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There are a handful of tried-and-tested investment styles that have built long-term wealth in the stock market. One of them is growth investing. Here’s a look at the style, and why it has the potential to supercharge returns in a Stocks and Shares ISA.
Fathers of growth investing
One growth investing principle is found in this quote from Philip Fisher‘s 1958 book Common Stocks and Uncommon Profits: “If the growth rate is so good that in another 10 years the company might well have quadrupled, is it really of such great concern whether at the moment the stock might or might not be 35% overpriced?“
This highlights Fisher’s philosophy of focusing on long-term growth, even if it means paying a premium in the short term. That is, because exceptional companies with very high growth potential can deliver enormous returns, the price (within reason) is less relevant in the grand scheme of things.
This is a core difference between growth and value investing.
Another pioneer was Thomas Rowe Price, the founder of the investment firm that still bears his name. Fisher and Price are called the fathers of growth investing.
In his 1937 booklet Change — The Investor’s Only Certainty, Price argued that even if a mature firm seemed cheap, it might be a (value) trap if the industry was facing long-term decline. Instead, investors should focus on companies in the earlier growth phase of their life cycle.
In other words, try to anticipate which industries and firms would grow to replace the old ones (disruptive innovation in today’s parlance).
This idea was met with great scepticism at the time, and is still viewed with suspicion by some today.
Buy-and-hold investing
In 1955, Fisher invested in Motorola due to its potential to become a leader in the nascent semiconductor industry. He held onto his shares for nearly 50 years, until his death in 2004.
This buy-and-hold strategy is another hallmark of growth investing.
Of course, that’s not to say value investors don’t adopt this philosophy (compounding dividends can create enormous wealth). But it’s less common because many are laser-focused on valuation. If a stock reaches its perceived intrinsic value, they will often consider selling it.
| Style | What it looks for | Risks | Famous proponent |
|---|---|---|---|
| Growth | Rapid revenue/earnings growth, disruptive sectors | Overpaying, large profits may never arrive | Philip Fisher |
| Value | Cheap shares, often with dividends, recovery potential | Value traps, cheap for a reason | Ben Graham |
| Quality | Moats, high returns on capital, proven cash flows | Quality usually comes at a price | Terry Smith |
By definition, growth investing carries inherent risks. In trying to identify tomorrow’s big winners, it’s possible to grossly overpay for a growth business that fails to reach its potential.
A growth innovator
Wise (LSE:WISE) is a stock that matches growth investing criteria.
Its cross-border payments infrastructure bypasses the old and expensive SWIFT network used by legacy banks. Instead, it operates local accounts in each country it supports, and its service is cheaper and faster.
Moreover, Wise is continually lowering its cross-border take rate, so is classed as an industry disruptor. Revenue has risen strongly from £421m in 2021 to more than £1.2bn last year.
But the stock also looks conventionally overvalued, with a price-to-earnings ratio of 28. Were the firm’s growth to slow, this multiple is probably unsustainable, which is where the risk lies.
However, I think the stock is worth considering for long-term growth investors. Over time, Wise looks set to gain further market share in a massive and fragmented £32trn market.
It currently has just a 5% share of the consumer cross-border market, but less than 1% of the global business market.
