Welcome to part three of our four-part series on the world’s top investing strategies.
In part one, we dove into the world of value investing…a strategy trailblazed by such investors as Benjamin Graham, Charlie Munger, and Warren Buffett.
To do it right, you have to pay close attention to company financial statements and ignore the short-term bloops in the market. This strategy works over the long-term.
A quick cheat sheet to be a top-notch value investor is to apply Buffett’s 12 Tenets when looking at companies. To catch up on part one, check it out here.
Then in part two, we explored the ideas behind contrarian investing.
With this method, you aim to go against the flow as much as possible. Buy when there’s blood in the streets. Sell when optimism and exuberance start to take over.
It takes confidence to leave the herd…but it’s paid off for investors who use this tactic. People like Jim Rogers, Sir John Templeton, and Marc Faber have all made a pretty penny from it. Read more here.
But today, we’ll delve into the investing strategy that is potentially responsible for more millionaires in today’s generation than any other approach.
I’m talking about growth investing.
The basic idea is that you hunt for high-growth potential companies…companies like Amazon before they explode. Of course, this upward momentum tends to spill over to the stock price…and result in short, sharp rises.
Some investors who have followed this approach have managed to bag three, four, five, and six-digit returns off single companies.
But many have also seen their positions tumble to zero.
Today, let’s quickly chat about the wizards of growth investing who have built small fortunes off picking high-potential companies.
T Rowe Price Jr
Thomas Rowe Price Jr was born near Baltimore in 1898.
(Interestingly, contrarian investor Jim Rogers later grew up just a few miles away from the same place.)
He studied chemistry, but quickly decided that he was more interested in dollars and cents. After joining large investment firms, Price decided that he’d pursue a no-commission high-growth strategy…which clashed with the industry norm of commission-based value portfolios.
So he convinced a few likeminded colleagues to join him in starting a new firm — T Rowe Price — in 1937.
The company has grown significantly in the past eight decades…and now manages just shy of US$1 trillion as of 2017.
The firm’s success was built upon Price’s unique strategy.
The strategy centred on investing in well-managed companies in high-potential fields…with the expectation that their earnings and dividends would grow faster than the economy and inflation.
Unlike value investors and contrarians, Price homed in on how individual businesses could ride waves of growth in budding industries. He wasn’t as concerned with existing profit margins as the value investors would…nor was he paying as much attention to macro-economic cycles like contrarians.
But Price wasn’t the only one finding success with this idea.
At the same time, on the other side of America, Price’s strategy was being developed in parallel by a man whom Morningstar would later call ‘one of the great investors of all time’ — Philip Fisher.
Philip Fisher grew up in San Francisco and attended Stanford Business School…where he promptly dropped out.
Instead of school, Fisher decided to join Anglo-London Bank as a securities analyst in 1928.
Not a great year to start as an investor.
But despite the onset of the Great Depression in 1929, Fisher stuck with the industry and even formed his own money management firm, Fisher & Company, in 1931.
Fun fact: while the two fathers of growth investing, Philip Fisher and T Rowe Price, were starting their respective investing firms, a toy company also made its debut. It was called Fisher-Price. No relation. The company has become one of the largest toy companies in the world.
Philip Fisher started up his company not far from where Silicon Valley would explode 50 years later.
It’s too bad he retired in 1999 because he would have dominated in the growing technology revolution at his doorstep.
His strategy was specialised on finding innovative companies run by smart managers and a solid long-term strategy.
Fisher created what he called the ‘scuttlebutt’ method, which focused on finding out everything he could about how people feel about the products that company offers.
He’d talk to customers, competitors, vendors and scientists to paint a picture about a certain company’s prospects. Based on that picture, Fisher could make a decision on whether or not the company had the potential he sought.
And, occasionally, he’d pick an amazing company. This quote by Fisher really sums up his strategy:
‘I don’t want a lot of good investments; I want a few outstanding ones.’
One of the most popular investors today who invests using a growth strategy is Mark Cuban.
He’s best known for his role as a shark on TV show Shark Tank.
Surprisingly, he grew up in a poor family in Pittsburgh, Pennsylvania…and as has been a common thread with great investors, he was a young entrepreneur.
He sold garbage bags at age 12 — his first venture.
After going to university and working as a bartender, dance instructor, and a party promoter, Cuban got a job working as a salesman for Your Business Software. The company sold PC software solutions…and was an early-mover in the industry in 1982.
Cuban saw the potential and decided to start his own business, MicroSolutions, to do something similar. After a few years, he grew the business and sold it to CompuServe (now H&R Block) for a sweet $6 million.
With that money, Cuban invested into several growing tech companies in the early ‘90s.
Not a bad time to be investing in tech start-ups.
One of the companies was Audionet…which became Broadcast.com…which Yahoo! bought in 1999 for $5.7 billion.
This investment, along with his other ventures, brought his net worth up to $3.7 billion in 2018.
Not bad for someone who was selling garbage bags door-to-door a couple of decades earlier.
Cuban’s investing strategy centres on finding the highest-potential innovators at the very fringe of the technological revolution. He’s scouring the smallest companies for good ideas because these small companies tend to be cheap…and happy to take on investment.
Most will fade back to zero…but some could become the next Broadcast.com.
Cuban’s advice to investors employing the growth strategy is to look towards artificial intelligence (AI). He says, ‘The world’s first trillionaires are going to come from somebody who masters AI.’
Hunting the next big thing
Growth investing is most certainly not for the faint of heart.
Nor is it for someone who’s looking for a quick and easy solution. It takes deep research and careful attention.
But for those who manage to put in the elbow grease, they can occasionally find a diamond in the rough.
That’s when they can pick up ten-baggers or greater.
The book to read on this strategy is Philip Fisher’s own Common Stocks and Uncommon Profits.
There’s simply no better guide to the ins and out of growth investing and it includes heaps of investing wisdom. That’s why Warren Buffett has personally recommended this book on several occasions.
Take a look at that book…and you’ll be well on your way to start filling in your very own growth portfolio.
Editor, Money Morning New Zealand
PS: The final briefing on the world’s top investing strategies will come out soon. In it, I’ll run through the myriad methods of 10 investors who have approached the world of money in their own unique way. We’ll talk about people like George Soros, Peter Lunch, Carl Icahn, and others. Coming soon!