Understanding growth stocks
We’ve covered dividend stocks and REITS in our previous issue. Today, we’ll talk briefly about growth stocks. Growth stocks are usually labelled on companies with strong growth potential. These are usually the rock stars among stocks.
Aggressive expansion and acquisition mean that retained earnings are reinvested back into the company.
Hence, growth stocks usually do not pay dividends as they need to expand their business to grow at a faster than average rate vis- a- vis to the overall market.
Reward comes in the form of capital appreciation.
For a long term investor, growth stocks can be a good risk/return proposition.
Although it comes with higher risk, with no immediate need for regular income, your length of time in the market will allow you to ride through the market cycles and volatility.
Remember to employ both quantitative and qualitative analysis diligently on your short- listed stocks Aside from employing the usual fundamental analysis on the target company, here are a few additional tips:
Invest in a business that you understand – Peter Lynch was a famed fund manager, frequently mentioned in the same breath as Warren Buffett.
Running the Fidelity Magellan Fund from 1977 to 1990, he averaged 29.2 per cent annual return.
Lynch once said that he would never invest in a business that he cannot illustrate on a sheet of paper with a crayon.
Solid business model – Make sure that the target company has an already proven business model.
It must have a competitive advantage when compared to its peers.
3. Don’t confuse investment with penny stocks – Be especially wary of hot stock tips from friends.
Speculative investments like penny stocks are usually very active during times of strong market sentiment.
However, when there is downturn, penny stocks will usually be sold off heavily as speculators flee.
Penny stocks may never see daylight again, even after the market has rebounded.
4. Beware of market hype – Don’t get caught up with the latest hype.
It can sometimes pay to be sceptical of any ‘great discovery of our time’ or ‘latest product that can revolutionise an industry’.Treat any new stock ideas objectively.
Do your homework. Remember the words uttered by Sir John Templeton, “The four most dangerous words in investing are, this time it’s different” Conclusion
We generated the total returns of 2 Unit Trust Funds.
One specialises in dividend stocks while the other is fully invested in small-cap or growth stocks. Both actively managed funds have managed to outperform the benchmark.
Dividend Fund has garnered 66.89 per cent while Small-Cap Fund managed 194.51 per cent while the broader Malaysian Index gained 13.66 per cent.
Had an investor been willing to accept a greater degree of price volatility and has a longterm time horizon; he would have been very well-rewarded indeed.
On the other hand, the dividend fund has been relatively defensive especially during times of market sell- off and provided benchmark- beating and inflation-beating qualities.
In a retiree’s broader asset allocation, he may have 40 per cent of his wealth in equities.
An example of what he can do within his equity investments; allocate 30 per cent into growth stock funds.
The rest of the 70 per cent can be in defensive dividend stocks. Both styles have a place in an investor’s portfolio.
Areca Capital is a niche Malaysian fund management and wealth advisory company. For any enquiries, they can be contacted at 03-79563111 or by email: invest@ arecacapital. com.
Disclaimer: The article is produced based on material and information compiled from reliable sources at the time of writing. The article is not an offer, recommendation or advice to transact in any investment products, including the stocks or funds mentioned within. Investors are advised to consult professional investment advisers before making any investment decision.