Unanswered Questions

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An age-old difficulty for investors is ascertaining the value of future growth. In the preface to the first edition of Security Analysis, the authors said as much, "Some matters of vital significance, eg., the determination of the future prospects of an enterprise, have received little space, because little of definite value can be said on the subject."

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Clearly, a company that will earn $1 per share today and $2 per share in 5 years is worth considerably more than a company with identical current per share earnings and no growth. This is especially true if the growth of the first company is likely to continue and is not subject to great variability.
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Another complication is that companies can grow in many different ways - for eg. selling the same number of units at higher prices; selling more units at the same (oe even lower) prices; changing the product mix, or developing an entirely new product line. Obviously, some forms of growth are worth more than others.

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There is a significant downside to paying up for growth or, worse, to obsessing over it. Graham and Dodd astutely observed that "analysis is concerned primarily with values which are supported by facts and not with those which depend largely upon expectations."

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Strongly preferring the actual to the possible, they regarded the "future as a hazard which his conclusions must encounter rather than as the source of his vindication."

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Investor should be especially vigilant against focusing on growth to the exclusion of all else, including the risk of overpaying. Again, Graham and Dodd were spot on, warning that "carried to its logical extreme, . . . [there is no price] too high for a good stock, and that such an issue was equally 'safe' after it had advanced to 200 as it has been at 25."

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Precisely this mistake was made when stock prices surged skyward during the Nifty Fifty era of the early 1970s and the dot-com bubble of 1999 to 2000.

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The flaw in such a growth-at any-price approach becomes obvious when the anticipated growth fails to materialize. When the future disappoints, what should investor do ? Hope growth resumes ? Or give up and sell ? Indeed failed growth stocks are often so aggresively dumped by disappointed holders that their price falls to levels at which value investors, who stubbornly pay little or nothing for growth characteristics, become major holders.

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