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Growth Companies|
Fast growth companies as a group will always outperform slow growth companies. It is not too difficult to see why.
Investors who buy growth companies are usually willing to forsake dividends in exchange for the promise of higher growth. Growth companies often need to reinvest their profits back into the business. When a growth company reaches the stage in its life cycle where it can afford to pay hefty dividends to shareholders, it is usually a sign that its growth opportunities are limited.
In order to retain the purchasing power of your investment, you need annual growth that equals the prevailing inflation rate. For the last 10 years the inflation rate was approximately 3% per annum. It is reasonable to assume that the next 10 years will not differ much. On that basis you would need 3% growth just to stay even. If you invest your money at 10%, which is the average mutual fund return for the last ten years, you will barely retain the purchasing power of your money, since you also have to pay taxes. Most investors are in a tax bracket exceeding 30%, including federal and state income taxes. Therefore, if you earn 10%, you are at best making 4% net.

Now let's see what happens if a growth company grows at 30%. First, your net after taxes is 21%. Your net after the inflation rate is 18%, which is exactly 4.5 times the net return of 4% you get from an 10% investment. It is therefore important to find investments that give you a high return. In the long term, companies growing at an above average rate will keep making a decent return on their investment in spite of temporary setbacks.

To summarize, 30% growth will increase your net 4.5 times faster than 10%. Therefore, you must go for higher returns and higher multiples. The assumption that a low multiple stock is a bargain is almost always wrong.

Take the time to build yourself an indexed growth portfolio, comprised of high quality high growth companies.  Monitor it, eliminate the weak positions, and let growth do its thing.  You will be a happy investor.

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