What Is Growth Investing?

Growth investing is one of the two classical styles of investment. There are numerous different definitions of the style and some confusion about the precise relationship between growth companies and growth stocks. But a focus on growth is generally contrasted with value investing, which tends to rely more on quantitative methods of analysis. Growth investing tends to be based more on qualitative judgments about the kind of companies that will offer remarkable growth rates and exceptional returns performance.

Growth stock investing arose as a definable concept in the United States of the 1930s the counterpoint to the safe, secure income investing of the depression years. It was presumed that companies with a past record of growth in revenues and earnings had the momentum to carry them into the future. And they had to go farther into the future or at greater rates of growth than the market had already accorded in its discounting through current prices. T Rowe Price, who first set out the principles of growth stock valuation in the 1930s, wrote:

Growth stocks can be defined as shares in business enterprise that have demonstrated favorable underlying long-term growth in earnings and that, after careful research study, give indications of continued secular growth in the future.

In order to turn a capital commitment into appreciation, the growth investor needs prescience about earnings or rate of growth or the market's willingness to pay for future events. At certain times in the market for example, in the late 1960s and early 1970s and, more recently, in the late 1990s the growth investor has been rewarded with handsome returns. Those returns have in part been the result of an increase in the number of growth investors rather than a change in the valuation systems used by an existing population of investors.

And the agreement runs backwards in that those equities that have appreciated are assumed to have growth characteristics. Almost any list of the best managed companies a popular and recurring article in business publications will be composed of those stocks that have had an unusually favorable price performance for some past period. Growth stocks may see the future through the rear view mirror.