Chapter 2: Market Strategies
What is growth investing
Growth investing is a strategy where investors focus on buying stocks of companies expected to grow at an above-average rate compared to other companies. These companies typically reinvest their earnings to expand their business rather than paying dividends.
Investors hope that the stock prices will increase significantly over time, providing substantial returns. This approach often involves investing in newer, innovative companies with high growth potential.
How does it work
A growth investing strategy starts with the investor looking for stocks with higher-than-average growth potential. These stocks often belong to smaller and newer companies, but they can also be from larger, established companies.
The investor typically invests equally in a few stocks, usually 10 or 15. They let their winners keep growing and losers keep shrinking, meaning the winning stocks will have a bigger impact on the portfolio.
Additionally, investors often reinvest their monthly contributions into the winning stocks, allowing them to grow even more.
Does it work
Growth investing is proven to work but can take time to yield significant results. Betting on smaller companies involves risks, as even in ideal conditions, not all of them will succeed; in fact, most may not.
However, the few companies that do succeed and become giants can more than compensate for the losses incurred by the smaller companies.
Growth strategies tend to be favorable during periods with abnormally few recessions, as stable economic conditions support the rapid expansion of high-growth companies.