There’s a thrill that comes with chasing the next big thing. When technology stocks were booming in the late ’90s, everyone wanted a piece of the action. During that time, internet stocks became synonymous with glamour and excitement, drawing investors in like moths to a flame.  

But the problem with shiny things is that they often come with a steep price tag. This led to a dilemma: investors couldn’t justify the high valuation, but they reasoned that it was simply the cost of buying into “growth.” 

Yet, what exactly is a growth stocks?

In theory, these are companies expected to expand rapidly, delivering outsized returns. But in practice, growth is as elusive as it is attractive. Many investors and analysts misunderstand what drives true value in a company. Compensation packages tied to profitability suggest that growth itself creates wealth, regardless of the capital required.  

But real growth stocks are, at their core, value stocks with a compelling story. And sometimes, these stories are built more on dreams and speculation than on solid financials. 

Take the Indian real estate and infrastructure boom from 2003 to 2008. During this time, the economy was roaring, fuelled by private investments, domestic savings, and massive foreign capital inflows. Infrastructure stocks became the darlings of the market, commanding sky-high valuations. DLF, a real estate development company, listed in early 2007 and enjoyed a market capitalisation of over Rs 1.5 lakh crore which was greater than many of the very well-known stocks. It was a classic case of growth frenzy. 

But here’s the thing: growth is a product of a bull market. Once the market turns bearish, the gloss wears off, and what’s left are the fundamentals—the cold, hard numbers. This is where value stocks thrive. They offer stability and steady returns, whereas growth stocks can become volatile, driven by competitive forces that eventually erode their high returns. The dream of a perpetual growth stock dies when reality sets in. 

The term ‘growth stock’ is a mirage, often only identifiable in retrospect. By the time a stock is labelled as growth, it’s already skyrocketed, capturing the imaginations of investors who buy into the hype. It’s what I call “dream stocks”—investments that soar on hopes and expectations rather than concrete results. They’re seductive because they don’t require the rigorous analysis typical of value investing. You just need to believe in the dream. 

However, when the dream becomes reality, the allure fades. Internet and technology stocks in 1999-2000 were all the rage, buoyed by the “value of mystery.” But when these companies started delivering on their promises, the excitement diminished, and their valuations began to reflect knowledge rather than fantasy. 

Investing in growth stocks can feel like an adrenaline rush, but it’s critical to remember that even the most promising stocks eventually lose their mystery. And when they do, investors are left holding the bag, often at a significant loss. The challenge is to discern when a stock’s growth story is built on real value and when it’s just smoke and mirrors. 

Behavioural Traits for Pursuing Growth Strategies 

Availability Heuristics: This cognitive bias is where investors prioritize information that is most recent or easiest to recall. This heuristic is particularly influential in the context of growth stocks, which often dominate headlines, catch the spotlight in media discussions, and consequently become the stocks “everyone is talking about.”  

This heightened visibility convinces investors that these are the stocks to watch and, potentially, to buy. The result is a market environment where front-page stocks, much like front-page news, command a significant premium due to their perceived importance. 

Consider Tesla Inc. in the mid-2010s, a stock that dominated news cycles with every tweet and announcement from CEO Elon Musk. Investors, bombarded with constant updates and breakthrough promises, found this information readily accessible and influential, leading to a surge in stock purchases based solely on the latest news, rather than long-term fundamentals. 

Follow the Herd: The availability of information leads to a bandwagon effect. Investors see others buying into growth stocks and decide to join in, partly out of fear of missing out (FOMO) and partly because of narratives. If the investment takes a downturn, the shared misery in collective failure is strangely reassuring compared to solitary missteps. This herd mentality can rapidly inflate stock prices as everyone jumps on board, but it is equally quick to cause a crash when sentiment shifts and the crowd rushes to exit. 

During the late 2000s, the Indian real estate and infrastructure boom attracted a lot of investors. Companies like DLF and Unitech saw surges in stock prices as investors followed the herd, expecting continuous growth in the real estate sector. This herd mentality contributed to an unsustainable bubble, leading to severe corrections when the market eventually adjusted. 

Chasing Fads and Fancies: The allure of the new and the not-yet-understood drives much of the excitement around growth stocks. In the market’s narrative, these stocks are often portrayed as gateways to futuristic returns. Historical examples abound, from the Tulip Mania to the Dot-com Bubble, where investors threw caution to the wind, chasing after the novel and untested.  

This pursuit of novelty often overrides rational investment strategies and leads to significant market corrections when the bubble of expectation bursts. 

The Indian startup ecosystem’s rapid growth in recent years created a surge of interest in technology and e-commerce-related stocks. Companies like Zomato and Paytm attracted high valuations and investor attention simply by being part of the trendy tech and startup narrative. This rush often resulted in high-priced IPOs, driven more by excitement about new business models than concrete profitability. 

Novelty Over Familiarity: The stock market has always had a penchant for what’s new and shiny. This preference can cloud judgment, leading investors to overlook the established value in favour of speculative growth. The allure of potentially discovering the “next big thing” can make even the wisest investors throw established investment principles to the wind. 

In the early 2010s, investors in India gravitated toward biotech companies like Biocon due to their novel approach to drug development and biotechnology innovation. This enthusiasm often overshadowed the performance of more traditional pharmaceutical companies, even though they had stable revenue streams and solid business models 

Instant Gratification: Much like society’s broader trend towards quicker, more immediate results—seen in everything from fast food to fast fashion—many investors prefer stocks that promise quick returns. Growth stocks, especially during bull markets, seem to offer this rapid payoff, akin to a sprint compared to the marathon of value investing. This impatience for quick returns can often lead to rash decisions, with investors jumping in without due diligence. 

We have seen this with many stocks like Yes Bank and DHFL, when there is news about some serious governance issue and as a result, the stock prices plummeted, despite this, investors looking for quick gains often piled into these stocks hoping for rapid profit without necessarily understanding the long-term impact on the business.  

Rationalisation Trap: When faced with losses, it’s human nature to seek justification for our choices, looking outward for excuses rather than inward for introspection. In the stock market, this often translates into blaming external forces like market manipulations or poor advice for poor outcomes, rather than acknowledging flawed investment strategies or misjudgments. 

The case of Satyam Computer Services serves as a classic example of the rationalization trap. Despite early signs of financial irregularities and governance issues, investors continued to rationalize their positions, attributing falling stock prices to external factors or temporary setbacks. The collapse of Satyam, due to a massive corporate fraud scandal, illustrated the dangers of overlooking warning signs and rationalizing investment decisions. 

Expectations Investing: At its core, investing in stocks is about predicting the future, not just of companies but of market perceptions. Growth stocks, with their volatile nature, often reflect high expectations that are not just about current earnings but about future potential. The key for investors is not just to identify companies with high potential but to gauge whether this potential is already reflected in their stock prices. Understanding and anticipating how expectations might change can lead to successful investment outcomes. 

Conclusion

These behavioural traits illustrate the complex psychology behind investment decisions, especially in the volatile land of growth stocks. Understanding these traits can empower investors to navigate the market more wisely and make informed decisions that balance the dream of growth with the reality of value. 

Disclaimer: Investments in securities are subject to market risks. Read all the related documents carefully before investing.