You may think you've missed the boat on a stock that's been delivering solid investor returns. Some investors, however, build entire investment strategies around the stock market's best performers. The name of the game is growth investing, and the idea is to capitalize on a company's momentum as long as you're convinced the fundamental business will remain strong. This strategy has some risks, but if history is any teacher, the odds are in your favor.
If you're interested in buying the stock market's best performers, you must be willing to pay for them. Growth stocks will be priced higher than the rest of the market, and it won't be unusual for some companies to be trading at their 52-week high or record levels. As a growth investor, you should believe that stock market performance is driven by earnings. You expect that a company will continue to generate higher profits and reward you with a rising stock price.
Show Me the Returns
Sticking to a strategy is one thing, but you want to know that it will pay off. For the two decades leading up to 1999, the answer was yes. Returns for investors in growth mutual funds were more than 3,000 percent compared to less than 2,000 percent returns generated by value funds, which invest in underperforming companies. In the two decades leading up to 2012, growth investors still did better, but returns were dramatically lower at approximately 300 percent, according to a 2012 article by "USA Today."
Some of the best-performing companies in the stock market are also those that choose to direct extra cash to shareholders in the form of a dividend. In the nearly four decades leading up 2013, dividend stocks generated higher returns every year versus both the S&P 500 index and companies that hoarded cash instead of rewarding shareholders, according to a 2013 article on the CNBC website. Some investors in high-performing stocks can have their cake and eat it too.
Speculative investing could be the riskiest method of all if you're looking for top performers. Speculative stocks are generally obscure companies that trade for less than $10 per share. Speculative investors buy these stocks in hopes that they will become top performers even if they're not moving higher in the present. These stocks ride on the coattails of larger, better-known companies that -- when they're shining -- lift an entire sector higher. Speculative stocks can turn from winners to losers in an instant because they're not trading on their own merits, according to a 2012 article on the CNBC website. So your strategy should include monitoring your riskiest performers to ensure they're going in the direction you want.
Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.