We've all heard the old investing adage "buy low, sell high" -- which is sound (if obvious) "advice." But as commonsensical as that particular truism seems, following it can sometimes be downright painful. Some stocks never look "low," after all, and passing them up because their multiples seem rich can take a toll on your portfolio.
For example
Consider the cases of EMC (NYSE:EMC), Apple (NASDAQ:AAPL), and Starbucks. Here we have a power trio of growth stocks that sport five-year earnings-growth estimates of at least 15% and trailing-12-month price-to-earnings (P/E) ratios of 27 or higher.
For the sake of comparison, the broader market (as measured by the S&P 500) sports a P/E of roughly 19. That premium, though, comes as no surprise: Over time, each company has delivered the market-beating goods for shareholders.
That said ...
The flip side with highfliers, of course, is that they can sometimes take you for a wild ride on the road to investment riches. All of the above have certainly experienced performance gyrations, which prompts this question: If you're the kind of investor who wants the gain but prefers to keep the potential pain to a minimum --- and aren't we all? -- what's the best way to proceed with apparently pricey growth stocks?
Two words: mutual funds. EMC, Apple, and Starbucks all appear in the lineup of one of my favorite mutual funds, a pick that's risen more than 40% since I first recommended it to members of the Fool's Champion Funds investing service. Because those names appear in a well-diversified portfolio that recently included buttoned-down big boys like Wal-Mart (NYSE:WMT) and Procter & Gamble (NYSE:PG) alongside racier picks like Red Hat (NYSE:RHT) and NVIDIA (NASDAQ:NVDA), investors here have been treated to a relatively smooth ride, too.
To wit: Despite the fund's focus on growth stocks, it has been only slightly more volatile than the broad-market-tracking SPDRs (SPY) exchange-traded fund (ETF) for the five years that ended with January. Over that same period, moreover, our Champ has struck a slightly milder profile than its typical Morningstar peer -- all while pole-vaulting over nearly 90% of its like-minded competitors.
The Foolish bottom line
If you're looking to wade into the potentially choppy waters of growth-stock investing, good for you: With greater risk comes the potential for greater reward. That said, I think you'd be Foolishly wise to consider getting the job done with a well-chosen mutual fund, a pick that provides plenty of bang for your growth-investing buck, and the peaceful, easy feeling that comes with owning a stake in a well-diversified portfolio.
If you'd like to sneak a peek at all the funds I've recommended since Champion Funds first opened for business -- all of which have made money for investors since receiving the newsletter's nod -- just click here and snag a free 30-day guest pass. There's no obligation to stick around if you find it's not your cup of tea, so go ahead and give the service a whirl. As you'll see, it's entirely possible to invest in high-flying growth stocks and sleep well at night, too.
Take Champion Funds for a test drive now and you'll also have access to our latest special reports: "The Challenge: ETFs vs. Mutual Funds" and "Add Kick to Your 401(k)!" Just click here to get the reports along with your free 30-day guest pass.
This article was originally published on Oct. 10, 2006. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication, he didn't own any of the securities mentioned above. Starbucks is a Stock Advisor recommendation. Wal-Mart is an Inside Value pick. You can check out the Fool's strict disclosure policy by clicking right here.
