Growth investing is the name given to the kind of investment where the investor buys a stock because the company is in a high growth industry. Such companies are expected to grow at a high rate for the next few years and are generally characterized by a high P/E multiple.
This type of investing became popular in the dotcom era. After the dotcom burst though growth investing ceased to be as sexy as before, but the concept is still widely used by analysts. Typically investments in emerging markets, technology stocks and smaller companies are used as vehicles for growth investing.
What investors need to keep in mind is that the P/E multiple is a means to judge the ‘price’ of a stock and by definition most of the ‘growth stocks’ have high earnings multiples.
Therefore the risk on your investment also becomes that much more. However that doesn’t mean that the stocks with high P/E will always be lemons. A lot of investors have made good money on stocks like Apple and Google which typically trade at a higher P/E due to their growth rates. What it means is that if a company doesn’t shine as it was promised to; the fall could be quite steep. Â
