Growth stock investing books
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Growth investing is highly attractive to many investors because buying stock in emerging companies can provide impressive returns as long as the companies are successful. However, such companies are untried, and thus often pose a fairly high risk. Growth investing may be contrasted with value investing.
Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Growth investors tend to favor smaller, younger companies poised to expand and increase profitability potential in the future.
Growth investors often look to five key factors when evaluating stocks: historical and future earnings growth; profit margins; returns on equity ROE ; and share price performance. Growth investors look for profits through capital appreciation—that is, the gains they'll achieve when they sell their stock as opposed to dividends they receive while they own it.
In fact, most growth-stock companies reinvest their earnings back into the business rather than paying a dividend to their shareholders. These companies tend to be small, young companies with excellent potential. They may also be companies that have just started trading publicly. The idea is that the company will prosper and expand, and this growth in earnings or revenues will eventually translate into higher stock prices in the future. They may not have earnings at the present moment but are expected to in the future.
This is because they may hold patents or have access to technologies that put them ahead of others in their industry. In order to stay ahead of competitors, they reinvest profits to develop even newer technologies, and they seek to secure patents as a way to ensure longer-term growth. Because investors seek to maximize their capital gains , growth investing is also known as a capital growth strategy or a capital appreciation strategy. Evaluating a Company's Potential for Growth Growth investors look at a company's or a market's potential for growth.
There is no absolute formula for evaluating this potential; it requires a degree of individual interpretation, based on objective and subjective factors, plus personal judgment. Growth investors may use certain methods or criteria as a framework for their analysis, but these methods must be applied with a company's particular situation in mind: Specifically, its current position vis-a-vis its past industry performance and historical financial performance.
In general, though, growth investors look at five key factors when selecting companies that may provide capital appreciation. These include: Strong Historical Earnings Growth Companies should show a track record of strong earnings growth over the previous five to 10 years. These announcements are made on specific dates during earnings season and are preceded by earnings estimates issued by equity analysts.
In general, if a company exceeds its previous five-year average of pretax profit margins—as well as those of its industry—the company may be a good growth candidate. Growth Investing vs. Value Investing Some consider growth investing and value investing to be diametrically opposed approaches.
Value investors seek " value stocks " that trade below their intrinsic value or book value, whereas growth investors—while they do consider a company's fundamental worth—tend to ignore standard indicators that might show the stock to be overvalued.
While value investors look for stocks that are trading for less than their intrinsic value today—bargain-hunting so to speak—growth investors focus on the future potential of a company, with much less emphasis on the present stock price. Unlike value investors, growth investors may buy stock in companies that are trading higher than their intrinsic value with the assumption that the intrinsic value will grow and ultimately exceed current valuations.
Vanguard is a leading ETF issuer and index investing company. The book does a particularly good job explaining the advantages of passive investing , diversification, and asset allocation. It also emphasizes the impact management fees and taxes have on long term returns. The author, Nassim Taleb popularized the term black swan , in his next book, The Black Swan — but many regard this book as a better book for investors.
Fooled by Randomness is all about the role that luck and randomness plays in life. It explains that because of hindsight and survivorship bias, people often attribute success to actions or behaviors when in fact luck played a greater role.
The same principle applies to many aspects of life including careers, innovation, and of course investing. The book also illustrates the way in which people perceive patterns when in fact they are looking at something random. This of course also applies to investing. In fact, in the 12th edition of the book was published. A Random Walk Down Wall Street busts popular investing myths by showing that price movements are mostly random.
He suggests that both technical analysis and fundamental analysis are flawed, and result in unnecessary trading costs. In summary, Malkiel believes that few investors will outperform a buy and hold strategy. Although index funds were very new when the book was first written, the book tends to suggest they are best suited to most investors.
Daniel Kahneman is a leading mind in the field of behavioral economics and decision making. The book explores the way the human mind works when it comes to decision making. In particular, Kahneman explains that people use two different cognitive systems to make decisions. The first uses pattern recognition to make automatic or instinctive judgments quickly. The second is more analytical and requires more time and effort.
When the outcome of a decision is important, as it is in investing, we need to decide which system is better suited to the decision. The book will help you decide whether you should trust your instincts or use a methodical approach. Carl Richards is a financial planner and wrote the book to highlight the mistakes people make with their personal finances.
While not exactly an investment book, it does a good job of illustrating the way investors sabotage their own investment. Richards uses the term behavior gap to refer to the gap between investment returns and investor returns. In other words, investors often end up with lower returns than the funds they invest in because of their actions. Fear, greed , and impulsive decision-making result in investors buying and selling funds at exactly the wrong time.
He suggests the best investment strategy is the simplest one, and investors should leave their investment to compound over time. The Behavior Gap is one of the best investing books for first time investors, and for anyone wanting to become an investment advisor.
Kiyosaki uses the analogy of two people, one rich and one poor, and the way they approach spending, saving, and investing. In the book, Kiyosaki explains that poor people work for money, while wealthy people make money work for them. Rich people also acquire assets, while poor people acquire liabilities. Compound interest also works both ways — depending whether you are paying or receiving interest.
Kiyosaki stresses the importance of creating income streams through real estate and dividend investing. In many ways Rich Dad Poor Dad fits more into the personal finance category than the investment books category — but is still worth a read. Both men have become well known for the wisdom they impart about investing and life.
This book is a collection of 11 speeches that Munger gave over a year period. However, you will learn a lot about the way great investors think. In short, you need to be objective and look at a situation from every side. You also need to think broadly and learn about lots of different fields. This one of the best investing books you can read to learn about the mindset of a successful long-term investor.
Each book in the series consists of a set of interviews with a diverse group of fund managers and traders. Schwager has also written several other technical analysis and trading books. All four of the Market Wizards books are worth reading, but the first, written in , and simply called Market Wizards, stands out amongst trading and investment books.
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