The shocking truth about growth investors

2nd August 2012

Growth investing and growth investors are dirty words to many value investors.  A focus on growth is often called the Greater Fool Theory, and study after study shows that growth investing performs badly when compared to value investing.

As a value investor, it's easy to mock growth investors with reams of data and an air of self-satisfied superiority.  There is a slight problem though.  The shocking truth about growth investors is that they're right.  Growth investing is a fantastic way to make money in the stock market, as long as you do it right.

Warren Buffett is a growth investor

Buffett is usually considered a value investor, and that's because he is one.  But he's also a growth investor, and with the help of Charlie Munger they pioneered a hybrid approach where they combined the best of both worlds – long-term growth companies bought at value investment prices.

It was Buffett's focus on outstanding businesses which could grow both quickly and consistently that really took him to the top of the world's richest people list.

The FTSE 100 as a long-term growth investment

As a UK investor my focus is always on beating the FTSE 100 in the long-run.  The FTSE 100 beats some 80% or so of private and professional investors alike, and so if I can beat the FTSE then I know I'm doing much better than the pros, which is always nice.

I also know that my time and efforts are not wasted, because any investor can invest in the FTSE at almost no cost in terms of either time or money.  If you are not beating the FTSE 100 then you are effectively wasting your time.

As a growth investment, the FTSE 100 typically grows both earnings and dividends faster than inflation, and it does so relatively consistently over the years.  That growth ultimately drives the index level higher, regardless of how pessimistic the market may be.

In order to beat the market, we need to turn our portfolios into supercharged versions of the index, with superior growth, superior yields and superior valuations.

We all want growth, but growth of what?

For me, the most important numbers that need to grow are revenues, earnings and dividends.

At the end of the day, it's the earnings and dividends which set the range within which a share price will fall (exactly where it falls within that range is up to the market), and both of those ultimately derive from revenues.

Long-term growth is all that matters

Short-term growth, positive or negative, is mostly noise and is unlikely to provide any useful information to investors.  If you find yourself trying to make money out of the day-to-day news then you might have inadvertently become a trader rather than an investor.

When I'm talking about growth, I mean long-term growth over as long a period as you can sensibly get data for.  For me this means looking at 10 year data for every single company that I'm interested in, and if it doesn't have 10 years of public data available, then I won't touch it.

This means that Facebook was out of the question, no matter how attractive it may or may not have been.

Where to get your data

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