The most aggressive investors often target the newest and fastest-growing stocks—but most of them won’t pan out

Some of the earliest stage and fastest-growing stocks may start out with a brilliant idea or a plan to get involved in a high-profile or fast-growing business area. They may enjoy an initial burst of sales or even earnings. But many just can’t keep up the momentum. They never reach the critical mass they need to achieve consistent profitability.

This is more common for fast growing stocks in the technology industry, because they compete with well-established, well-financed senior techs. The seniors have an enormous advantage in well-trained staff, sales networks, media contacts and all sorts of other business assets that can take years, if not decades, to develop.

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Aggressive investors and the fastest-growing stocks

Some aggressive investors like to get into fast-growing aggressive investments at what they describe as “the ground floor.” They think the best way to profit from stocks is to buy them when they are just barely starting out on a growth phase that can last for years if not decades. Ideally, they want to buy the future top performers when they are still near or close to the penny stock range and have yet to be discovered by the broad mass of investors.

These investors rarely find what they’re looking for. That’s because there’s a large random element in investing, especially at the ground floor. Many promising junior stocks fail to thrive as businesses for any number of reasons. To paraphrase the opening lines of Tolstoy’s Anna Karenina, successful stocks tend to have a lot in common, whereas unsuccessful stocks tend to suffer from their own unique sets of risks and faults.

Illiquid or “thin” stocks make the fastest-growing stocks even more speculative options

You compound your risk if you invest in a promising junior that is a “thin” or illiquid trader. When a stock is a thin trader, it doesn’t take much buying or selling to influence its price. So if just one important investor decides to sell, it can cause an abrupt stock-price slump. This can spark a cascade of selling and a collapse in the stock’s price. The resulting stock downturn can scare off other potential investors. This can make it impossible for the formerly promising junior to raise additional funds when it needs them.

Investors in start-up companies also face one overriding, continual risk: it’s easier to launch a promising company than to create a successful business. That’s why only a minority of fast growing stocks ever go on to significant success.

If you chase the fastest-growing stocks, try minimizing your risk with these tips

• Focus on investment quality when looking for aggressive stocks with the potential for higher returns. When we look for aggressive investments, we zero in on companies that have established a business and have at least some history of building revenue and cash flow. We also look for companies that stand to benefit as the economy continues to improve, and have proven management and long-term growth plans.
• Limit aggressive holdings to a smaller part of your overall portfolio. Because aggressive stocks expose you to a greater risk of loss, we recommend limiting your aggressive holdings to a smaller portion of your overall portfolio.
• Downplay stocks in the broker/media limelight. That limelight fosters bloated investor expectations. Stocks that are talked up like this may seem like ideal candidates for big gains, with lots of investors getting on board. But when stocks fail to live up to those expectations, brutal downturns follow.
• Diversify your aggressive investments. As with your more conservative holdings, we recommend that you cut your risk by spreading your aggressive holdings across most if not all of the five main economic sectors (Manufacturing & Industry; Resources; Consumer; Finance; and Utilities). In the search for greater gains, you may choose to invest more heavily in Manufacturing and Resources, the two riskiest sectors. If so, take care to spread your money out across the many industries within each of these sectors. That way, you protect yourself from an unforeseeable industry downturn.

Some aggressive investors buy stocks from companies with big ideas but very few fundamentals to back them up. Would you take a risk with a company that has a lot of appeal but few fundamentals behind it, and how much of your aggressive portfolio would you be willing to put towards this investment?

Despite the risk, the occasional fast-growing stock can prove profitable. If you like fast-growing stocks, what do you look for that indicates a successful venture?