When investing for growth, time is an extremely important factor. You must be willing to carry your investments for years as long as it is achieving the expected and desired results. If not, you must sell it and replace it. It is extremely difficult to predict the future and know which assets will grow fastest. Therefore, you must follow a strategy that helps you identify trends that have a high probability of success. Below I am listing a few such strategies.
Listed Stocks
Listed equities and ETFs provide one of the best vehicles to grow your money. They are easy to get in and easy to get out of. You get in when you see a growth trend developing and you get out when everybody else see the same trend. One way of selecting stocks with above average growth potential is the screen below. You scan for companies with high growth in sales and earnings per share. You create a diversified selection among four or five different industry sectors and carry them until their growth rates begin to decelerate. The most important aspect of this methodology is to weed out companies from your selection that do not behave as expected, that is sell the underperformers. The money you will make will come from the few stocks that will appreciate substantially over your holding period. if you diversify properly, the losers will have minimal impact on your portfolio, as long as you keep the losses small.
The Growth screen focuses on the growth in sales and earnings per share instead of valuation. It seeks companies that are undergoing an acceleration in profitability. Typically the share price will follow the growth in earnings, however, such stocks tend to be more volatile. An example :
- E.P.S. growth current quarter > 25%
- E.P.S current quarter> EPS previous quarter
- E.P.S. current year > EPS previous year
- Sales growth current year> sales growth last year
- R.O.E. > 20% but < 60%
- Price > 50 day moving average OR
- Price > 200 day moving average
The last two stock screens are an easy way to weed out stocks whose price has fallen below widely followed benchmarks.
Exchange Traded Funds (ETFs)
Instead of searching for stocks that meet a certain criteria or trade a specific market, an ETF can be an excellent surrogate. Nowadays, there are hundreds of ETFs that track markets, sectors, industries, bonds commodities and currencies. There are even ETFs that are actively managed. I find them extremely useful when targeting a market that is difficult to follow such as Biotechnology . I am not qualified to evaluate biotech firms. So instead of guessing which firms to pick, I simply buy IBB. On the other hand, If a certain market, especially emerging markets, looks very cheap and the probability of a turnaround looks high, I would buy an ETF on that market.