Want to know how to find fast-growing stocks for your portfolio? Follow these tips to spot the best—and stay out of the worst

Are you interested in learning how to find fast-growing stocks? Some investors think the best way to profit in 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.

However, these investors rarely find what they’re looking for. Sometimes stocks with intriguing business concepts just never get anywhere. They generate a number of encouraging news releases, but these releases turn out to be a series of exaggerations and broken promises.

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How to find fast-growing stocks for maximum success? Watch out for these three risks:

1. These stocks tend to be highly volatile, but not consistently so. They may go racing up and down, but also go through long periods of relative price stability.
2. If you wait to buy on a dip, you may sit through a long rise and miss out on a huge gain.
3. A bigger risk of waiting to buy on a dip is that the downturn that spurs you to buy may look like a dip at first, but turn out to be the start of a major decline.

Waiting for a dip sounds like conservative, risk-reduced investing. In fact, it’s much more effective at cutting your profits than your risk. Your best guide to conservative investing is to disregard market cliches like “buy on a dip”.

Avoid a momentum investing mindset when deciding how to find fast-growing stocks

Momentum investors include those investors looking to make a quick gain on the so-called “positive earnings surprise.” That’s when a company outdoes brokers’ earnings estimates. These investors view a “negative earnings surprise”—lower-than-expected earnings—as a sell signal. They use a variety of formulas to make buy and sell decisions, but all come down to “buy on strength and sell on weakness.” So, they tend to pile into the same stocks all at once, and the gains that follow are something of a self-fulfilling prophecy. They lack the right kind of investing wealth mindset.

The key problem with a momentum investors mindset is that when the stock’s rise falters, momentum investors try to get out as a group, but there are never enough buyers. This leads to violent price fluctuations for these stocks, or ETFs that hold them. When you hear that a stock reported a 10% earnings gain and its shares dropped 25% to 50%, it often means that the momentum investors who owned it were hoping for, say, a 15% earnings gain.

It’s natural to be tempted to try a momentum investing approach by leapfrogging from one stock to another, and routinely switching out of the laggards in your portfolio and into stocks with better performance. But basing investment decisions on performance alone is bound to cost you money sooner or later.

That’s because it raises your risk of investing in a stock that owes its performance to having gambled and won. When a gambler’s luck turns sour, you may give back all of your winnings and more besides.

All in all, our advice is to have the wealth mindset of a skeptical optimist in your own investing philosophy.

Buying stocks on “the ground floor” can lead to problems when you’re considering how to find fast-growing stocks that will help you profit

Some aggressive investors like to get into fast-growing stocks at what they describe as “the ground floor.”

These investors rarely find what they’re looking for because there’s a large random element in investing, especially at the ground floor. Many promising junior stocks fail to thrive as businesses for one or more of any number of reasons. To borrow from 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.

How to find fast-growing stocks: 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.

Use our three-part Successful Investor approach for all of your investments, including fast-growing stocks

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What would persuade you into buying fast-growing stocks?

How do you plan for volatility or losses when you buy fast-growing stocks?