Not all investors are the same. Therefore, not all investors share the same goals and objectives. Consequently, there are numerous strategies and investing methods available to choose from. Moreover, it also goes without saying that the investment strategy that’s right for me may not be right for you. For that reason, it’s imperative that each individual looks for the strategy that is right for their own individual goals, objectives, risk tolerances and status. By status, I’m referring to how many years you have left before retirement.
Additionally, the time the individual investor has left in front of them prior to retirement may be one of the most important considerations regarding what type of approach or strategy they should embrace. Although many advisers like to offer tidy rules-of-thumb about how this decision should be made, I believe that common sense and personal preference should be the driving forces. With investing, one size rarely fits all.
For example, common sense would dictate it is logical that younger investors with more time available could justify taking on more risk. Therefore, high-growth stocks might be appropriate investments during their accumulation phase because achieving the highest total return possible might make the most sense. However, achieving higher returns usually comes with taking on higher risk. Consequently, a very conservative investor even with lots of time in front of them may not possess the risk tolerance to go for total return exclusive of dividends.
In my most recent article titled Trying to Beat the Market Is a Fool’s Errand I introduced the notion that portfolios should be built to meet the specific needs of the individual investor building it. In that article I utilized an example of a dividend growth portfolio that generated a 3% yield that would meet a hypothetical retiree’s specific income needs. In other words, I focused on income over total return. With this article I will change that focus to investing for the highest total return possible during the accumulation phase.
I typically write about dividend growth investing because personally I believe it is the most appropriate strategy for investors of my age and status. However, I didn’t always see it that way, especially when I was younger. My early investing career started out with a hunger for maximum total return or growth. In those days, I was willing to take on more risk, but I never allowed myself to be reckless. Throughout my career, I’ve always believed that you can pay too much for even the best of companies, and that view included investing in fast-growing businesses. Because then and now, I believe you make your money on the buy side. Moreover, that principle applies to conservative and aggressive investments alike.
Nevertheless, even though my temperament for taking risk has diminished, I must admit that even today I appreciate the power and performance of a high-growth stock. Years of study and analysis have shown me that investing for high-growth offers rewards that can be orders of magnitude beyond what a blue-chip dividend paying stalwart could ever provide. Yes, there is more risk, but if approached properly the total returns from investing in high-growth stocks can be incredible. Therefore, I believe I owe it to regular readers to at least introduce them to just how profitable investing for growth can be.
My Personal Definition of a Growth Stock
Although there may be many definitions of what a growth stock is, my own definition is rather simple and straightforward. For me to consider a company a growth stock, or even a great growth stock, I focus on above-average earnings growth. When investing for growth, my minimum threshold for earnings growth is 15% per annum or better. On the other hand, when looking for growth I will often search for a minimum of 20% per annum earnings growth, because the faster – the better – to my way of thinking.
My position is based on the principle that earnings represent the ultimate driver of future return. Moreover, this applies equally to dividend paying stocks as it does to growth stocks. After all, the primary source of dividends is clearly earnings. On the other hand, assuming the investor invests at a reasonable valuation, earnings growth is also the primary source of capital appreciation in the long run.
At this point, many readers may be thinking that earnings growth of 20% or better might be unrealistic or even unattainable. Admittedly, companies that grow earnings at 20% or better are rare, but frankly, not as rare as many might think. Growth of this nature is usually found with younger and even smaller companies, but not always. However, as a general rule, younger smaller companies are where the fastest growth is usually found. Furthermore, investors must understand and realize that achieving high-growth rates over a sustained period of time is quite difficult.
The Incredible Benefits of Earnings Growth
I will discuss the risks associated with investing in high-growth stocks in more detail later in the article. However, at this point I would like to share some observations about investing in high growth stocks that I feel are both interesting and important. As regular readers of mine know, I am a stickler for fair valuation. Personally, I like to refrain from ever investing in any type of company at prices or valuations that I believe exceed what a company is truly worth.
On the other hand, one of the great benefits of investing in high-growth stocks is that as long as they are in a high-growth phase, you can pay more than they are worth and still make money. Of course, if you find them at or below True Worth™ value then you can make more money while simultaneously taking on less risk. Lower risk and higher return is certainly a desirable objective. However, my point here is that as long as they are growing fast, there is no price or valuation, within reason, that you could pay and not make some money.
Melodramatic Examples of the Power and Performance of Investing in Growth Stocks
In order to illustrate my last point regarding how you can even overpay for a great growth stock and still make money I offer the following eight examples of powerful growth stocks that have achieved my historical 20% per annum threshold. However, I would simultaneously like to also provide an admittedly rather melodramatic illustration of just how powerfully-rewarding investing in growth stocks can be.
To be clear, I ask the reader to participate with me in an exaggerated hypothetical scenario in order to fully experience the power and performance of investing in growth stocks. With each of the following examples I am assuming that an individual investor had $1 million available to invest into a single stock (business) approximately 15 years ago. My purpose in making this rather preposterous assumption is to create a scenario that is analogous with how the majority of the richest people in the world had accumulated their great wealth.
Billionaires such as Bill Gates, Larry Ellison, Mark Zuckerberg, Larry Page,