Why do we buy stocks, not keep the money in saving account? The main reason is, buying stock allow us to participate in a business: we invest in the business, business makes money, then business reinvest the money to make more money. In the end, our initial investment grow much larger from the compounding effect (like a snowball). This is the beauty of growth stock.
Take the example of Apple, the maker of iPhone: in 2008, Apple sold 11.6 Mio units of iPhone. In 2018, Apple sold 217.7 Mio units of iPhone. In the 10 years, iPhone sales (in units) grow 34% year over year! In the same period, Apple stock price (adjusted) grow from $3.05 at end of 2008 to $39.4 at end of 2018. Price CAGR (compound annual growth rate) is 29% (without considering dividend payouts). If you invested $10,000 into Apple in 2008, by 2018 your investment has grown to $129,180. This is exactly why we invest in stocks, not in saving accounts.
So, where are these growth stocks to pick? First of all, we need to understand the nature of growth stock. Growth stock is driven by the innovation. A new technology provides something different from tradition and people like it. So the new technology gain the market share rapidly.
In the past 15 years, information technology sector lead the innovation and growth. FAANG stocks: Facebook (Metaverse now), Apple, Amazon, Netflix and Google (Alphabet), are very good examples of this growth wave. They occupy the world with smart phones, social networks, e-commerce, online stream etc. in the past decade, growing at tremendous pace.
But, their growing story will not last forever. At some point of time, their market share will be so high that there will be no additional market available for them. Apple is an example. iPhone sales is not growing anymore in the past several years. Unless Apple can grow in other area, otherwise Apple is not a growth stock to me anymore. Looking back the past 150 years, a lot of stocks have turned from growth stocks to value stocks: railway, steel, oil & gas, electricity, cable TV, healthcare, not long ago, telecom. So, be prepared that one day, FAANG will not be growth stock anymore.
What’s next growth wave we can ride on? Again, nobody can predict the future, but there are enough growth concepts and stories to further study: electric vehicles (TESLA!), space travel, metaverse, clean energy, robots, crypto…
Growth takes time. Be patient. It may take several years before people realise the innovation will work or not. Make it a long term investment and stick to the core: monitor if the company is still innovative and can transform innovation into products and grow at a faster pace than others. If you choose the wrong stock, cut it off and move on. It’s like a bet, so better don’t bet on a single stock, but a basket of stocks, or use growth ETF.
Lastly, Everybody likes growth stocks, that’s why they are expensive. Worried about the price you pay for the growth stock? DCA (dollar cost average) is a good way to invest in growth stocks, but still, the key is patience. High inflation or high interest rate hurts growth stock price, but it could also mean buy opportunity: the news that Fed will raise rate has made growth stocks suffer a lot in the past month. But in the long term, Fed or rates can’t stop innovation or growth. So this could be a good entry opportunity. It’s never too late to invest.
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