Topic: Growth Stocks

The Best Long-Term Growth Stocks: Here’s what to look for—and what not to look for

The best long-term growth stocks may offer plenty of reasons to make you believe they are worth adding to your portfolio. However, it’s important to also recognize the potential for costly mistakes.

Long-term investment strategies aren’t built by making a fast dollar, or profiting from inside information. They are built over time, and most importantly, by learning how not to repeat the mistakes of the past.

When we look for the best long-term growth stocks, we focus on stocks that have a good long-term history of rising sales, if not profits, as well as favourable prospects. The best of these grow at a higher-than-average rate within their industry, or within the market, as a whole, and could keep growing for years or decades.

The best long-term growth stocks won’t help you if you make these costly mistakes

  • Impulsive selling
  • Mistaking poor judgment for a lack of integrity
  • Not knowing your risk tolerance

Impulsive selling can be a detriment to your best long-term growth stocks

One big risk of volatile markets is that they can spur you to make impulsive sell decisions. They lead some investors to sell “at the bottom”—that is, to sell some, if not all of their best holdings right around the time when the market hits what will turn out to be its low.

In hindsight, it may seem that the best way to deal with this risk is to sell when a market downturn is just getting started. That would be the best way—if only it were possible! But nobody can foresee how long a drop in prices will last, nor how far down it will go. You can find lots of systems and signals and gurus that guessed right, once or several times in a row. Eventually, though, they all guess wrong. One wrong guess can create losses that far outweigh gains from a series of lucky guesses.

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One problem for unsuccessful investors is that they live by the idea that a stock is “worth” only what it will fetch if you have to sell immediately. You’ll sometimes hear them say things like, “I lost $50,000 last Thursday,” even if they didn’t sell anything.

Those following our Successful Investor approach protect themselves from impulsive sell decisions by maintaining a sense of perspective. They recognize that stock markets are volatile.

More important, they understand that the value of a stock is equal to the total of all dividends and other distributions it will ever pay out, plus the price you get when you sell it, reflected in today’s dollars.

In other words, the value of a stock depends on the total of all the money you will ever get from owning it. Why else would you buy it? However, you have to discount that total, because of the length of time you have to wait to get the money. The right discount rate will depend on the risk, or uncertainty, of receiving the payments, and on the general level of interest rates.

No stock can ever be so undervalued or desirable that it overcomes a lack of integrity on the part of company insiders

We’ve always believed as part of our Successful Investor philosophy that investors should sell a stock if they have any doubts about the integrity of the people who are in charge of the company. In other words, if you think a company is run by crooks, you should sell the stock right away, no matter how attractive it seems as an investment.

However, to enhance your long-term returns, not just avoid loss, you need to apply this tip in a moderate fashion. You need to distinguish between lack of integrity, on the one hand, and naïveté, or poor judgment, on the other. Many public companies unintentionally run afoul of tax rules or regulatory decisions, for instance. If you take that as a sign of low integrity, you can wind up selling sound investments at market lows.

It’s important to know your risk tolerance when investing in the stock market

There are several considerations that go into a successful growth investing strategy. Still, many investors overlook a number of important factors that can lower their risk.

In the end, there’s no such thing as risk-free investing. The tips below for lowering your growth investing strategy risk have long been part of the Success Investor approach.

  • Balance your cyclical risk
  • Be skeptical of companies that mainly grow through acquisitions
  • Don’t overindulge in aggressive investments
  • Keep an eye out on a growth stock’s debt
  • Keep stock market trends in perspective
  • Look for growth stocks that have ownership of strong brand names and an impeccable reputation
  • The best long-term growth stocks should have the ability to profit from secular trends

Do you feel with today’s high stock prices it will be harder to find good growth stock candidates going forward, or do you see a lot of potential remaining in growth stocks today?

How has your growth investing strategy changed during the recent stock market turmoil?


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