We've all heard the old investing adage "buy low, sell high" -- which is sound (if not obvious) advice. But as commonsensical as it seems, trying to follow 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 Comcast (NASDAQ:CMCSA) and Yahoo!. These growth stock go-getters sport high five-year earnings-growth estimates and have trailing-12-month price-to-earnings (P/E) ratios well above the market average of 18. That's also true of EchoStar (NASDAQ:DISH) and Research In Motion (NASDAQ:RIMM).
That premium valuation, 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. All the stocks mentioned appear in the lineup of one of our favorite mutual funds, a pick that's risen 57% since it was first recommended to members of the Fool's Champion Funds investing service in 2004 -- easily topping the S&P 500's 37% return. Because those names appear in a well-diversified portfolio that recently included buttoned-down big boys like Microsoft (NASDAQ:MSFT), ConocoPhillips (NYSE:COP), and Chevron (NYSE:CVX), 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 November. Over that same period, moreover, our Champ has struck a slightly milder profile than its typical Morningstar peer -- all while pole-vaulting over 70% 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 feeling that comes with owning a stake in a well-diversified portfolio.
If you'd like to sneak a peek at all the funds recommended since Champion Funds first opened for business, 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.
This is adapted from a Shannon Zimmerman article originally published on Oct. 10, 2006. It has been updated.
Rex Moore has gone Wii crazy. At time of publication, he owned shares of Microsoft. Microsoft is an Inside Value recommendation. Yahoo! is a Stock Advisor selection. You can check out the Fool's strict disclosure policy by clicking right here.
