Growth Investing: A Beginner’s Guide to Investing in High-Growth Companies
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Summary:
Growth investing is an investment strategy that focuses on capital appreciation. Although commonly associated with stock-buying strategies, growth investing can apply to a number of different investment vehicles, such as real estate and cryptocurrency. A growth investment strategy differs from an income investment strategy in that its goal is to grow capital and not produce income.
Sometimes you have goals or dreams that require a lump sum payment in the future. It could be the first time you move on a dream property, or maybe you hope to grow your money to purchase an annuity closer to retirement. Regardless, if you have money that needs to grow, a growth investment strategy is the ideal strategy to implement. Your main focus is to grow your capital while other benefits, such as an income or dividend, are nice but by no means required. Although most commonly associated with stock buying, a growth investment strategy can encompass a number of different investment vehicles.
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Growth investing 101
Growth investing is an investment strategy that favors capital appreciation over all else. It differs from income investing in that although receiving dividends or rental income is a plus, the main goal of the investment is to grow capital, not produce income. A growth investment strategy can also benefit from the use of leverage if used correctly. To put it simply, you put your money somewhere, hoping it will grow in value. Here are some of the investment vehicles you can utilize with a growth investment strategy.
- Stocks
- Business (private equity)
- Real estate
- Funds
- Mutual funds/ETFs
- Alternative investments
Growth investing in stocks
When you hear the word “growth investing” while watching the news, it is probably in relation to the stock market and people talking about “growth stocks.” A good growth stock means that you think a company and its share price are poised to grow, along with the capital you have invested.
This strategy differs from other stock strategies, such as value investing, in which you earmark stocks that are undervalued rather than ones you are sure will grow. Growth and value stocks and growth and value investing are two strategies of stock buying that can complement each other. There are several metrics you can use to define a stock that is poised to grow. We won’t get too much into the weeds on this now, but here are some factors you should pay attention to if you think a stock is poised to grow.
- Such companies should have higher than average growth in earnings per share (P/E ratio)
- Healthy and possibly growing gross profit margin
- Good ROI on invested capital means the company could grow more
- Unrelated events that could make several stocks grow (grain stocks and Ukraine War, for example)
- Rapidly expanding industries (such as AI and space)
What about funds?
Many investors who are interested in growth stocks might not even want to look at individual stocks but rather invest through a mutual fund or ETF. These growth investors will rely on fund managers to analyze what might constitute growth stocks and growth companies. These fund managers will typically rely on the fundamental principles above, but they might have their own methodology for growth stocks as well. The advantage of an ETF or fund strategy for stock investing is that the fund managers should have many more tools for research analysis than your average Joe.
Growth investing strategy: Mr. Wang’s $1 million dream
You might remember our article on income investment strategies that feature Mr. Wang returning to Yunnan province and living off his income generated in the United States. In this scenario, Mr. Wang isn’t going to return to Yunnan Province right away. Instead, Mr. Wang wants to stay in the U.S. and grow his capital. Mr. Wang starts this time with $500,000 with the idea of reaching $1 million.
1. $180,000 in real estate
First Mr. Wang wants to buy real estate in an area where he thinks property prices will surely grow. He assumes that property prices will grow at 6% per year. He decides this based on a number of factors related to current inventory and demographic trends.
Pro Tip
Always look for a growth story when pursuing a growth investment strategy in real estate, says Scott Lawlor, CEO at WayPoint Residential. “The growth story has been spectacular for some time, and we believe it’s only getting better. At the same time, the market has continued to deliver inadequate new housing stock to keep up with the growing population. As a result, we forecast extremely favorable conditions for investment in the housing market well into the future.”
He puts down $180,000 as a down payment. Let’s see how much he has grown his initial $180,000 after five years.
| Property Price | $900,000 |
|---|---|
| Yearly Growth in Prices | 6% |
| Mortgage | $630,000.00 |
| Downpayment | $180,000.00 |
| Value in 5 years | $1,204,000.00 |
| Total Profit on Home | $304,000.00 |
| Total Invested | $180,000.00 |
| Total ROI | 168.89% |
You can see that Mr. Wang has made a 168% return on his initial capital, meaning his initial money has doubled and then some. Real estate is the easiest way to grow money, as the average Joe can utilize leverage through all the mortgages available. Just with the real estate, he made $300,000+ towards his goal.
Pro Tip
There are other fees associated with a property, such as mortgage origination fees and various closing costs. For simplicity, we don’t include these costs in the model as they are not invested in the asset but are fees to third parties. Be aware that with all real estate investments, there will be tangential fees and closing costs.
2. $150,000 in stocks
Mr. Wang has identified a portfolio of stocks that he thinks can be great growth investments as they have huge profit margins and they reinvest all their profits into the company for growth potential. He assumes that, on average, this portfolio of stocks should grow at 8% a year over five years.
| Stock Portfolio | $150,000 |
|---|---|
| Yearly Growth | 8% |
| Year 1 Value | $162,000.00 |
| Year 2 Value | $174,960.00 |
| Year 3 Value | $188,956.00 |
| Year 4 Value | $204,073.00 |
| Year 5 Value | $220,399.00 |
| Total Profit Year 5 | $70,399.00 |
| Total ROI | 46.93% |
Remember, if the portfolio is growing 8% per year, that’s 8% compounded. This is different from income investing where the yield is not compounded; it’s an exact percentage every year. After five years, Mr. Wang can turn that $150,000 into $220,000.
3. $150,000 in cryptocurrency
Mr. Wang, with his last investment, decides to invest in cryptocurrency. Cryptocurrency is speculative, with the idea that the value will increase over time. It’s true that there are some new, more exotic cryptocurrencies and crypto lending platforms that can produce a yearly yield. But for the most part, investing in crypto is a bet that the price of crypto will go up. Crypto is volatile, but Mr. Wang figures that if he buys a bunch of Bitcoin today, then he should average about 10% per year over five years, regardless of the swings in the market.
| Crypto Portfolio | $150,000 |
|---|---|
| Yearly Growth | 10% |
| Year 1 Value | $165,000.00 |
| Year 2 Value | $181,500.00 |
| Year 3 Value | $199,650.00 |
| Year 4 Value | $219,615.00 |
| Year 5 Value | $241,576.00 |
| Total Profit Year 5 | $91,576.00 |
| Total ROI | 61.05% |
At an average of 10% per year, Mr. Wang will have a profit of $91,576, giving him $241,576 in total. Again, this is crypto with a long-term hold where the trend is up, regardless of the swings in the market along the way.
Mr. Wang’s million-dollar breakdown
Mr. Wang has taken a look at his portfolio estimates, and after five years, assuming the yearly growth and returns, he is left with almost $966,000. This is not quite the $1 million he was looking for, but it’s close. He feels he can make up the shortfall later.
| Invested Capital | Total Profit | Total | ROI on Capital | |
|---|---|---|---|---|
| Real Estate | $180,000.00 | $304,000.00 | $484,000.00 | 168.89% |
| Stocks | $150,000.00 | $70,399.00 | $220,399.00 | 46.93% |
| Cryptocurrency | $150,000.00 | $91,576.00 | $241,576.00 | 61.05% |
| Total | $480,000.00 | $465,975.00 | $945,975.00 | 97.08% |
Using leverage in growth investing
Most of us will only use leverage in growth investing through real estate via obtaining a mortgage. However, leverage can be used for many different investment vehicles, such as buying stocks and crypto. It’s important to note that with leverage comes risks. You can grow your capital faster using other people’s money, but you can also lose your capital faster if things turn in the wrong direction.
According to Brock Pierce, a cryptocurrency advocate and former U.S. presidential candidate (and Hollywood star), you can see this with excess swings in the Bitcoin market. He had this to say about recent volatility in Bitcoin. “This liquidation-linked move in Bitcoin highlights the importance of understanding how leverage works, to the upside and downside. The digital asset ecosystem is driven in large part by significant large bets, often linked to leverage. Thus, many investors in this space constantly keep a close eye on what so-called whales, or large investors, are doing and how the derivatives markets look at a given point in time.”
The digital asset ecosystem is driven in large part by significant large bets, often linked to leverage. Thus, many investors in this space constantly keep a close eye on what so-called whales, or large investors, are doing and how the derivatives markets look at a given point in time. - Brock PierceClick to Tweet
Leverage can be an important tool for investors, and can influence the market significantly. But remember that sometimes certain factors can affect growth that are completely outside of the real fundamentals. If you need help deciding where to invest your money and which strategy to use, these investment advisors can help.
FAQ
What are examples of growth investments?
Real estate (with the idea the price will appreciate) and growth stocks are some examples of growth investments.
How do I start investing in growth?
First, devise what type of return you want to get on your money. How much money do you want to make in a certain period of time? Then conduct research as to the best investment vehicles to start growth investing.
How long should I hold growth stocks?
Growth stocks should be viewed as a medium-to-long-term hold to take full advantage. Furthermore, there might be swings in the market in either direction that need to be weathered.
Key takeaways
- Growth investing is an investment strategy that focuses on capital appreciation. Although commonly associated with stock-buying strategies, growth investing can apply to a number of investment vehicles, such as real estate and cryptocurrency.
- Growth investing is usually associated with growth-stock buying. These are stocks that are predicted to grow in value due to various metrics.
- If you are looking at growing your money, you should do research and due diligence to find out which stocks and other investment vehicles will help you achieve your goals.
- You can hope for above-average growth, but use estimates that are in line with what the market might actually produce.
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