Future of Growth Investing

The epitome of growth investing was the one-decision stock era of the bull market of the early 1970s. The notion was that growth of earnings per share could be projected as a straight line on semi-log paper for the most durable, well managed companies. Predictable growth would be valued richly by investors, which would make equity capital cheaper and easier to raise. In turn, this equity could be invested at higher than average rates of return on capital, which cycled into more earnings per share. And so the money machine would turn. The proper investment strategy was to buy the right companies and hold them forever.

The index funds of the late 1990s get some of the same influence although not by overtly selecting highly regarded stocks (see Indexing and Mutual Funds). But the index tends to be more heavily weighted in those stocks. The one-decision phenomenon of the 1970s and the indexing craze of the 1990s may end up at the same place: ownership of a handful of richly valued companies whose history is not a precursor of their future. And the indexer, like the one-decision investor, is disciplined to stay invested no matter what.Jeremy Grantham of Grantham, Mayo, Van Otterloo & Co. LLC comments:

Historically, at the stock levels in the United States, equity investors have over-paid for comfort (stability, information, size, consensus, market domination, brand names). Historically, equity investors have over-paid for excitement and sex appeal (growth, profitability, management skills, technological change, cyclicality, volatility, and most of all, acceleration in the above).

Paying-up for comfort and excitement as growth managers do for example, is not necessarily foolish, for clients also like these characteristics. Conversely, when a value manager is very wrong as he will be sooner or later he will be fired more quickly than a growth manager. To add insult to injury, the data indicates that the best growth managers add more to growth than the best value managers can add to value, probably because the fundamentals and the prices are more dynamic for growth stocks.

Finally, beyond the financial details of potential growth companies and growth stocks, what are the broad requirements of a successful business? And conversely, what are the features of business failure? We suggest three characteristics which, if found together, will guarantee success for failure. If a business has a combination of passion, authenticity and integrity, it will succeed. In contrast, whenever you find together the three ingredients of mediocrity, arrogance and isolation, the business or indeed the country concerned will fail.