If a business does well, the stock eventually follows. - Warren Buffett

Companies which are able to increase their earnings every year, have an established formula of sales that they can clone repeatedly (think of a successful franchise, an established brand that can expand its sales…), and low capital costs can frequently show great growth. Once Harvey Norman was a little retail shop in the Eastern States that was listed very cheaply. With the money raised from their float, and other sources, this retailer expanded its operations nationwide and is now a spectacular stock worth many times its original asking price. This is where small investors really shine, because they can investigate these little stocks easily enough, yet few of the funds will touch them until they have grown large enough to take large positions. A few thousand invested in a true growth stock will appreciate tens or hundreds of times over a couple of decades, and the most wealthy stock investors come from this category.

If you combine value investing with growth investing you have a highly successful formula that has worked to make such men as Warren Buffet one of the world's most wealthy men. Absolutely he requires all his purchases to be made at significantly less than par value, but at the same time seeks out companies capable of growing their earnings significantly in the long term.

The Zulu Principle and Beyond The Zulu Principle by Jim Slater are very well written and detailed books describing a very sensible formula for investing in growth stocks. His methods concentrate on finding companies that have the capability of growing the EPS and he gives some very simple and elegant ratios such as the PEG (Price Earnings ratio divided by the forecast Growth) and some very Warren Buffett-like analysis techniques. Anyone wanting to know how to invest like Warren Buffett but not having their very own insurance company to give them the millions to invest might want to check out these books, which I would describe as Warren Buffett's methods tuned for small companies.

In Beating the Street, Peter Lynch also talks about growth companies, and gives some very useful advice. He points out that due to their expansion the market generally trades growth companies at substantially higher price/earnings ratios than the market average. However growth stocks are not always the best sector to be invested in at any given moment, in fact growth stocks go through a cycle within the overall market cycle. By charting the average PER of a small company growth fund vs the S&P 500's average PER, Lynch produced a chart showing wild swings in the price of growth stocks with respect to the market. Generally growth stocks ranged between a PER equal to that of the market, and twice that ratio. In the period following growth stocks reaching double the average PER growth stocks tended to stagnate, when PERs fell to only 1x the market average, they were due for a boom.

What this means is that the best time to invest in growth stocks is when the market has ignored them for a while, and the worst time is when they are the flavour of the month. The PEG system and the PERgrowth/PERmarket system are compatible, they work on the problem from a bottom up and a top down approach respectively, the best strategy may well be to combine the approaches by using Lynch's method to find out when the best time to invest in growth stocks is, and Slater's system to pick the good ones.