A successful growth investor can generate enormous wealth in the stock market. To help you in this regard, here is a collection of valuable tips from some of the greatest investors of all time.
1. "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage."
-- Warren Buffett
Growth comes to businesses that can anticipate future trends -- and position themselves to win within them. Thus, many of the most successful investors spend the majority of their time studying the competitive dynamics of important, emerging industries in order to determine who is winning today and -- far more importantly -- who is most likely to win in the future.
2. "A business that makes nothing but money is a poor business."
-- Henry Ford
An often-overlooked source of competitive advantage is a purpose-driven culture. Some of my best investments have been in businesses that help to lead the world forward.
A meaningful purpose can galvanize employees to do their best work and encourage customers to buy. It's been said that we often buy on emotion, and the companies that can create an emotional bond with their customers stand to benefit far more than those who do not. It also gives people a reason to root for these companies to win, and cheer their successes.
3. "Every month that passes, every person that I get to interview, every business that I study ... I become more and more certain that looking at the leader is incredibly important."
-- Tom Gardner
Leadership matters. For early stage growth companies in dynamic industries, it matters even more. If you can identify a disruptive business with an excellent leader at the helm, you will give yourself a huge leg up on achieving market-beating returns.
Like Motley Fool co-founder and master investor Tom Gardner, I like to invest in founder-led businesses in particular. That's because often times these men and women lead their companies with the passion of people who built them from the ground up, and whose lives are intricately linked to the success of their businesses. Even better is a founder who has a large ownership stake, which serves to further tie their interests to our own as long-term investors.
4. "Buy high."
-- David Gardner
Traditional investment dogma is to buy low and sell high. Yet Motley Fool co-founder and renowned investor David Gardner actually prefers when financial commentators call his stocks "overvalued." As he explains:
If everybody has the idea that a stock is overvalued, then it makes even more sense to buy it, because everybody's money is presumably sitting on the sidelines, because it's "overvalued." So a big portion of the market is not willing to pay up to buy that stock. As the years unfold, these great companies will then convert their skeptics into shareholders. And as that money comes into stocks, over time, that's what drives up share prices.
As David notes, investors often miss out on these opportunities because the stocks of premium companies almost always look expensive -- except in the rearview mirror. If we are to avoid this mistake, we must be willing to pay a fair price for a quality business.
5. "All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out."
-- Peter Lynch
One of the wonderful things about investing -- and particularly growth investing -- is that one multibagger (a stock that goes up multiple times in value) can make up for a lot of losers. That's because, at worst, a stock's price can go to zero in the event of bankruptcy. On the other hand, the stock price of a business that performs well can rise 100%, 1,000%, and even 10,000% or more. We call that asymmetric risk, and it can be a powerful ally of growth investors.
6. "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."
-- Warren Buffett
In order to maximize the benefits of your big winners, you actually have to hold onto them -- something that's often easier said than done. Premium-priced growth stocks can get slaughtered during market downturns.These difficult periods can wreak havoc on your emotions. Yet if you can stay the course, you give yourself the opportunity to earn truly life-changing returns.
7. "The best stock to buy is the one you already own."
-- Peter Lynch
Not only should you refrain from selling your best stocks, you should also consider adding to them -- including on the way up. Earning great returns on a small investment can be exciting, but earning excellent returns on positions that you added to over time can be what ultimately helps you achieve financial freedom.
8. "If I'd only followed CNBC's advice, I'd have a million dollars today. Provided I'd started with a hundred million dollars."
-- Jon Stewart
Buying -- and holding -- the best growth stocks requires fortitude. A countless number of skeptics will be telling you that you're wrong (and perhaps, crazy). Whether it's financial journalists like me or talking heads on TV, you need to be able to make up your own mind about a business and maintain your conviction despite what might seem like nearly constant criticism from financial pundits.
9. "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."
-- Warren Buffett
As you can see, being a good growth investor requires a bit of contrarianism. We like finding small companies that the naysayers overlook, doubt, and even mock. We enjoy holding them as they scale a wall of worry and prove the skeptics wrong. And we love turning a smaller amount of money into a much larger fortune as this occurs. However, it's important not to take this too far. We shouldn't take too much joy from being contrarian, for it can lead to a level of stubbornness and arrogance that can portend our investing doom. More so than striving to be different, we should strive to be right.
10. "Spend each day trying to be a little wiser than you were when you woke up."
-- Charlie Munger
So how do we discover the trends that will inform our vision of the future? How do we identify the most competitively advantaged businesses poised to profit from these developments? And most importantly, how do we have the courage to invest in them before the crowd, maintain the fortitude to hold them even as the bears mock us, and ultimately emerge triumphant? The answer lies in our ability to embark on a never-ending quest for wisdom. Start -- or renew -- your journey today, and in time, perhaps you can become a master investor like the legends listed above.