Value the Advantages of Growth Stocks

Physician's Money Digest, November 2005, Volume 12, Issue 15

In general, growth stock investing refers to investing in companies growing their earnings at above-average rates. The growth investor looks for large increases of at least 25% in current quarterly earnings per share. Over the past few decades, the best-performing stocks showed earnings increases of 70% or more in the quarter right before they started to make their huge price moves. Also, growth investors look for accelerating earnings in at least the three most recent quarters. There are two major advantages offered by investing in growth stocks: large stock price appreciation and compounding.

In general, growth stocks offer the largest stock price increases. But investors can't blindly buy and hold because the stocks can also fall back in price. This is what happened to the high technology stocks of the 1990s. Growth stocks show well-defined topping patterns, which can be detected by the experienced investor, and such stocks can be sold prior to their downward price moves.

Compounding your wealth is the fastest way to grow it. In general, the stock market is comprised of alternating bull and bear markets, and the big winners of one bull market rarely lead the next bull market cycle. For example, even though Sun Microsystems, EMC Corporation, and other high tech stocks were big winners of the bull market of 1998-2000, they were not the leaders of the bull market in 2003. The astute investor buys growth stocks correctly, and then sells them after they show large stock price increases. Instead of holding on to them while they come down, the astute investor has cashed out and preserved their capital for compounding it in the new big winners of the next bull cycle.

Whether you're a physician who invests on your own or through a stock broker or money manager, be sure to keep in mind the importance of buying and selling growth stocks correctly, and follow a well-planned investing discipline like CANSLIMâ„¢, instead of relying on feelings and emotions.

is a private money manager

affiliated with Sierra Capital Planning in

northern California. He runs a fee-based

business and a hedge fund for qualified investors.

For more information, call 877-467-8657 or visit www.sierrainvestor.com. Avanish Agrawal

contributed to this article.

Michael Doran