Investing strategies part 1: Growth shares

Investing can be extremely rewarding, but if you have made the decision to invest in individual stocks it is important to ensure you are well equipped to make informed decisions. Having an investing philosophy or strategy forms part of a well structured plan, which should also include but not be limited to: your goal(s), risk appetite, desired return and time horizon.

Growth investing is one of the most common stock market strategies. Knowing which type of investor you want to be and which strategy to employ will help you construct a share portfolio to meet your specific needs. It is worth noting that there can be (and is) overlap between the types of investors I’ll cover in this two-part series.

Growth investing at a high level

Growth investors buy companies with great potential for, well, growth. Generally trading on higher multiples of sales and earnings, investors often acquire a stake in these businesses with a long-term focus. The belief is that although the current sales or earnings figures are relatively low to the market capitalisation of the company, the high quality business will be able to grow at extremely fast rates across a number of important metrics. Growth investors are acutely aware of the power of compounding and feel more comfortable with volatility.

Growth investors are excited by new companies, new industries and innovation. Often investing in disruptors or pioneers in their market, analysing growth companies can require investors to look at total addressable market (TAM). TAM is the revenue opportunity of the whole market in which a company operates. TAM is important for growth investors as it provides an idea of how large a company could be in the future. If you can find the first mover or top dog in a market with a huge TAM, then there’s a better chance of earning a return of 3, 5, or even 10 times your money.

Some examples of growth shares include Shopify Inc (NYSE: SHOP) and Altium Limited (ASX: ALU).

The reality

As a growth investor, your strike rate of winners to losers is likely to be quite poor. The hope is that you let your winners run, to more than cover the losers. One way to improve your win/loss ratio is to ensure you don’t overpay for the companies you invest in.

Investing with funds you don’t need in the next few years and having a longer investing time horizon will minimise the impact of short-term volatility. I believe that for everyone who isn’t close to retirement or their investing goal, investing in growth stocks provides the best chance of beating the market.

For more growth stock ideas, check out some of these great picks.

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Motley Fool contributor Lloyd Prout (Proutlb95) owns shares in Shopify Inc. and Altium Limited and expresses his own opinions. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Shopify. The Motley Fool Australia owns shares of Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.