Growth investing may still have a spot in portfolios
— -- If you read academic investment research, growth investors belong somewhere between people who believe the Earth is flat and those who get their stock tips from talking dogs.
Nevertheless, from time to time — actually, for long periods of time — growth investing works quite well. We may be entering one of those periods. The question is whether the gains from growth stocks are worth the pain when growth goes sour.
Growth investing holds that a company's stock price closely follows its growth in earnings. A company with above-average earnings should see its stock price grow faster than average.
Naturally, this is not as easy as it sounds. The stock market looks forward, not backward. Successful growth investors have to forecast corporate earnings growth, and, as Yogi Berra observed, it's tough to make predictions, especially about the future.
Nevertheless, growth investing has a long and storied history.
T. Rowe Price, founder of the Baltimore-based mutual fund company that bears his name, was one of the first big advocates of growth investing. So is James Stowers, founder of the American Century funds in Kansas City, Mo.
Peter Lynch, former manager of Fidelity Magellan fund, was one of the most spectacularly successful growth investors, turning in a 2,475% gain over 13 years, vs. 508% for the Standard & Poor's 500-stock index.
And growth had a long run. The Lipper Large-Company Growth Fund index soared 3,072% the 20 years ended Dec. 31, 1999, vs. 2,579% for the S&P 500. Value funds, which look for beaten-up stocks of companies that Wall Street hates, gained 1,944%.
But the past 10 years have been brutal for growth investors. The average large-company growth fund has plunged 32% the past decade, vs. a 1% loss for large-cap value funds.
Not surprisingly, growth has been shunned by investors, who have yanked an estimated $185 billion from large-cap growth funds the past decade, more than triple the amount they've pulled from large-company value funds.
