In the Globe and Mail, Chris Umiastowski writes about growth stocks and over the past 3 years his picks are up 275% which means we all would love to have those returns in our portfolio. In his case, as one would expect in the knowledge economy to be technology stocks including Netflix, Facebook and Tesla. The process Chris follows is a 3 step process:

Step one – pick stocks that genuinely excite you. The reason will be in steps two and three. In the past he has suggested trying finding the company which is radically changing what we consider to be the norm. The examples were Netflex is changing how we watch TV; Facebook changes how we interact with others and Tesla is changing how we build cars and a sustainable source of fuel for transportation. Now Chris says most of us have a limited knowledge of niche markets – find something that genuinely excites you. The test is within the industry does the potential company that you are considering investing in making a real difference in the industry? If the answer is not a resounding yes, then look for alternatives.

Step two – think about the long-term potential and what it means to valuation. Use all the regular considerations about what kind of revenue. gross margin, profit it has to make to be traded for 15 to 20 times earnings? If your homework tells you it has the potential put the stock on your short list of stocks to buy.

Step three – this is the reason why the stock should excite you. You need to continue to do homework till you are knowledgeable about the industry and many of the reasons why it might not work out and why the company should grow. If you find the strong company, have an understanding of the industry and being a bear does not crush your interest, begin to buy.

Linking to dividend paying stocks, in the above steps there is homework to be done, if something excites you then it does not feel like homework because you want to do it anyways. If you can understand the framework of the company and its financials begin to work the method you believe then the homework is fun and exciting. The other alternatives is to invest in an index fund of growth stocks or invest in dividend stocks because you need to be concerned with two aspects – is the company profitable and can it continue to pay its dividend. At the minimum with dividend stocks you have very defined exit points.

There are more questions than answers, till the next time – to raising questions.