Use these 23 proven tips for successfully investing in growth stocks

By definition, growth stocks are companies that have above-average growth prospects. They are firms whose earnings growth has been above the market average, and is likely to remain above average. Most pay small dividends or none at all. Instead, they re-invest their cash flow in the business, to promote their growth.

Although these stocks can be highly volatile, they often make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they continue to grow at higher-than-average rates within their industries, or within the market as a whole.

Below are 23 tips for investing in growth stocks

1. For most investors in growth stocks, you should limit your growth investment holdings to, say, 30% of your overall portfolio.
2. Always focus on investment quality first, especially when looking for growth stocks that have the potential for higher returns.
3. Be wary of investing in growth stocks that have huge media hype. This also means downplaying stocks that are constantly in the broker/media limelight.
4. To cut your losses, diversify the growth stocks you invest in by investing in 5 or more stocks instead of just one. Gains on your winners should overwhelm your losses.
5. If you’re investing in growth tech stocks, begin by focusing on up-and-coming technologies—for example, smartphones have spurred on many new apps and network systems.
6. Look for growth stocks that are multi-product companies. Technological advances come in spurts, and tend to leapfrog each other.
7. Focus on growth tech stocks with a variety of existing or soon-to-be-released products, and avoid one-hit wonders.
8. Always review the balance sheets of the growth stocks you want to invest in.
9. When investing in growth stocks, always look at earnings.. A perpetual money loser will eventually go broke, no matter how impressive its technology. But if it makes even a little money, it can stay in business and perhaps reap the bonanza of a new product.
10. While you are looking at balance sheets, look for hidden assets like real estate. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
11. Another type of hidden value is brand loyalty. Does the growth stock in question have a loyal following? Apple is the perfect example of growth tech company that leveraged its loyal fan base to jump start the digital music revolution with the iPod.
12. Growth stocks are typically newer companies. Investors should remember that marketing is a lot easier than inventing a successful product.
13. Growth stocks can have an uphill battle when they first hit the market. Even a great new product or computer program may fail to overcome retailer and customer skepticism.
14.  A growth stock’s acquisitions can bring “time-bomb” risk. Companies sometimes grow quickly by buying other companies. But sellers may simply want out of a losing situation. Growth by acquisition can work out, but it can also mean a waste of capital and time.
15. Junior growth stocks often trumpet their deals with major firms. Watch out for misleading press releases that exaggerate a small firm’s real association with a bigger company.
16. Be especially wary when growth tech stocks splurge on elaborate web sites and glossy investor brochures, but take too long to produce any real results.
17. When investing in more speculative growth stocks, use our “sell-half” rule. This says that if a stock you own has doubled, you should sell half so you get back your initial stake.
18. If you are too slow to sell speculative stocks in your growth portfolio, your profits, and even your principal, can evaporate all too quickly.
19. Most successful investors will hold a blend of growth stocks and some value stocks at any given time, depending on where they discover the best opportunities. Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise. Many technology stocks, for instance, start out as growth stocks and transition into value stocks.
20. Keep an eye out on a growth stock’s debt. It should be manageable. When bad times hit, debt-heavy companies go broke first.
21. The best growth stocks should have the ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Free trade and rising environmentalism are just two examples of secular trends.
22. Try to find growth stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.
23. If you can find a growth stock that has freedom from business cycles, you’re in good shape. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with resources and manufacturers.

Do you have a process when you’re investing in growth stocks that you’d like to share? What do you look for? Share your experience with us in the comments.