Investing for Growth
Posted by Gail | Filed under Investing
I think a lot of the site issues have been resolved so I’ve put a new Sticky Situation at the end of this blog. Also, Question 3 in our new feature on the Success Post called Thinking Things Through is up. Head on over and add your 2 bits. Next week. of all is still running smoothing, we’ll resume polls and success stories.
If you’re looking for stocks that will outpace other companies in earnings — and so the share value will appreciate by a wider margin — you’re shopping for growth.
Some companies show a lot of promise but fail to ever achieve their goals. Dot coms and biotechs are famous for this. That’s why you have to be careful just how speculative you’re willing to be when it comes to choosing growth stocks. If you’re very aggressive, you may pick companies that never realize their potential. But you may also hit the next 724 Solutions that was a “ten-bagger”: it grew tenfold. It opened at $26ish?? in early 2000 and by March it had hit almost $300! And if you were an early entry into the RIM experience, well, you’re laughing.
What you’ll focus on as a growth investor is how fast a company is growing. Typically, investors who choose companies that are growing exponentially care not one whit what they have to pay for them. Witness the huge jump in price-to-earnings ratios, which have taken many an expert’s breath away. You want a company whose quarterly growth beats the same quarter for the previous year. Or you want a company that manages to beat analyst’s earnings estimates. If a company surprises once, it could surprise twice or three times and cause investor-fever and a run up in the stock price.
Some growth investors don’t believe in, “growth at any price.” They want to be more reasonable about their decision making. They look for how Company A might grow, and what it is worth, compared to the growth in Company B, and it’s stock appreciation. If this is your game, you might want to familiarize yourself with the PEG (projected earnings growth) ratio. (Yes, there are more ratios in heaven and hell than you have heard of.) This is calculated by dividing a stock’s P/E ratio by its earnings growth rate over the previous 12 months. Growth stocks typically have a PEG ratio of 1.5 or less.
The price-to-earnings ratio measures the ratio of a stock’s prices relative to its earnings. If a stock was selling at $30 a share, with earnings of $2.50 a share, the P/E ratio would be 12 (30 ÷ 2.5 = 12)
As a growth investor, don’t fall into the trap of thinking that the company’s growth cycle will last forever. It’s pretty easy to believe there’s no end in sight when growth stocks are soaring. But if you don’t limit how high you’re prepared to go, you may find yourself buying just before growth comes to an end, in which case you’ll be holding stock that has a long way to fall before it reaches solid ground. That’s what happened when technology stocks nose-dived as if to prove that you can’t keep going up forever. As a growth investor, you’ll need to keep a close eye on the market so that at the first sign of a slowdown in growth you can trade out of those high-performance stocks.
Don’t have the patience for a buy and hold strategy? Like to see a stock’s price rising before you’re prepared to jump on the bandwagon? You’re a momentum player. You’re of the belief that a body in motion will continue to stay in motion until another force acts upon it. Okay, that’s Newton’s First Law of Motion — which some people call inertia — but it applies to the momentum play. Typically momentum investors buy the top 20 percent of stocks in terms of price momentum and earnings momentum. You believe that stocks that are hitting new highs are far more interesting than stocks that are holding steady or just creeping along.
The danger with a momentum play is just about any “force that acts upon” your stock can change the direction in which it’s moving. An increase in inflation and an accompanying increase in interest rates will cause the money to flow to economically sensitive stocks because of low valuations and improved earnings potential. And a trend-less market — up today, down tomorrow — is anathema for momentum players.
Oh, please, please, if you’re going the momentum play, don’t fall into the trap of overriding your sell-points because you’ve fallen in love with a stock and you just can’t let it go even after it has lost its momentum.
Next week: Technical Analysis
Last week: Investing in Equities – Looking for Value
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Sticky Situation:
You lent a hefty sum to a friend. After she misses a payment or two, she shows up with an expensive new pair of shoes. And you say…
August 10, 2010 at 7:42 am
re Sticky Situation…
I would say nothing. You can’t assume that your repayment money was used to purchase the shoes. They may have been a gift ?
August 10, 2010 at 7:48 am
… nothing about the shoes, since WHERE she spent the money isn’t my business. However, i would have no problem reminding her of our repayment plan, and I’d ask her if (like the bank) we need to set new terms of what’s being paid when so it works for her. If she still shows no sign of paying it back, I’d remind her that things like this can ruin friendships, so could she please take repaying me seriously? If it’s still a no-go, call it a lesson learned.
As my dear dad says, NEVER lend money you expect to see again. Not only because it can ruin relationships, but because if your finances can’t take the hit, you don’t actually have it to give.
August 10, 2010 at 8:25 am
it depends on the friendship. If this was a constant pattern, I might call her on it. But if it was a one time, I hope I’d have the grace to be forgiving.
When I lend money out (which happens very rarely) I do so on the assumption that, for whatever reason (emergency, crisis, lack of integrity) I might never see the $$ again. That way, if I don’t, it’s no loss. Well, it is, but at least I wasn’t counting on that $.
August 10, 2010 at 8:48 am
Well I would say (a) thank you for the shoes, my wife will love them and (b) WHERE’S MY MONEY!
But that’s just me, I tend to be direct– get it out there and let the dust settle. Oscar Wilde said it best, a true friend stabs you in the front.
August 10, 2010 at 8:50 am
I’m with Dawn in my own personal lending…once it’s lent, fuggedaboutit. If I didn’t have it to lend or would lose sleep over when it was going to be repaid, then I had no business lending it in the first place.
I wouldn’t say anything about the shoes other than “Nice shoes, where’d you find them?”
August 10, 2010 at 9:09 am
Never have lent money to a friend — they all make more money than I! lol
I don’t know how I’d respond; I think I’d be pretty PO’d… probably make some sarcastic, subtle remark that wouldn’t likely find its mark… end up feeling pretty resentful, and would see the friendship fade away…
Neither a borrower nor a lender be — I always stand by this when it comes to lending/borrowing money from family; worst time I had was when we ‘owed’ money to DH’s family… our vehicle had died, and we borrowed his recently deceased father’s vehicle, on the condition that we would pay each of his brother’s money as part of their inheritance… it killed me knowing we owed them money, and my parents gave us money to pay them (which didn’t feel much better, but better to be in debt to one family than 3).
August 10, 2010 at 9:36 am
Situation mentioned has happened – only substitute a new suit for shoes. And I didn’t say anything. I probably should have, I certainly fumed silently, but I just didn’t. And yes, eventually the money was repaid… slowly. No, we are no longer friends.
August 10, 2010 at 9:46 am
I think if a payment is missed, new shoes or not, the lender should gently remind the borrower. If a second payment is missed a the lender needs to be much more direct. If the payments do not resume the next action would depend on the size of the loan and the period of time elapsed. If the loan was “hefty” it should not be let go and it may need to end up in civil/small claims court. It the amount was not large the best thing would be to consider it a lesson learned and let the matter drop.
August 10, 2010 at 9:48 am
I unfortunately would never lend money to a friend….ever…perhaps I simply mistrust people at a deep level…
I would give a good friend money with no expectation that it would be paid back. And I would give a family member money with no expectation that it would be paid back.
Lending money is just complicated and brings up all the horrible issues around repayment.
I would never give money I didn’t have and didn’t need. And I certainly would never go into debt to give money. Nor will I ever co-sign a loan for anyone without having the means to pay for it myself in the event something goes wrong. Which means, I’ve never co-signed a loan….yet.
August 10, 2010 at 9:57 am
I would refer to our written contract that we wrote up together and signed ahead of my lending her money (for a small amount, I wouldn’t have one and would consider it a gift if it didn’t get repaid, but for a sizeable loan, everything would be in print and signed!).
August 10, 2010 at 9:58 am
To add to that post–I would refer to what the penalties are in that contract (or other action we agreed on).
August 10, 2010 at 10:09 am
The Growth stocks I commonly see as ones that will nose dive. I remember people in my company still trying to convince others that nortel was a good buy when it was at $120/share. I didn’t buy in, I knew I had missed that gravy train and as it all came crashing down everyone was excited about the deal that could be made at $70 and so on down the other side of the decline.
I personally like blue chip stocks and if I speculate I do so in a mutual fund where someone is doing the hard leg work for me.
As for the Sticky situation, I probably would never end up in it, Never a lender or borrower be between friends. Anyways, I’d probably write off the amount I leant and maybe remind her once or twice, int he end I’d sever the friendship. (which is why I won’t lend money in the first place)
August 10, 2010 at 11:28 am
That is sticky…it’s one of the reasons I try to avoid loaning significant sums to friends. Each person sets their own priorities for spending etc., so perhaps she saw those shoes as a “need”, something that we would disagree on. I would not feel good about judging my friends’ spending habits, and to be honest, I would totally be judgmental if she owed me money. If I did find myself in that spot, I’d be like others above and not say anything…I would try to remind myself not to make assumptions or jump to conclusions about where they came from, but I would undoubtedly stew about it and bitch and moan to DH later on.
August 10, 2010 at 11:30 am
I also would not lend money to friends or family, but I would comment on the new shoes. “Wow, great shoes! They look expensive!” Then, when the conversation about the shoes was over, ask when I can expect the money.
August 10, 2010 at 11:49 am
Never again, I lent a family member money on a monthly basis when they were out of work. We set up a chart and each person would sign that the specific amount had be given and the date. The agreement was once they were back to work they would pay back on a reverse payment plan. They got a nice job and when I asked for the money back they said they just didn’t have it. Note: Found out they were paid 8 months severance that just sat in the bank. As well they were supposed to give the whole severance to another family member that had a large LOC that they both had been using for years. Didn’t happen and on top of that they had been getting money from another family member.
I do lend friends $30 max. Usually when we are out I may have cash and it just makes sense to combine the bill and work it out later. They are always slow but, pay back. Other times we agree they pay next time and it evens out faster.
August 10, 2010 at 12:09 pm
In my sons graduating year his girlfriends friend couldn’t afford a dress for prom. He offered to help her out and let her borrow the money, she proceeded to purchase a 200.00 dress. He was so proud because she looked beautiful and she wouldn’t have gone otherwise. He quickly realized she wouldn’t pay him back. Tough lesson for a seventeen year old. I was proud of him for his generosity and thoughtfulness yet sad he learned such a hard lesson. I should ask him now if he lends to friends.
August 10, 2010 at 12:28 pm
When I give money away to people on the street, I don’t ask where they’re going to spend it. But wait, I don’t give money away to people on the street. I give to registered charities that tell me where they’re going to spend it and I agree with them.
I don’t think I would loan someone money for a undisclosed reason or for a reason I disagreed with.
And most likely, I would do what others have said: I would give a friend a gift of money, not a loan. Loans are stressful because people who borrow money are often in big enough trouble already. I have given loans to family members and ended up waiving them because they weren’t paying me back regularly. It was an unpleasant situation, full of guilt and awkwardness, and I would not want to be there again. On the other hand, I regularly give another family member a supplement to his very low income and I don’t mind one bit.
August 10, 2010 at 12:37 pm
Thank you for this post, Gail. You explain things very clearly.
As for the sticky situation, that’s a tough one. If there was a repayment agreement, I would have gone to a lawyer to draw up a contract. I would have to ask the lawyer for advice on how to enforce the repayment agreement. That may mean losing the friendship, but I would have to do it. Generally speaking, I prefer to give money (only what I can afford), rather than loan it. That way *I* have less stress, because I don’t have to worry about repayment.
August 10, 2010 at 2:04 pm
Oh that’s happened to me (only it was ridiculously expensive hair extensions)! I blanched, and stared… I couldn’t say anything for fear it would be mean and jeapordize our relationship. I simply decided then and there that my dad was right all along “a borrower nor a lender be”, and wrote off the loan as a life lesson.
Since then I have said “no” to more friends, even though they act a little put out at first. But with my rejection I usually tell them that they don’t need to borrow from friends and offer to tell them how they can do it on their own… it is usually possible! They come away stronger for it, and our friendship is unstressed.
August 10, 2010 at 6:17 pm
I did lend money to a family member(son) and when one payment is missed, just before the second payment is due I ask if everything is ok because I don’t want a second payment missed. I understand that you don’t ever lend money, but it was the best solution all around, saying that the bank is now closed, except of course for the repayment.!
August 10, 2010 at 6:58 pm
If it were me, I would remind them of the debt and ask when payment could be expected (no comment on the shoes specifically). If they continued to miss payments, I would write off the friendship and the loan (if it were small), or let them know I would be taking them to small claims court (if it were large).
August 11, 2010 at 2:24 pm
I have lent money to a friend in the past. I considered her completely trust worthy and was stunned to end up chasing her for the cash. There was always a reason she hadn’t been able to pay me but she never once came to me and explained that, I always had to ask her for an explanation. In the end I never received a penny of it and we’re no longer friends. On the other hand my DH occasionally lends money to a friend of his who’s always in dire financial straits and he pays him back every time and never needs to be reminded.
Basically it’s risky to lend to friends or family. Do it at your own risk and only with money you can afford to be without.
December 16, 2011 at 2:42 pm
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