Fundamentals and Purpose

Growth Investing is a strategy focused on capital appreciation through the identification of companies that exhibit, or are expected to exhibit, revenue and cash flow growth rates significantly above the market and overall economy average.

Unlike the traditional "Value" approach, which often seeks mean reversion (waiting for the market to correct a downward pricing error), Growth Investing seeks exponentiality. The growth investor does not aim to buy a dollar for 50 cents; they seek to buy a small or mid-sized company that, through innovation or market disruption, can become a giant in the future.

The fundamental purpose is to capture compound interest in its purest form. The thesis is that, over the long term, the stock price will follow the trajectory of the company's earnings (or sales). If a company manages to multiply its earnings tenfold in a decade (a "Tenbagger," in Peter Lynch's words), temporary expansion or contraction of the valuation multiple will be irrelevant compared to the magnitude of underlying growth.

The Mechanics of the Growth Engine

To understand this strategy, one must stop looking at the balance sheet (what the company has today) and become obsessed with the income statement and, more specifically, the structure of the future market.

1. TAM (Total Addressable Market)

The ceiling is more important than the floor. For a growth investor, the size of the opportunity is vital. A perfect company in a small market has a mathematical limit. An imperfect company in a gigantic and nascent market (like e-commerce in 1999 or the cloud in 2010) has an immense runway. The analysis must answer: How much can this company grow before saturating its market?

2. Operating Leverage

This is the "Holy Grail" of Growth Investing. It occurs when revenues grow faster than costs.

• Initial Phase: The company spends heavily on R&D and Marketing to acquire customers. It loses money.

• Scale Phase: Costs stabilize (the software is already programmed), but revenues continue to flow with each new customer.

• Result: Each additional dollar of sales becomes almost pure profit. Detecting the moment just before operating leverage kicks in is where the greatest fortunes are made in this strategy.

3. Pricing Power and Competitive Advantage

Growth without a moat is ephemeral. For growth to be sustainable, the company must have a "Must-Have" product. If the company can raise prices without losing customers (Pricing Power), growth will come not only from selling more units but from selling them at higher prices, compounding growth in two ways.

The Growth Trap: When Growing Destroys Value

It is imperative to address the critical nuance that separates the sophisticated investor from the naive speculator. There is a mistaken belief that "growth is always good." Nothing could be further from the truth.

As Warren Buffett lucidly warned:

"Growth is simply a component —usually positive, sometimes negative— in the value equation."

And he adds the key sentence: "Growth can destroy value if it requires cash injections in the early years that exceed the discounted value of the cash those assets will generate later."

This leads us to the vital distinction between Value-Creating Growth and Profitless Prosperity:

• Unit Economics: The investor must look under the hood. How much does it cost to acquire a customer (CAC) and how much value does that customer generate over their lifetime (LTV)?

  • Scenario A: It costs me €10 to bring in a customer who leaves me €50 in profit. -> Growth is glorious. The faster it grows, the more value I create.

  • Scenario B: It costs me €10 to bring in a customer who leaves me €8 in profit. -> Growth is suicidal. The faster the company grows, the faster it goes bankrupt. It's selling dollar bills for 90 cents. Volume does not fix a broken business model.

Many "Growth" investors lose all their capital because they confuse sales expansion with economic value creation.

Specific Metrics for Growth Investing

Since many growth companies (especially in early stages) lack net profits (P/E is useless), other navigation tools are used:

• PEG Ratio (Price/Earnings to Growth): Popularized by Peter Lynch. Divides P/E by the annual growth rate. A PEG of 1.0 is considered "fair value." It allows comparing an expensive fast-growing company with a cheap non-growing one.

• Rule of 40: Widely used in Software (SaaS). Adds % Revenue Growth + % Profit Margin (or EBITDA). If the sum exceeds 40, the company is elite, regardless of whether it prioritizes growth or profitability at that moment.

• Churn Rate: The silent killer. If a company grows 50% by acquiring customers but loses 30% of existing ones, its net growth is painful and expensive. Low Churn indicates product quality.

Typology of Growth Companies

Not all growth is equal. Fisher and Lynch categorized these companies to understand their risks:

1. Stalwarts (Solid Giants): Mature companies that still manage to grow above GDP (10-12% annually). They won't make you rich overnight, but offer protection and steady growth (e.g., Visa, Microsoft in the last decade).

2. Fast Growers (Gazelles): Small, aggressive companies growing at 20-30% or more. Here lies maximum risk and maximum reward. They are volatile and fragile.

3. Turnarounds: Companies that stopped growing and reinvented themselves. If the turnaround thesis works, the market reacts violently upward.

Psychology and Risk Management

Growth Investing requires a different psychological constitution than Value Investing.

Volatility as a Toll

Growth stocks are "long-duration" assets (their significant cash flows are far in the future). This makes them hypersensitive to interest rates. If rates rise, the present value of those future flows drops dramatically. The growth investor must tolerate 30%, 40%, or 50% drops without panicking, as long as the fundamental thesis (sales, adoption, margins) remains intact.

The Risk of "Priced for Perfection"

When a stock trades at 50 times sales, the market is discounting a brilliant future. If the company reports 25% growth when 30% was expected, the stock can plummet 20% in a day. There is no traditional margin of safety in valuation; the margin of safety must come from superior business quality and market dominance.

Knowing When to Sell

In Growth, winners are let run (Let your winners run). Selling Amazon or Netflix in 2012 because they "seemed expensive" was one of the costliest mistakes in history. In Growth, sell only when:

1. The growth thesis is broken (market saturation or superior competition).

2. Unit economics deteriorate.

3. Management changes strategy without justification.

Final Verdict: Convergence

Returning to the initial reflection, Growth Investing is not the opposite of Value Investing; it is its more dynamic and harder-to-calculate version.

It requires more imagination and projection ability than static balance sheet analysis. It demands understanding consumer behavior, technological trends, and business model scalability.

The successful growth investor is not the one blindly chasing the "next big thing" (hype), but the one who identifies companies with durable competitive advantages that are just beginning to monetize their potential. It is the search for the ultimate compounding machine, understanding that sometimes paying a high P/E today is the cheapest way to own tomorrow's massive cash flows.