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Why Growth Stocks Are the Best Way to Build Wealth.

Why Growth Stocks Are the Best Way to Build Wealth

Beware the fun police.

It doesn’t matter where you turn, there’s always someone determined to put a dampener on your day.

We watched part of the England v Australia test match rugby union the other morning. Towards the end of the game, Australia had a penalty kick from about 40 metres.

In the old days (like, about five years ago) the crowd would whistle and boo to distract the kicker. It rarely worked, but it was fun.

Not anymore. On flashing lights around the Twickenham stands it read, ‘Quiet Please – Respect the Kicker‘.

Where’s the fun in that? Based on the low noise level, it seems most of the chinless wonders in the crowd heeded the message. We always suspected rugby was a game for big softies.

But it’s not just sport where the fun police are out in force. Nowhere are they more rife than in the stock market

If you recall, last year one of the biggest share offerings in a decade came to the market. It was the Facebook [NASDAQ: FB] IPO.

All indications were that the stock would come on the market at about US$25-$30.

But the company (or its advisors…or both) got greedy. They decided to list the stock at a super-pricey US$38.

To make things worse there was a huge stuff-up at the NASDAQ exchange that caused a delay to trading. In short, it was a botched IPO.

Not surprisingly, over the next few months the stock price hit the skids, trading below US$20 per share.

What a disaster. And yet, despite all that it was still the right thing to buy Facebook stock. And despite all the negativity around Twitter, given the opportunity, you should buy that stock too.

Financial Fun Police on Patrol
The point of investing is to make money.

You can make a decent amount of money buying safe and dependable dividend stocks.

We strongly recommend investors do just that. That’s why we’ve banged the drum for you to buy and own dividend stocks. Hopefully you’ve taken that advice.

But in most markets, buying dividend stocks will only get you so far.

While dividend payers have gone great guns over the past year, you shouldn’t expect a repeat of those returns again. That said, you should always keep a lookout for stocks that could pay a dividend for the first time or which could increase their dividend.

That’s something we’ll continue to look out for in Australian Small-Cap Investigator (about one-third of the stocks on our current recommended buy list are dividend paying stocks).

However, looking ahead our money is firmly on growth stocks. We like two types of growth stock right now: resource stocks and technology stocks.

These stocks are generally the polar opposite of the dividend stocks we mentioned above. Growth stocks are high risk. Anything can happen. They’re so risky that your financial advisor (a member of the Fun Police) will probably tell you not to touch them with a 20-foot barge pole.

But growth stocks are also the best way to boost your wealth…provided you can buy into the right stock at the right time…

Is Twitter the New Google?
We’ll agree that the Facebook share price didn’t quite get off to the start we expected. It didn’t help that Facebook revealed that its mobile advertising strategy still needed some work.

But it wasn’t the first IPO to get off to a shaky start, and it won’t be the last. The important thing is to look at the business rather than a mishandled IPO. And in our view Facebook was a no-brainer investment.

Facebook is Google. It’s Apple. It’s Microsoft. It’s Amazon.com.

Facebook is the market leader in its industry. And so is another soon-to-IPO company, Twitter.

Sure, we’ve seen the numbers. It looks expensive. It could come to the market with a market cap of US$13.6 billion. That’s a big price for a company that doesn’t make a profit.

But with potentially game-changing growth stocks you typically have to pay up for future growth. If the market thinks Twitter can grow its business, attract more advertising revenue, and become profitable, then investors will pay a premium.

And if Twitter can exceed the market’s expectations then, despite the negative commentary today, the share price will likely keep going up.

If You Like the Odds, Back It
That’s how it is with growth stocks. The same goes for Aussie resource stocks. It’s all about predicting future potential revenue streams.

If the market valued every resource stock purely on current profitability, then three-quarters of the Aussie market would trade at zero cents…because they aren’t profitable.

But this is all part of the fun of investing (or punting) on growth, especially small-cap growth. You identify what could be a game-changing event for a particular company or industry, you figure out the potential reward and risk, and then if you like the odds, you back it.

That’s what growth investing is all about. In short, don’t let the Fun Police succeed in their attempts to turn investing into a chore, because as an investor if you want any chance of meeting your retirement goals you have to invest in growth.

Kris Sayce.+

This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.