What is Growth Investing? How to Identify Tomorrow’s Winners
Growth investing is the art of finding companies that are expanding faster than the broader market and betting on their continued success. While it might seem like the opposite of value investing (which we explored in our previous post), we see it more as a different lens for viewing opportunities. Instead of looking for discounts on today’s value, growth investors pay premium prices for tomorrow’s potential.
Understanding the Growth Investing Philosophy
Growth investing operates on a simple premise: some companies will grow so much that today’s “expensive” price will look cheap in retrospect. We’re not looking for bargains in the traditional sense—we’re looking for excellence.
Think about early investors in companies like Amazon, Netflix, or Tesla. These stocks always looked expensive based on traditional metrics. But investors who understood their growth potential and held on through the volatility have been richly rewarded. That’s the promise and challenge of growth investing.
The philosophy requires a fundamental shift in how you evaluate investments. Instead of focusing on what a company has done, you’re betting on what it will do. This forward-looking approach makes growth investing both exciting and risky.
Key Characteristics of Growth Stocks
Through years of tracking growth stocks, we’ve identified several common traits that separate true growth companies from the pretenders:
Rapid revenue growth is the most obvious characteristic. We typically look for companies growing sales at least 15-20% annually, though the best growth stocks often exceed 30% or even 50% yearly growth. This isn’t just about one good year—it’s about consistent, sustainable expansion.
Market leadership or disruption defines many great growth stocks. These companies either dominate their niche or are creating entirely new markets. They have something special—proprietary technology, network effects, brand power, or visionary leadership—that competitors can’t easily replicate.
Reinvestment over dividends is standard practice. Growth companies pour profits back into expansion rather than paying dividends. Every dollar retained can fuel more growth, whether through R&D, marketing, or geographic expansion. This approach aligns with building long-term value rather than providing immediate income.
High valuations come with the territory. Growth stocks typically sport:
- P/E ratios well above market averages (often 30-50+)
- Price-to-sales ratios that would make value investors faint
- PEG ratios that only make sense with continued high growth
Volatility is part of the package. Growth stocks can swing 30-50% in either direction based on quarterly results, competitive developments, or changing market sentiment. This volatility creates both opportunity and risk.
The Growth Investing Process
Successful growth investing requires a systematic approach different from traditional fundamental analysis:
1. Identifying Growth Trends
Start by understanding where the world is heading:
- Technological disruption (AI, renewable energy, biotechnology)
- Demographic shifts (aging populations, emerging market consumers)
- Changing consumer behaviors (e-commerce, digital entertainment)
- Regulatory changes creating new opportunities
We spend considerable time reading industry reports, following venture capital investments, and understanding which trends have staying power versus which are just fads.
2. Finding Growth Candidates
Once you’ve identified promising trends, look for companies positioned to benefit:
- Revenue growth rate consistently above 20%
- Expanding margins showing operational leverage
- Large addressable markets with room to grow
- Competitive advantages that are strengthening, not eroding
3. Analyzing Growth Quality
Not all growth is created equal. We distinguish between:
- Organic growth from winning customers and expanding markets
- Acquisition-driven growth that might not be sustainable
- One-time boosts from temporary factors
- Quality growth that improves the company’s competitive position
4. Valuation in Context
Traditional value metrics often don’t work for growth stocks. Instead, consider:
- PEG ratio (price-to-earnings divided by growth rate)
- Price-to-sales compared to growth rate
- Market opportunity versus current revenue
- Competitive position and barriers to entry
A stock trading at 50 times earnings might be cheap if it’s growing at 60% annually with a massive market opportunity.
Growth Investing Strategies
Different approaches work for different investors and market conditions:
Pure Growth Investing targets the fastest-growing companies regardless of price. This aggressive approach accepts high valuations for exceptional growth, betting that execution will justify the premium.
GARP (Growth at a Reasonable Price) blends growth and value principles. We look for companies growing above average but not at astronomical valuations. This moderate approach might target 15-25% growers trading at 20-30 times earnings.
Sector Rotation Growth focuses on industries in their high-growth phase. Technology might dominate one decade, renewable energy the next. This approach requires understanding industry lifecycles and macroeconomic trends.
Small-Cap Growth targets younger companies with more growth potential. While riskier, small-caps can deliver exceptional returns if you identify tomorrow’s large-caps early.
The Psychology of Growth Investing
Growth investing demands a particular mindset that we’ve cultivated over years:
Future-focused thinking is essential. You’re investing in what could be, not what is. This requires imagination and the ability to envision how industries might evolve.
High risk tolerance goes beyond accepting volatility. You must be comfortable with the possibility of permanent loss. Not every growth story pans out, and when growth stocks fall, they can fall hard.
Conviction during volatility separates successful growth investors. When your high-flying stock drops 40% on a earnings miss, do you see a buying opportunity or a reason to sell? Your answer determines your success.
Patience with a different flavor than value investing. Instead of waiting for the market to recognize existing value, you’re waiting for potential to become reality. This might take years and include stomach-churning volatility.
Real-World Growth Investing Examples
Let’s examine how growth investing works in practice:
Amazon (1997-Present): Early investors faced a company losing money while building infrastructure. The stock looked absurdly expensive by traditional metrics for years. Those who understood the e-commerce opportunity and AWS potential have seen 100x+ returns.
Netflix (2010s): When Netflix pivoted to streaming, bears focused on content costs and competition. Growth investors saw the global opportunity and pricing power. Despite “expensive” valuations throughout, the stock delivered massive returns.
Tesla (2010-Present): Perhaps no stock better exemplifies growth investing’s risks and rewards. Wild volatility, production challenges, and constant controversy—yet believers in the electric vehicle revolution and Musk’s vision have been rewarded.
These successes shouldn’t obscure the failures. For every Amazon, there are dozens of “story stocks” that never delivered. Remember Pets.com, Theranos, or countless “Uber for X” companies? Growth investing requires accepting these failures as part of the process.
Common Growth Investing Mistakes
We’ve learned these lessons through experience:
Confusing growth with momentum leads to buying peaks. Just because a stock has risen doesn’t mean the growth story remains intact. Always focus on future growth potential, not past performance.
Ignoring valuation entirely is dangerous even for growth investors. While we accept higher valuations, there are limits. A great company at an absurd price is still a bad investment.
Failing to monitor the growth story causes missed exit signals. Growth stocks require constant vigilance. When growth slows or competition intensifies, it’s often time to move on.
Over-diversification in growth stocks dilutes returns. Since many growth stocks fail, there’s temptation to own dozens. But spreading too thin means your winners can’t offset your losers. We prefer concentrated bets on our highest-conviction ideas.
Building a Growth Portfolio
If growth investing appeals to you, consider this approach:
Start with Your Circle of Competence
Invest in industries you understand. Tech workers might grasp SaaS business models. Healthcare professionals might spot biotech opportunities. Use your knowledge advantage.
Balance Growth with Stability
Pure growth portfolios are rollercoasters. Consider balancing high-growth positions with more stable holdings. This connects to broader portfolio diversification strategies for managing risk.
Size Positions Appropriately
We typically limit individual growth stocks to 5-10% of our portfolio. The highest-conviction ideas might reach 15%. This concentration allows meaningful returns while managing risk.
Set Clear Exit Criteria
Before buying, know why you might sell:
- Growth rate declining below expectations
- Competitive advantages eroding
- Valuation reaching extreme levels
- Better opportunities elsewhere
The Role of Growth Investing in Your Portfolio
Growth investing works best as part of a balanced approach. Consider how it fits your overall investment portfolio type:
- Young investors can handle more growth exposure given longer time horizons
- Aggressive portfolios might be 60-80% growth stocks
- Balanced approaches could include 30-40% growth allocation
- Conservative investors might limit growth to 10-20%
The key is aligning your growth allocation with your risk tolerance and time horizon.
The Future of Growth Investing
Growth investing evolves with the economy. Yesterday’s growth stocks become today’s value plays. New industries emerge while others mature. Successful growth investors adapt to these changes.
Current growth themes we’re watching include:
- Artificial intelligence and machine learning
- Renewable energy and climate technology
- Biotechnology and personalized medicine
- Space commercialization
- Digital finance and cryptocurrencies
The next decade’s biggest winners might be in industries that barely exist today. That’s both the challenge and excitement of growth investing.
Is Growth Investing Right for You?
Growth investing suits investors who:
- Can handle significant volatility
- Enjoy researching new technologies and trends
- Think in 5-10 year timeframes
- Accept that many investments will fail
- Get excited about transformation and disruption
It’s not for those seeking steady income, stable returns, or low volatility. But for those with the right temperament and time horizon, growth investing offers the potential for life-changing returns.
We’ve found that combining growth investing with other strategies creates the most robust portfolios. You don’t have to choose between growth and value—the best investors use both tools as market conditions warrant.
Managing a growth portfolio requires careful tracking of rapidly changing metrics and market conditions. Try OnePortfolio for free to monitor your growth investments and ensure they continue meeting your expectations.
