Growth Investment Style And Strategy

This paper researches on growth investment style and strategy.Growth investment is an investment style which focuses on the earningsgrowth of companies. Its core idea is that investment income stems fromstock price rising driven by the earnings growth of companies. Growthinvestors generally use top-down methods. From industry level, investorsselect industry with the best prospect by forecasting the market share,judging development stage, analyzing industry competitive andresearching industry chain. From corporation level, investors pickcompany with the most development potential by analyzing themanagement and researching the moat of companies.Then growth investors generally adopt concentrated investmentstrategy. Kelly, an American mathematician, proposed Kelly Criterion toapply this strategy. Furthermore, this paper introduces the assumption ofBlack-Scholes option pricing formula that stock prices follow geometricBrownian motion and optimizes Kelly Criterion based on stock pricefollowing lognormal distribution. After investors forecast the expectedvalue and variance of the return on investment a stock, they can use themodel to get the optimal investment proportion on this stock in order toachieve the fastest growth rate of wealth.Finally, this paper builds an investment portfolio based on theanalysts’ consensus expectation for earning growth of listed companies.From two aspects of the proportion of stocks’ earning below expectationand the rate of return on investment, the portfolio with20%~30%expectedgrowth rate is optimal in the past five years. And the rates of return oninvestment of all portfolios with more than20%expected growth rate aresignificantly higher than the CSI300Index, which proves the growth investment style based on expected earnings growth is feasible in Chinesestock markets.