Some authorities would say that a true growth stock should be expected at least to double its per-share earnings in 10 years, that is, to increase them at a compound annual rate of over 7.1%.
Obviously stocks of this kind are attractive to buy and to own, provided the price paid is not excessive.
The problem lies there, of course, since growth stocks have long sold at high prices in relation to current earnings and at much higher multiples of their average profits over a past period. This has introduced a speculative element of considerable weight in the growth stock picture and has made successful operations in this field a far from simple matter.
In the past, the "best of common stocks" actually lost 50% of its market price in a 6 months' market decline.
Other growth stocks have been even more vulnerable to adverse development; in some cases not only has the price fallen back but the earnings as well, thus causing a double discomfiture for those who owned them.
For example, a particular stock price advanced 5 times (from $5 to $256 i.e 50x) as fast as the profits (from 40 cents to $3.91 per share i.e. 10x); this is characteristic of popular common stocks. Two years later, the earnings had dropped off by nearly 50% and the price by 80%.
For growth stocks, wonders can be accomplished with
- the right individual selections,
- bought at the right levels, and
- later sold after a huge rise and
- before the probable decline.
But the average investor can no more expect to accomplish this. In contrast, Benjamin Graham think that the group of large companies that are
- relatively unpopular and
- therefore obtainable at reasonable earnings multipliers,
- offers a sound if unspectacular area of choice by the general public.
by Benjamin Graham