The markets are going up and with stock prices rising there is a scramble to find the next new idea. Now to satisfy this appetite fund managers are weaving new theories and stories to come up with fund offerings to attract investments in their funds. The race for asset gathering has picked up steam.
The new fad doing the rounds is of “Growth”. Mutual funds have shifted their focus on coming out with “Growth Funds” comprising of growth stocks. I am quite amazed at such marketing strategies. What is a growth stock?
The term “growth stock” is meaningless since a growth stock can be identified only in hindsight: it is merely a stock that went way up. For most of us, our greatest richness always has been and will continue to remain in dreams. Stocks go to particularly high levels when a lot of people think that they might equal their dreams. It would be more appropriate to term “growth stocks” as “dream stocks”.
When a stock becomes a fancy in the markets it is chased by one and all. This steep rise makes it a “growth stock”. Before the rise, how many would have called it a growth stock? How many fund managers would have bought it? Since it is easy to sell the dream story of a growth stock, it is also possible to create a large band of followers chasing this growth illusion. Moreover for the fund manager the growth stock investing does not require the hard work that goes in value investing. This is based on vague dreams, hunches, illusions or popular opinions. Moreover when fund managers want to throw caution to the wind and chase high priced stocks they take shelter under the umbrella of growth strategies.
Growth investing is more of a philosophy of buying what is popular. When one lacks conviction and courage to do what is the right thing one joins the herd and does things right. During the technology boom internet retailing stocks were glamorous. The stock markets were crazy about them and were willing to pay a heavy price to own them. When one cannot justify the high valuation of a stock they would argue that it is a growth stock and hence expensive. It is a universal fact that for any stock to be a growth stock , it has first to be a value stock. Value and growth are inseparable. The problem is that many investors as well as professional fund managers don't understand the true impact of growth on the value of the company.
As recent as 2005/2008 stocks of brokerages were chased as growth stocks because of the sustained bull run. A highly brokered market, intense competition and the internet trading was bringing down the rates of brokerage. However such firms were a fancy and considered to be growth stocks in spite of their value eroding very fast.
To give you an example: On January 4, 2008 a newly listed full service brokerage firm Motilal Financial Services Ltd. enjoyed a market capitalisation of around Rs.6000 crores. No doubt a very good company promoted by a very highly qualified and efficient management of repute.However the said business was fast losing its competitive edge and comparative advantage. The market was giving it a valuation that was close to the combined market capitalisation of multinational giants Gillette and Proctor and Gamble which stood at around Rs.6700 crores. The former was the growth stock as the financial services sector was a fancy,and the latter were beaten down companies out of favour but they offered much value to the investors. Investors who opted for value and bought these beaten down stocks have become immensely rich and those who went for growth have become much poorer. Currently the market capitalisation of Motilal Financial Services Ltd. is around half at Rs. 3200 crores while Gillette’s market capitalisation is around Rs.6600 crores and that of Proctor and Gamble is around Rs. 13700 crores.
Based on this growth theory, be prepared to witness a flurry of IPO’s and Mutual Fund schemes hitting the markets.
Investors in their pursuit to grab a piece of something novel forget the inherent conventional wisdom of time tested principles of investing. This fascination of something new is as old as the stock markets. From Tulip mania, to South Sea bubble, to the Internet bubble in 2000 to Financial Services, Real estate , Power and the Infrastructure bubble as late as 2007/2008. Once upon a time they all promised growth and were known as growth stocks.
The concept of growth stock is a product of the bull market. It dies when the bear markets sets in. Bear markets ultimately create value. Bull markets create dreams.
Investors need to be very careful when they are fed with these new innovative dreams of growth stories. There is only one right way of investing. Buy a value, sit on it and let time do the rest. It is all about long term value investing.
