GARP investing or Growth at a Reasonable Price investing is a hybrid method of making investment decisions. It has characteristics similar to both growth and time investing. This method was developed to reduce the risks involved in value investing while increasing earnings at the same time. Experts have so far found this method to be highly effective.
The GARP Investment Strategy
GARP simply stands for growth at a reasonable price. In this strategy, GARPers want to increase the value of their investments while minimizing their risk exposure. When analyzing stocks, GARPers normally look at the financial history of a company and its growth prospects. There is a common misconception that holding half your portfolio as growth investments and half of it as value investments is considered GARP investing. The truth is that GARPers normally invest in companies that meet a certain criteria.
GARP Investing Tips
Most investors normally consider the price to earning ratio of a stock. For most investors, the higher the ratio, the better the investment. However, GARP investors prefer a lower price to earnings ratio. Generally, a ratio of 15 to 25 is preferred for any GARP investment. However, this will vary from company to company. Most investors also prefer a high growth rate. However, GARPers prefer a lower growth rate. The preferred rate of growth for most GARP stocks is anywhere between 10 to 20 percent. A positive cash flow is also a good indicator for any GARPer.
Value investors normally do very well in bearish markets. On the other hand, growth investors normally perform best in bullish markets. The beauty of investing as a GARPer is that you can make money regardless of the condition of the market. This is because you will be employing the best of both strategies.
GARP may sound like the perfect investment strategy, but it is actually more complicated that it sounds. For an investor to use this investment strategy successfully, he or she must be familiar with both value and growth investing. That being said, investors who normally use GARP investing make a lot of money with minimal exposure to risk. The investment strategy works best in both bear and bullish markets.