When I was approached to be the "growth guy" in Strategy Lab, I felt honoured and excited. Then I realized I needed to somehow take my thinking about growth stocks and boil it down to bite-sized nuggets. That can be an intimidating challenge for a guy who loves to talk.
If you have a few hours, I could tell you about the 11 years I spent covering tech stocks as a Bay Street analyst. But let me cut to the chase: My investing style doesn't suit Bay Street. I don't like to over-analyze the details of a company's quarterly financial results. I could care less about correcting a company's earnings-per-share number to reflect a foreign exchange loss or the tax effects of a particular transaction.
I'm a technology guy, so my way of investing in growth stocks tends to involve electrons, photons, radio waves and other geeky stuff. My style is to look for the common themes that are propelling the next wave of business and technological innovation.
"We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10," Bill Gates once observed. I apply Mr. Gates' wisdom by buying into long-term trends. My firm belief is that if you invest in the leading companies that are driving the trends, superior returns should follow.
The big trends I care about these days are: 1) the deployment of 4G wireless broadband technology; 2) mobile computing; 3) cloud storage and cloud computing; 4) "over the top" video – that is, video over the Internet.
These trends drive me toward many large cap stocks that lead their particular industries. Think Google, Apple and Netflix. When I buy these stocks, I'm not buying them because I think I understand their business better than other people do. I'm buying them because I believe the technology waves they're riding will reach much further than the market currently believes. I'm investing in the wisdom of Mr. Gates.
I also invest in smaller companies where I have an information advantage. Getting that edge is easier than you may think. The Canadian small cap technology scene is small, shrinking, and essentially ignored by Bay Street. If you dig, it's relatively simple to learn more than most professional investors about this neglected market, precisely because few others are looking.
Mind you, I'll rarely invest in a small cap technology stock solely because I think I've got an information advantage. I still prefer companies that have a foothold in some important area of technology. I like enterprises with strong growth or firms that could be tempting acquisitions for a larger player.
As a result of this approach, I've "lost" several good stocks over the last year due to acquisitions. But I didn't mind having my shares in Miranda Technologies, Zarlink, RuggedCom and Mosaid snapped up in takeovers, considering the premium I was paid to lose them. After all, investing is about making money.
Of course, to consistently make money as a growth investor, you have to factor in the price you're willing to pay for a given stock. At times, a growth investor can resemble a value investor.
For instance, I enjoy investing in stocks that are perceived to be long-term dogs when, in reality, their earnings are only temporarily depressed because of some short-term issue. An example: I recommended Sierra Wireless back in 2002. At the time the stock traded around $2, which was below cash value per share. The market assumed the company was dead.
I thought investors were going overboard in punishing the company for a difficult product transition. I was right, and the stock went on to reach $42 in the spring of 2004. But again, the optimism grew beyond reality. Ten years after my initial recommendation, it's hovering at about $9.
So is growth investing all that different than value investing? Not really. To my mind, everything is about finding the right stock at the right price. The difference between me and the typical value hunter is that I don't need to be as exact with the numbers as someone who invests in mature businesses. If I'm off 10, 20 or even 100 per cent in estimating some aspect of a technology company, it doesn't kill my returns so long as the trend behind my investment has massive growth.
Oh, and there is one more important difference between the value and growth schools of investing – growth is far more exciting. Maybe that's one reason I talk so much! As Strategy Lab unfolds, I aim to help you share in my excitement.
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