What it means
A growth investor is buying a trajectory rather than a snapshot. The businesses that attract this money tend to be expanding into large markets, reinvesting heavily in product and sales, and often paying no dividend because every available dollar goes back into growth.
The return is expected to come almost entirely from the share price rising. What makes the strategy work, when it works, is compounding.
A company growing earnings at 25% a year roughly triples them in five years, and if the market still assigns a similar earnings multiple the share price follows. The risk is that a single missed quarter can reset expectations, and shares priced for rapid growth fall hard when growth slows.
In practice growth investors look for consistent revenue growth well above the market average, expanding or at least stable margins, a large addressable market and some durable advantage such as a brand, network or technology lead. Valuation still matters, but it is judged against expected future earnings rather than current ones.
The price to earnings growth ratio is the most common tool for that comparison. The strategy carries a distinct risk profile.
Growth shares are typically more volatile, more sensitive to interest rate changes because their value sits further in the future, and more concentrated in sectors such as technology and healthcare. That concentration is why most balanced portfolios hold both growth and value exposure rather than committing entirely to one.
Growth investing is not the same as speculation, though the two are often confused. A disciplined growth investor analyses unit economics, cohort retention and margin trajectory; a speculator buys on momentum and story alone.
The difference usually shows up when markets fall.
In practice
Real-world examples.
Example
A fund manager builds a portfolio of 30 companies each growing revenue above 20% a year. She accepts that roughly a third will disappoint, expecting the winners to more than compensate over a five-year holding period.
Example
A private investor compares two healthcare companies. One trades at 18 times earnings growing at 8%, giving a PEG of 2.25, while the other trades at 35 times earnings growing at 30%, giving a PEG of about 1.17, so he favours the second despite its higher multiple.
Example
A pension trustee reviews the scheme's asset allocation after growth shares fall 30% in a rising interest rate environment. Rather than selling, the trustees rebalance towards the target weighting, buying more of the fallen holdings at lower prices.
Think of it
“Growth investing is betting on companies that will grow fast-paying up for expected future expansion.
Formula
Calculation
There is no single formula, but growth investors commonly use the price to earnings growth ratio, known as PEG:
PEG Ratio = Price to Earnings Ratio / Expected Annual Earnings Growth Rate (%)
Worked example. A software company's shares trade at $90 and it earns $3.00 per share.
Price to Earnings Ratio = $90 / $3.00 = 30
Analysts expect earnings to grow at 25% a year for the next few years.
PEG Ratio = 30 / 25 = 1.2
A PEG near 1.0 is often treated as reasonably priced for the growth on offer, so 1.2 suggests a modest premium. A rival on a price to earnings ratio of 40 growing at 40% would score 40 / 40 = 1.0, which on this measure is the better value of the two despite the higher headline multiple.Case study
Seen in the real world.
This case is illustrative and fictional. The Marrowfield Growth Fund, an invented investment fund, held 25 companies selected purely on revenue growth above 30%, with no valuation limit applied at purchase.
For four years the approach performed strongly as the market rewarded growth almost regardless of price. When interest rates rose sharply, the portfolio fell 42% against a market decline of 18%, because the companies held were valued on earnings expected many years ahead and those distant earnings became worth much less in present terms.
The managers did not abandon growth investing, but they added a valuation discipline: no purchase at a PEG above 1.5, and a requirement for a credible path to positive cash flow within three years. Over the following four years the fund recovered and outperformed, with roughly a third less volatility than in its first period.
Watch out
Common mistakes.
- Assuming any fast-growing company is a good investment, when the price paid relative to expected earnings determines the return just as much as the growth itself.
- Extrapolating a recent growth rate indefinitely, since high growth rates almost always slow as a company gets larger and its market saturates.
- Building a portfolio entirely of growth shares and describing it as diversified, when such holdings tend to be concentrated in a few sectors and fall together.
Questions
People also ask.
How is growth investing different from value investing?
Growth investing pays a premium for expected future earnings, while value investing looks for companies priced below their current apparent worth.
Why do growth shares fall when interest rates rise?
Their value depends on earnings far in the future, and higher rates reduce the present value of those distant earnings more than they reduce near-term ones.
Is a high price to earnings ratio always a warning sign?
Not on its own, because a high multiple can be justified by rapid growth, which is exactly the comparison the PEG ratio is designed to make.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%