We will talk about the Approach you should have while Investing in a Growth company.
In one line before delving into details, it should be similar to having an affair with a hot woman. The risk is high but so is reward 😉
You will feel proud when talking about your investment. People will talk about you behind your back (mostly how lucky you are to select that company). But you will have to care or rather monitor your investments regularly and go through the motions and up-down frequently. These stocks are in limelight, chased by hundreds of traders and subject to extreme vagaries of the market.
But here is the key advice – Be prepared to break-up or dump this growth company at any time. Don’t put your heart into it. Have pre-determined targets for exiting this stock. Also only invest in those growth companies that are yielding positive profits. This is different from those that are growing fast in terms of Sales but their bottom line is in Red. Most Indian e-commerce companies fall in this category.
What are Growth Companies?
Growth companies are those who generate significant positive cash flows or earnings. These are increasing at very fast rates than the overall economy or GDP of the country. A growth company tends to have many profitable reinvestment opportunities for its own retained earnings. Since it is able to reinvest all cash flows, it pays no dividends to stockholders, rather they put all cash back into their own business.
How much should you invest in a Growth company?
This question is very significant and should not be taken lightly. You would have heard the phrase – “Don’t put all your eggs in one basket”. This is very apt while investing in a Growth company. No matter how much positive you are about a particular company and how much you love it. Your investment in a Single growth company should not be more than 10% of Net Worth. And if you are investing in multiple growth companies then your total investments should not be more than 20% of your Net Worth.