Growth shares are known to be volatile. But this added risk comes with the potential for chunkier long-term returns. And even achieving a five-fold gain over several years isn’t out of the realms of possibility, especially when investing early in a winning business.
Making a plan
Turning one grand into five isn’t all that difficult. But I have to accept that it also isn’t guaranteed. My investments may go down as well as up.
Looking on the bright side though, simply investing in a low-cost FTSE 250 index fund could do the trick. But it won’t be quick. Assuming that the UK’s flagship growth index continues to deliver its historical 11% annualised return, it will take roughly 15 years to deliver that five-fold return.
Obviously, that’s quite a while to wait. But by being more selective, I think it’s possible to achieve these sorts of gains in a significantly shorter period, perhaps even just a couple of years.
For investors comfortable with substantial levels of risk, penny stocks and small-caps might be the answer. While often unproven, these tiny enterprises can be impressively innovative with the potential to grow into new industry leaders. Alternatively, mid-cap and large-cap stocks could also do the trick at a typically lower level of exposure to volatility. Rolls-Royce is a prime example of this, surging by almost 650% since October 2020!
Investing in the best
Regardless of which class of growth shares an investor decides to go with, the underlying business needs to be top-notch. This is especially true when dealing with smaller companies which can occasionally skyrocket only to collapse a few months later. ITM Power and Argo Blockchain are two prime examples of this in recent years.
Even enterprises with big market values can fall prey to volatility if the business is struggling and losing market share. And while some investors focus on timing these waves of positive momentum, it’s a strategy that’s exceptionally difficult to pull off. Why? Because timing the market is practically impossible. And the few that succeed often mistake skill for luck, leading to disastrous errors later on.
So what makes a winning investment? This is the question at the heart of the stock-picking process, and there are a lot of factors that need to be considered.
In terms of qualitative features, competitive advantages and talented management can be enormous catalysts for growth. As for quantitative characteristics, free cash flow is one of the most crucial elements. After all, a company with the world’s best product or service is nothing without the capital to fund it.
These are far from the only factors to explore when analysing a business. Other critical areas of investigation include liquidity, solvency, efficiency, addressable market, employee culture, insider ownership, etc. But they can serve as an excellent starting point on the journey to finding multi-bagger investment opportunities.
