Should you invest in ASX growth shares to beat the market?
The answer seems like an obvious "yes", but I don't think it's that easy these days.
How much growth does a business need to be generating to be classified as a 'growth' share? 10% growth? 20% growth? And what are referring to? Revenue? Net profit? Earnings per share (EPS)?
Can we call any business that's generating any positive growth a 'growth' business? Or are we mostly talking about shares which are simply going up in value? This is known as 'momentum investing' if you're just investing in shares that are going up rather than paying close attention to the company's progress, which does have its own merits (until the share goes down because it was overvalued).
When people talk about 'value investing' they usually mean investing in cheap or distressed businesses. But I think all investing is value investing. If you don't think it's good value compared to its price, or pay no heed to value, it is simply speculation – which isn't investing at all.
If you could go back in a time machine and choose the fastest growing businesses then clearly owning a portfolio of shares like Altium Limited (ASX: ALU), A2 Milk Company Ltd (ASX: A2M), Appen Ltd (ASX: APX) and Nearmap Ltd (ASX: NEA) would have done very well and beaten the market.
Over time, businesses that are growing revenue and profit at a faster rate than the overall growth of the market should lead to market-beating returns assuming you buy at a reasonable price.
The problem is that these days most of the growth shares are trading at very high valuations. So although their profit may be growing faster than the market, we may see p/e ratios contract if investors don't feel confident about investing at such high prices.
Foolish takeaway
If you can find growth at a reasonable price (GARP), perhaps where shares have an expected growth rate higher than their p/e ratio (PEG), then that would be a good indicator of a potential market-beating share.
