Critics on Peter Lynch

Why not? Of course, the purpose of equity investing is growth, is it not? So the two words seem to be inseparably linked. But perhaps we confuse growth with appreciation. And perhaps we automatically associate past growth with future appreciation. They can differ.

Marc Faber, our guru for Manias, Panics and Crashes, points out, there are two reasons why highly popular stocks, which have become viewed as growth stocks, usually end up as costly disappointments:
First, exciting new markets often fail to keep growing as rapidly and profitably as expected. Second, when a business achieves great success, competitors are attracted into the field, slowing growth and shrinking profit margins for the early leaders. Gottaown stocks are very likely to be losers.

Certainly, when growth stocks start to decelerate, when momentum ends, the price of failure is high. Once a growth stock starts to fall, it loses its momentum attractions, followers of the trend start to desert, forcing the price down further and creating a downward spiral. In such circumstances, there can be high penalties for earnings disappointments. Eventually, growth stocks fail to fulfill their original promise and disappoint investors. Then, as fallen angels they become potential seeds for future value stocks.

Some growth industries never produce any growth stocks: competition is so fierce that no one makes any money. And in a classic article published in the Harvard Business Review over 40 years ago, Peter Bernstein (see Economic Forecasting), makes the important distinction between growth stocks and growth companies:

Growth stocks are a happy and haphazard category of investments which, curiously enough, have little or nothing to do with growth companies. Indeed, the term growth stock is meaningless; a growth stock can only be identified with hindsight it is simply a stock which went way up. But the concept of growth company can be used to identify the most creative, most imaginative management groups; and if, in addition, their stocks are valued at a reasonable ratio to their increase in earnings power over time, the odds are favorable for appreciation in the future.

While Peter Lynch likes growth companies, out of self-professed lack of understanding, he has tended to avoid the high-tech area, where many of the biggest individual growth stock gains of the 1990s have been made (see Internet Investing). His style is also limited to investing in US equities. Of course, it is true that the concept of investment in growth companies as a distinct style of equity investing seems to emerge only in maturing economies. Growth is assumed to be an integral element of any stock selection criteria in many other parts of the world