Invest in Growth Stocks at the Right Price
I know you want to generate capital gains in the stock market. You need to use a strategy that fits the current market environment and your own personality to do that.
There are two ways two make money in the stock market everyone talks about, but you will be a lot better off if you combine the two of them. I'm talking about growth investing and value investing here. You know buy when it goes up or buy cheap and sell high later. Combine both.
Growth investors base their investment decisions on a study of the earnings of a company, but completely disregard valuations. They don't care if a stock is highly valued, only that earnings are growing quickly. William O'Neill is the most popular proponent of growth investing. He looks for companies whose quarterly earnings are up at least 20% from a year ago, whose annual compounded earnings per share should be between at least 15% for the past five years, and who have a new product or service that will help it capture market share. Although O'Neill then takes into consideration how strong the stock is when compared to the rest of the market and the general phase of the market, most pure growth stock investors do not worry about the position of the market or the stock itself.
Even though growth stocks tend to outperform the rest of the stock market during bull markets, growth stock investing holds special risks. Part of the reason why growth stocks do so well is that their earnings tend to surprise analysts to the upside. That catches the attention of investors and causes traders to buy the stock in hopes that the company will surprise again, causing the stock to become highly valued.
At some point this is going to happen, because nothing goes up forever, not even a rocket ship. The big companies we all know about all grew fast when they started out, but most don't grow as fast anymore so they are no longer growth stocks. Think about GE for example.
Because growth stocks tend to be highly valued they are susceptible to large and sudden drops on any negative news. An earnings warning or statements from a CEO that earnings are going to grow at a slower pace are enough to crush investors. Strategies based on growth stock investing do not tell investors to sell until it is too late.
Value investing is the other way investors make money in the stock market. Warren Buffet is the most well known value investor. Value investors like buying stocks in companies that have big book value, pay out dividends, and do not have much debt on their balance sheet. In the best cases they can find a stock that is actually priced lower than the company itself, meaning the company could be sold for more than it stock price say it is worth. It is a bargain.
In a bear market or a big stock market correction you can find bargains and that is when it is time to think about being a Warren Buffett. It happens all of the time. Investors always get scared from time to time and sell stocks at a stupid price. That is when you can buy.
Sometimes a value investor has to wait a long time after buying a stock to see it go up, because the public stays scared and doesn't see the value in the stock. This can even happen in whole markets. Gold and commodities stayed at low prices until only a few years ago for example.
Value investing methods also tend to underperform strategies based on growth during bull markets and can cause investors to sit out on the best moving stocks. For instance Warren Buffet refused to invest in technology stocks during the 1990's, because they did not meet his valuation criteria.
There are two ways two make money in the stock market everyone talks about, but you will be a lot better off if you combine the two of them. I'm talking about growth investing and value investing here. You know buy when it goes up or buy cheap and sell high later. Combine both.
Growth investors base their investment decisions on a study of the earnings of a company, but completely disregard valuations. They don't care if a stock is highly valued, only that earnings are growing quickly. William O'Neill is the most popular proponent of growth investing. He looks for companies whose quarterly earnings are up at least 20% from a year ago, whose annual compounded earnings per share should be between at least 15% for the past five years, and who have a new product or service that will help it capture market share. Although O'Neill then takes into consideration how strong the stock is when compared to the rest of the market and the general phase of the market, most pure growth stock investors do not worry about the position of the market or the stock itself.
Even though growth stocks tend to outperform the rest of the stock market during bull markets, growth stock investing holds special risks. Part of the reason why growth stocks do so well is that their earnings tend to surprise analysts to the upside. That catches the attention of investors and causes traders to buy the stock in hopes that the company will surprise again, causing the stock to become highly valued.
At some point this is going to happen, because nothing goes up forever, not even a rocket ship. The big companies we all know about all grew fast when they started out, but most don't grow as fast anymore so they are no longer growth stocks. Think about GE for example.
Because growth stocks tend to be highly valued they are susceptible to large and sudden drops on any negative news. An earnings warning or statements from a CEO that earnings are going to grow at a slower pace are enough to crush investors. Strategies based on growth stock investing do not tell investors to sell until it is too late.
Value investing is the other way investors make money in the stock market. Warren Buffet is the most well known value investor. Value investors like buying stocks in companies that have big book value, pay out dividends, and do not have much debt on their balance sheet. In the best cases they can find a stock that is actually priced lower than the company itself, meaning the company could be sold for more than it stock price say it is worth. It is a bargain.
In a bear market or a big stock market correction you can find bargains and that is when it is time to think about being a Warren Buffett. It happens all of the time. Investors always get scared from time to time and sell stocks at a stupid price. That is when you can buy.
Sometimes a value investor has to wait a long time after buying a stock to see it go up, because the public stays scared and doesn't see the value in the stock. This can even happen in whole markets. Gold and commodities stayed at low prices until only a few years ago for example.
Value investing methods also tend to underperform strategies based on growth during bull markets and can cause investors to sit out on the best moving stocks. For instance Warren Buffet refused to invest in technology stocks during the 1990's, because they did not meet his valuation criteria.
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posted by Dominic Jackson at
2:03 AM
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