Investment Philosophies: Successful Strategies and the Investors Who Made Them Work, 2nd Edition

CHAPTER 9

The Allure of Growth: Small Cap and Growth Investing

There is a widespread belief that while value investing is for the risk averse, growth investing is the investment philosophy of those who like to take risk. Though there is nothing wrong with seeking out risk, taking on risk for the sake of doing so is foolhardy. Growth clearly has value, but the real issue is whether you can buy it at a reasonable price. In this chapter, we examine the basis of growth investing and dispense with the notion that all growth investors are risk seekers. As with value investing, we will look at the various strands of growth investing and examine what you would need to be a successful growth investor.

WHO IS A GROWTH INVESTOR?

Many services define a growth investor as one who buys stocks that trade at high multiples of earnings. Though this may be a convenient way to categorize investors, it is not an accurate one. In fact, it leaves us with the misleading picture of growth investors as being uninterested in the value of what they are buying. While this may be true for some growth investors, does anyone really believe that Peter Lynch, who built Fidelity Magellan by focusing on growth companies, cares less about value than Warren Buffett does?

We will define growth investors as those who invest in companies based on how the market is valuing their growth potential, rather than as existing investments. With our categorization, note that growth investors care just as much about value as ...