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Most people can understand the basics of growing their money, but what can get overlooked is the rate of growth. It makes a big difference when trying to evaluate a potential opportunity and the resulting rewards. Being in front of that growth early on can be very rewarding.

When looking at the financials of a company it is always a good sign that a company is growing its revenue. Hopefully, they will keep driving down their costs with additional scale, helping their profit margins and earnings per share. When companies are growing 5-10% annually they are considered on the lower end of growing companies. When you invest in value stocks, they tend to be companies that aren’t growing as fast. “Blue chips” or dividend-paying stocks are usually considered value stocks. Growth stocks on the flip side of the coin are growing their revenue 30-50% annually, if not higher. When you compare two growth rates to measure the time needed to double production, for example, it can really surprise people how exponential growth really accelerates the speed of accomplishing that goal. Below is an easy example of production growth and earnings growth (earnings per share for a public company) :

Company A:

Makes 10 units first year while growing 10% annually

Time needed to double in size: just over 7 years

Company B:

Makes 10 units first year while growing 30% annually

Time needed to double in size: 3 years

Company A:                                                                         Company B:

(10% earnings growth)                                                        (30% earnings growth)

Base Year       $1.00   share                                                  $1.00 share

Year 1             $1.10                                                               $1.30

Year 2             $1.21                                                               $1.69

Year 3             $1.33                                                               $2.20

Year 4             $1.46                                                               $2.86

Year 5             $1.61                                                               $3.71

Year 7             $1.95                                                               $6.27

Year 10           $2.59                                                               $13.79

As you can see growing much faster enables a company to double in production much quicker and grow its earnings substantially. When taking a long-term view of an investment opportunity, this can really be a powerful concept to understand. Most value investors lack the vision to see why investors tend to pay very high prices for growth stocks. In my own opinion, they don’t realize how much earnings potential companies can realize when they experience exponential growth. In the real world, the power of exponential growth can be seen in areas such as increases in internet download time, the time it took to map the human genome or the exponential decline in the price of commodities such as computer memory chips or solar panel equipment. This kind of growth starts slow and quickly gains momentum.

The last part is key as the dismissive value or bearish investor doesn’t forecast correctly the exponential, not linear, growth a company can have once they have this powerful force acting as a tailwind. It’s true that growth investing has its ups and downs as investors can be picky over quarterly fluctuations. However, with taking a long-term view and riding out some of those ups and downs you can be rewarded tremendously in picking companies with exponential growth.