Many growth-oriented investors ask me how to find that elusive home run stock. The ones that go up by 50%, 100% or more in a single year.
And they’re often surprised when I say the answer is relatively simple: just start by getting on base, and then the home run will come to you in due course.
The point here is that investors have to put themselves in the right position to “get home” by getting off on the right foot with an investment to begin with. That’s because once you have a modest gain in a position, then incremental gains have a compounding effect. If the stock continues to climb, your rate of capital gains increases.
And with quality growth stocks it’s that compounding effect that ultimately generates big returns. The investment builds like a snowball, gaining more and more momentum as it rolls along. All you have to do is hold on and try to make sure that the bullish investment thesis remains intact.
Any major changes to the stock’s story – good or bad – means reconsidering your thesis. But as long as it remains intact, stick with the company and keep yourself in position to get a little lucky and capture the outsized gain.
In many cases, this hands-off approach works. Rapidly growing companies don’t typically excel for a couple of quarters and then flounder. History suggests that expansion periods for quality companies endure for longer than many investors expect. This means you can continue to hold on to stocks that have previously made big gains.
And often this is a far better choice for your hard-earned capital than to be a far more active trader. Especially in a bull market like this one.
The harsh reality is that very, very few stocks are overnight successes. Certainly there are some examples, but more often than not investors that chase quick profits end up getting burned badly. And those losses are hard to make up for, often driving the same investors to take on greater and greater risk to make up for cumulative losses.
This results in a downward spiral of capital destruction – exactly the scenario that you want to avoid.
To increase your chances of growth investing success, it helps to find companies that are benefitting from a long-term trend and that are doing something unique, better or faster than the competition. Click here to discover one of the top growth trends that I believe will hand investors big profits in 2015.
You’ll also want to identify a few specific growth catalysts that are likely to propel the company’s expansion, and the resulting increase in the stock’s value. These catalysts don’t need to be fancy – they can be a new product, a restructuring of debt, expected dividend growth, turning the corner to profitability … any number of things.
What’s important is that you believe there is a high likelihood for the growth catalyst to extend for several years. Then just hold on.
And that can be a hard thing to do, because it’s very tempting to lock in profits when your successful stock picks are up 40%, 80% or even 100%. But if you always sell your winners, you’ll never have the 100%, 500% and 1,000% winners that translate into truly life-altering profits.
That said, it’s rational to want to lock in some profit along the way. One way to balance these two competing perspectives is to sell a quarter or half of your position. Doing so keeps you in the stock for any future gains. And the freed up capital can be put to work in a lower-risk investment, like an index fund.
If you’re ready to discover the best growth stocks with the brightest prospects, I recommend that you click here now.