TSI #31: Is this a good time to buy growth stocks?

Hello Stoic Investors,

Today I want to focus on growth stocks and how not to lose money with them. 

Imagine this. Excited to build wealth, you invest in a few promising companies in late 2021. A year later, you are down 60% or more. 

Sadly, this is not a story but rather a cruel reality of what can happen if you’re not careful.

According to Schwab, roughly 20% of all investors started in 2020. How many of those do you think are still investing after the 2022 plunge?

The stock market gives no refunds on losses.

Therefore, it is time we understand what growth stocks are.

Growth and value stocks

The general investment community likes to split stocks into different categories.

The most famous split is between growth and value.

Growth stocks are shares of companies that are expected to experience high growth rates in revenue and investors’ returns. As long as that growth is indeed accomplished, all is well. However, if it is not, the stock will tank (as most did in 2022).

Value stocks, on the other hand, are shares of companies that trade at a lower price relative to the company's financial performance. These are usually established companies with less volatile share prices.

I bet you are curious about which group offers a superior return. 

Note: Past returns offer no guarantee of future returns.

If you’re anything like me, then this is your next question.

Should I jump into growth?

Even as growth outperformed value, this does not mean it’s ripe for investing. 

If you like picking individual stocks, you have to pay special attention to the price.

Even a great company can be a terrible investment if you overpay.

Let me spend a few more words on the common issue of paying too much for a stock.

The so-called Price-to-earnings ratio is one of the most popular valuation metrics of stocks. It provides an indication of whether a stock at its current market price is expensive or cheap. 

If a company was currently trading at a P/E multiple of 20x, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

If you are looking at growth stocks, please be aware of the fact that they are still not cheap. Even after the recent plunge. 

“The investment game always involves considering both quality and price, and the trick is to get more quality than you pay for in price. It's just that simple.” – Charlie Munger

So, note down these points and start investing today: 

-Growth stocks move fast, value stocks move slow

-Growth stocks outperformed value since 2019 

-However, they are still not cheap