How to Invest in the Best Growth Stocks:
5 Rules for Successful Growth Investing
I was talking with a longtime subscriber recently—a professional money manager—when the topic of education came up. He told me, “The thing I‘ve always liked about Cabot is that you educate your readers. You don’t just tell them what to buy and sell, you explain why.”
Today, recognizing the value of that thought, I’m going back to the basics, bringing you five rules for successful growth investing in the best growth stocks, complete with the all-important reasons why. You can also download a report by Cabot's Vice President of Investments, Mike Cintolo, with the names of the 10 best growth stocks to buy now.
1. Use market timing to guide your investing. In bull markets, we say, “A rising tide floats all boats.” In bear markets, we say, “It’s hard to swim against the outgoing tide,” ... as so many investors have learned. So learn to recognize the major trend of the market, and learn to respect the power of that trend.
2. Do your very best to ignore the economic news.
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The fact is, the stock market is always looking six to nine months ahead, so today’s news means nothing. Sure, the ongoing drama in Europe makes for great cocktail chatter, but it won’t help you make money. In fact, if you’re always focused on investing according to the hottest news, you’ll find you’re always one step behind the professionals. You’re at a disadvantage. To succeed as an investor, you’ve got to find an area where you have an advantage, and that’s on the road less traveled, namely younger, less well-known companies.
3. Invest in fast-growing companies.
Fast growth can overcome a huge number of smaller deficiencies, like inexperienced management, competition, weak patent positions, and more. And fast growth eventually attracts the attention of institutional investors, who are very useful in both providing downside support and in pushing prices higher as they buy their way in. The best growth stocks are in small companies growing at triple-digit rates—100% or better—through organic growth, not acquisition.
4. Average up in your winners.
As the song says, “Accentuate the positive.”
So when you've invested in a small, fast-growing company, and the market gives you a profit, don’t take the profit. Wait for a normal pullback, and then buy some more of that top growth stock!
5. Cut losses short.
As the song says, “Eliminate the negative.”
If a stock you bought has declined, it has not done what you hired it to do. Thus, you should consider letting it go. Analyze the chart carefully, and tolerate no losses exceeding your own personal pre-set limits. Our absolute maximum loss limit is 20% in bull markets and 15% in bear markets, but we do our best to cut them even shorter. The very worst thing you can do is let a loss get bigger and bigger.
Perhaps the biggest rule of all, which has existed for centuries, is about diversification. “Never put all your eggs in one basket.” This applies even to the best growth stocks. Of course, everybody knows this, so I don't even include it my five growth investing rules. But sometimes ... people forget.
Why Invest in Growth Stocks:
Growth stocks are shares in a company whose earnings are growing faster than the overall market. They are expected to increase the value of your portfolio. They do not typically pay dividends; rather, the company invests excess cash back into the business to increase (‘grow’) the value of the company.
If you want to grow your wealth (as opposed to taking income from your investments), and have a few minutes each day to manage your portfolio, growth stocks are for you.
Good growth stocks will have these characteristics:
- Revenues and earnings are growing at a rate of at least 10%, compared to the same period a year ago.
- There is great potential for future growth.
- Profit margins and cash flow are healthy.
- Not yet a ‘darling’ of the investment community, a growth stock will have a growing institutional following, which provides some stability and predictability to the stock’s price action.
- The stock price is going up.
Some of the growth stocks that Cabot subscribers have profited from include Home Depot, Cisco Systems, Apple, Amazon.com, eBay, Crocs, Monster Beverage, Las Vegas Sands, First Solar, Chipotle Mexican Grill and many more familiar names.
Cabot Market Letter
, Cabot’s flagship newsletter, has fine-tuned its growth investing strategy since 1970. Cabot China & Emerging Markets Report
applies this strategy to the fastest-growing markets on earth.
• Learn more about Growth Stock Investing
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