What is growth investing?
Growth investing means looking for companies whose sales and profits could grow much faster than the market average in the coming years: businesses entering new markets, launching new products or expanding quickly. They often reinvest most of their profit in the business instead of paying it out as dividends.
Such shares usually cost more relative to today’s earnings, because buyers are paying in advance for bigger earnings later. A growth investor is therefore trying to answer one question: will this growth really happen, and is today’s price already assuming even more than that?
Say two shops in your neighbourhood are for sale. One is an old grocery making Tk 1 lakh a year, priced at Tk 8 lakh. The other is a new online delivery business making only Tk 50,000 now, but doubling every year, priced at Tk 10 lakh. Buying the second is a bet on future growth: if the growth continues, the price will look cheap; if it stops, far too high. The numbers are only an example.
Why it matters to an investor
- To understand high P/E ratios: a high P/E does not automatically mean “too expensive”, nor does “great company” justify any price.
- To recognise expectation risk: growth share prices carry a lot of hope; when hopes fade even slightly, prices can drop sharply.
- To separate story from numbers: before buying on “this is the future”, check whether earnings are actually growing.
- To see why dividends are low: firms that reinvest profit pay out less, so the return depends mainly on the share price.
How much to pay for growth
A good company and a good share purchase are two different things. If a company’s earnings grow 20% a year but its shares are already priced as if they will grow 40%, the price can fall even while the company does well.
This is why growth shares are very sensitive to news. Earnings slightly below expectations, or rising interest rates, can hit the price hard. Higher interest rates reduce what far-off future earnings are worth today, and much of a growth share’s value lies in far-off earnings.
A lesson from history: the dot-com bubble
In the late 1990s, excitement about internet companies swept the United States. The tech-heavy Nasdaq Composite index peaked at about 5,132 points on 10 March 2000, then fell about 78% by October 2002. It took the index about 15 years, until 2015, to get back above its old high.
The internet really did change the world; the mistake was the price. Many companies had no profits, and some later shut down. The lesson: even if a sector is going to grow, which companies will win and what price is sensible today are separate questions.
What growth investors look at
- Whether sales and profits have grown steadily over several years, not just one good year.
- Where the growth comes from: new customers, new markets, or simply borrowing to expand.
- Whether competitors can easily copy it, and whether management is transparent.
- How much growth today’s price already assumes, and whether that is realistic.
Worked example
- Say a share costs Tk 150 and earnings per share (EPS) are Tk 5. P/E = 150 ÷ 5 = 30.
- If earnings grow 20% a year for five years as hoped, EPS becomes about Tk 12.44. A Tk 150 price would then be a P/E of only about 12; today’s price would look reasonable.
- But if growth is only 5% a year, EPS becomes about Tk 6.38. If a disappointed market then pays a P/E of 15, the price is about Tk 96.
Result: even with earnings rising, the share price can drop from Tk 150 to about Tk 96 simply because expectations were not met. The risk in growth shares is paying for too much hope. The numbers are only an example.
Common mistakes
- Confusing a “great company” with a “good price”.
- Treating a fast-rising share price as proof of future growth.
- Buying on a story, news or rumour without looking at earnings.
- Assuming fast growth will last forever. Competition and the size of the market eventually slow it down.
In growth investing you pay today for the future: even if growth arrives, you can lose money if the price assumed even more.