InCred Wealth, February 17, 2025
Investment Strategies #5: Growth Investing
Welcome to our blog series on investing styles, in this series, we explore various approaches to investing breaking them down into simple, digestible insights.
In our last blog, we discussed 'Low Volatility Investing', which as a strategy aims at creating stable returns with lesser risks. In our final blog of this series, we will focus on Growth Investing, an investment orientation which seeks to profit from the companies that seem to have great prospects of growth and profit.
What is Growth Investing?
Growth investing is an investment style which identifies companies who to exhibit a high degree of growth in revenue, earnings, or market share. Unlike Value Investment, which seeks undervalued stocks, the principal contrast is, Growth Investing focuses on future potential rather than current valuation.
This strategy allows investors to align themselves with companies that innovate, grow rapidly, and reinvest their profits into further development. The strategy carries with it a certain risk; however, for many investors, this risk offers the prospect of high returns.
Core Principles of Growth Investing
- 1. Focus on Earnings Growth – Growth investors will favor firms with strong historical and projected earnings growth.
- 2. Market Leadership & Innovation – Growth stocks tend to be leaders in their industry and provide innovative products or services.
- 3. Cost Leadership: Most growth companies, also tend to have Cost Leadership. Such Firms have more cost efficient processes and are better placed to handle price fluctuations
- 4.Reinvestment Strategy – These companies generally do not pay out high dividends or dividend payouts are limited; instead, they re-invest profits into the business for further Capital expansion, achieving operational efficiency, technological advancement and cost leadership
- 5.High Price-to-Earnings (P/E) Ratios – These companies trade at steeper valuations due to their higher growth potential and street generally tends to appreciate these elements and prices them higher.
- 6.Industry Trends & Scalability – Emerging industries with scalable business models are often among the best candidates for growth investing.
Benefits of Growth Investing
- • High Returns – Over the years, growth stocks have historically overperformed the broader market.
- • The Compounding Effect – If earnings are reinvested into future growth and return, then the growth would be magnified.
- • Exposure to Market Trends – Investing in innovative companies introduces investors to fast-moving industrial transformations.
- • Portfolio Diversification – Growth investing is exposed to sectors yet to be covered in value-investing portfolios.
As Warren Buffett said: "Somebody today is sitting in the shade because somebody planted a tree a long time ago."
Growth investing lives by this philosophy while extolling long vision and patience.
Challenges of Growth Investing:
Growth investing generally has a potentially sizeable upside. However, carrying a high risk must still be paid attention to:
- • Market Volatility – Growth Stocks can fluctuate widely in price, they are more susceptible to swings in short-term fluctuations and bear market phases.
- • Overvaluation – Inherent risk exists through P/E ratios in some growth stocks, leading to significantly inflated stock prices.
- • Execution Risks – Companies need to deliver on high operational expectations for sustained periods. If any growth trajectory changes or has a combination of strategic and operational missteps, the fall can be sharp.
- • Economic Downturns – During bear markets, growth stocks may be outperformed by value stocks
- • Quantitative Tightening Cycles – A greater part of intrinsic value of growth stocks emerges from deep discounted cashflows and hence in a Quantitative Tightening environment marked by rise in benchmark interest rates, intrinsic value of growth stocks tends to drop and hence may trigger sell-off
Growth Investing in Action: Success Stories
- 1. Rise of Amazon – Amazon has come a long way from being an online bookstore to becoming the world's largest e-commerce and cloud giant, making its early investors very wealthy.
- 2. Tesla’s Market Leadership – Tesla has cemented its place as a leader in innovation, positioning itself as one of the most valuable companies in the world.
- 3. Netflix’s Transformation – Netflix has revolutionized the media industry, growing into a global entertainment powerhouse.
- 4. Eicher Motors & Royal Enfield – By focusing on premium motorcycles, Eicher Motors has skyrocketed in value.
- 5. Titan’s Transformation – An early bet by Rakesh Jhunjhunwala proved to be a massive success, yielding significant returns.
Final Thoughts,
Growth investing is about recognizing potential, embracing innovation, and maintaining a long-term vision. By understanding this strategy and learning from legendary investors, you can position yourself to benefit from transformative businesses.
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