In my more than 15 years of investing, I’ve mainly been a value investor.
So, my primary goal has been to purchase high-quality companies at low valuations. This approach has worked well for me — especially because it’s right in line with my risk tolerance.
That said, I definitely wish I could’ve found a few explosive growth stocks. Whereas income investors prioritize dividends, and value investors prioritize valuation, growth investors prioritize upside — sweet, sweet upside.
Of course, there’s no free lunch in investing. With higher upside comes higher risk. Everyone hears about the success stories of yacht-owning investors who’d bought Amazon or Microsoft in their infancy. But it’s easy to forget about those who lost everything on Pets.com or Nortel.
So, here are two tips to help you in your growth investing journey. They’ll help you hone in on the next big thing but will also assist in limiting your risks.
Tip #1: Mind your megatrends
If you want to find the next millionaire-maker stock, make sure it’s in a rapidly expanding industry.
Sure, you can always invest in fast-growing restaurants, clothing retailers, or small-cap energy producers. That’s fine. But if you really want to increase your chances at snaring a multi-bagger, you might want to focus your attention on true megatrends — you know, the major changes and developments that will significantly impact society for decades to come.
Think electric cars, the e-commerce revolution, or the Internet of Things. Right now, the pot industry is making all the headlines, with investors clamouring to take advantage of looming legalization. Say what you will about the current valuation and risk of weed stocks like Aurora Cannabis (TSX:ACB) and Canopy Growth (TSX:WEED)(NYSE:CGC), but one thing’s for sure: the market opportunity is massive.
Remember: you’re buying growth stocks for their upside. Be sure that the industries you buy into can support plenty of it.
Tip #2: Diversify, diversify, diversify
Fools know the importance of diversification. But it’s especially crucial when it comes to growth investing.
As I touched on earlier, high growth usually comes with increased risks. So, it’s important to dampen that risk by never committing too much of your portfolio to any one or two growth ideas — no matter how confident you might be. Instead, spread your growth plays across several companies … in different countries … looking to capitalize on different megatrends.
Not only does diversification reduce portfolio risk, but it also gives you a greater chance of hitting pay-dirt. More than any other style, growth investing is a numbers’ game.
“All you need for a lifetime of successful investing is a few big winners,” growth investing legend Peter Lynch once wrote, “and the pluses from those will overwhelm the minuses from the stocks that don’t work out.”
The bottom line
Growth investing can be a tricky game. But as long as you use megatrends to maximize your upside and diversification to minimize your downside, you’ll greatly boost your chances of success.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Brian Pacampara owns no position in any of the companies mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.