grown so large they’re now more like ETF’s than individual companies. Consider Microsoft, if they were so inclined could easily break up their company in to many smaller companies. They might have a company for cloud services, another for gaming, still another for software or hardware and the list goes on. In every one of those instances, they’re still likely the leader in that respective field and if they aren’t, they have the resources to “bully” or buyout those that are.

Which means we must look at the investing picture a little differently. I’m not saying other currently unknown companies won’t one day achieve this level of success, I’m simply saying these companies are large. Meaning, they, at least currently, have an outsized level of control in the market. Not only do they command the most investment dollars for their shares, they also command the physical market with their products or services.

In that light, following these behemoths and there up and coming projects may just be akin to growth investing, nested in a former growth stock. As an example, one may consider Nvidia. A company that was founded over 30 years ago and largely rose to prominence in the 90’s & early 2000’s. Yet, look at the level of growth they’ve experienced in the last 10 years, well after they’re growth years. It’s certainly food for thought and more than worth a look if you’re considering a growth investment.

Products & Services

If revenue is the lifeblood of a growth stock then their products or services are the heartbeat. One doesn’t happen without the other. Make a world changing product and the revenue will come, this much I’m sure. Still, it isn’t uncommon for a growth company to try and repurpose old ideas as the latest wave of change. Further complicating an investors chances at finding a terrific growth asset.

As it relates to the tangible offerings of a company, it’s important to identify a few common characterisics.

  1. Does the market have a need?
  2. How far reaching is that need?
  3. Does the product or service differ meaningfully from currently available offers?
  4. Is the product or service priced appropriately for significant growth?

Should the product or service actually be useful on a large scale would eliminate thousands of possible companies immediately. As most, just don’t offer anything groundbreaking or that can’t be acquired elsewhere. Further, if the product or service provides no use to other regions then they could also be eliminated from consideration. Lastly, if the product or service isn’t priced appropriately that barrier may prove too high a bar for the product to ever grow it’s wings.

In all, these are just a few more considerations a potential investor must weigh carefully before committing their relatively limited investment capital.

Income Potential: Zero

As you may have surmised from my Dividend Investing 101 or my Income Investing 101 posts, I’m encouraged by a consistent income stream from my investments. However, growth investing should absolutely not be offering much, if ever any, dividends. As investors, we should probably demand this from that portion of our portfolio. We want our growth assets to do what they’re intended to do, grow. Returning any of that capital to us as shareholders in the form of dividends would be counter-intuitive.

Moreover, many companies elect to buyback shares in lieu of a paying a dividend. I also believe this would be a detraction from a solid growth company. Generally speaking, when a company cannot identify any better use for their capital, they return it to shareholders. Typically a positive aspect of investing. However, growth focused companies should be scaling up at every turn, increasing outflow so that inflow follows. Any less than growth would categorize the asset in some other way.

Evaluation of Growth Stocks & the Next “BIG” Thing

Far and away the most difficult aspect to growth investing would be finding what the world believes is a ground shaking new product. In our own lives that new iphone may be revolutionary but would they agree in Japan or Africa. Difficult to know. In hindsight, it’s clear to see that yes the iphone was a revolutionary product when it first arrived in 2008. Prior to that, we had never experienced touch screen technology or the convenience of having a computer in our palm.

For me, rather than attempting to identify the next life changing device I prefer to hold a basket of ETF’s that will more than likely hold the next “BIG” thing. I wouldn’t achieve the life changing rewards inherent to the biggest winners but my portfolio would grow. A respectable trade off between the work of finding that unicorn and capitalizing on it’s growth.

In either scenario, an investor would be rewarded but for those few but shrewd among us. Finding that next product or service offering the world just can’t live without would certainly reap an outsized reward.

To evaluate a growth stock, probably the most logical starting point would be to identify those aspects that would eliminate an investment from consideration. Truly not an exhaustive, these questions may curate a respectable list of potential investment opportunities.

As a side note – much of the minutia can be whittled away quickly using an investment screener similar to the one found at Finviz.com. It isn’t a replacement for due diligence but does lighten the burden in our busy lives.

  1. Do we need the product or service?
  2. Does that need address a large enough market?
  3. Are there any competitive advantages to this product over another?
  4. Do the financial statements align with what we know of previous growth companies?
  5. Is the company increasing market share and revenue?

Once a list of possibilities is concluded an investor may wish to move on in an examination of qualitative factors relating to the company or it’s products. Possibly, culture, management, intellectual property, or business strategy to name a few. Any of which would prove valuable to an investor and the company alike.

Downside to Growth Investing

Few if any aspects of investing are as challenging as finding that next great stock. Income investing, dividend growth investing, or even day trading can return rewards quickly. To succeed in growth investing is similar to throwing darts at a dartboard 100 yards away. The board is barely visible and wind, rain, or even birds may interrupt the darts trajectory. Making growth focused investments incredibly risky. They occupy valuable capital that could be utilized elsewhere for most of a lifetime.

Next, is the all too common practice of lofty valuations. Investor logic has largely left the building on this front as companies like Nvidia race ever higher, regardless the fundamentals that traditionally chart an assets course. It isn’t uncommon for an investor to hear the hype and invest just before the fall. There is never a guarantee that a terrific growth story, even such as Nvidia, won’t begin to stall.

In the end, my opinion is, the greatest detriment to growth focused investors remains the opportunity cost of chasing these darlings. If you’re seeking eye-watering returns then you’ll have to stay committed even as the world falls to pieces.

The cost of committing to an asset for 10, 20, 30 years or longer means never being able to put that money to work elsewhere. Especially considering that most companies don’t ultimately become Amazon or Netflix. No, just the opposite is true as most become 3D Systems Corp. (DDD) A company I believed was the next big growth stock as 3D printers entered the mainstream. Goes without saying, I was wrong.

FOMO & Overvaluation

FOMO, or fear of missing out isn’t a new phenomenon but rather a new acronym for us as humans. A popular anecdote amongst investors is the tulip mania bubble that occurred during the 1600’s. Where speculation or FOMO, drove the value of tulip bulbs to an extreme valuation. As you can see, where any market exists, humans wrestle with the emotion of missing out. In truth and more often than not, by the time we learn about the value of a “tulip bulb” the market is nearing it’s peak. Making FOMO a pitfall all investors must be on the lookout for.

The next step in FOMO is the dramatic price increase, often an overvaluation of the asset in question. In the above example, tulip bulbs are said to have reached a valuation 5 times an average person’s salary. To translate that, the average annual salary in the US today is $59,000. Resulting in the price of a tulip bulb nearing $300,000!

Overvaluation has become a truly concerning aspect of the modern stock market. With many assets trading well outside their inherent values. Consider the magnificent 7 (Mag 7) of Google, Apple, Amazon, Meta, Nvidia, and Tesla. Combined, they blanket the indices designed to track the state of the market. Making it even more difficult for the average investor to ascertain a market pulse. With such a determination being critical for a growth investor determining when to invest.

Volatility Expected

As you’ve probably gleaned from most of this article growth investing comes with an outsized measure of volatility. Volatility as it relates to growth can be summed up in this way, you may well make and lose a fortune many times over. All but a comfortable ride and one that I’ve experienced the loss side of more times than I’ll ever admit. Still, an investor traveling through these waters needs to know what they’re in for.

As these new companies push the boundaries of societal norms, they will inevitably experience some push back. Often, nay always resulting in volatility to the share price. Failing to stay the course is similar to my investment of Apple back in 2014. After making a few thousand dollars I moved on thinking the price was overvalued. Temporarily I was proved right as the price declined nearly 20% shortly after. However, as I quickly learned that was expected volatility and an investment that would have paid for a house as of today’s valuation.

Final Thoughts

At the end of the day, determining whether growth investing is the right fit for you depends on your goals and risk tolerances. Investing in this space takes, in my opinion, remarkable courage and foresight. The likes of which most don’t possess, including myself. For this reason, I’ve chosen to invest in several different ETF’s that either hold or will eventually hold these incredible growth stories. I may indeed sacrifice stratosphere level returns but I also alleviate extreme volatility from my portfolio which isn’t to be quickly discounted.

At it’s foundation, growth investing is about finding, investing, and holding those truly transformative companies BEFORE everyone knows who they are. With a watchful eye and an enjoyment for research and study finding a successful candidate is achievable. Still, it’s important to also be on the look out for detractors such as FOMO, overvaluation, or meaningless hype. People and companies alike have an uncanny ability to oversell and under deliver on the promises they make.

Until next time.

God bless,

Jeff

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