Graham was suspicious of 'hot' or fast-growth stocks because their promise relies on the prediction of ever-increasing future earnings with little historical evidence that the company can consistently produce ever-rising future earnings.
He warned the growth stock investor to seek two things:
- Assurance that growth will continue
- Assurance that the investor isn't paying too high a price for future growth.
Peter Lynch warns investors to be especially careful with companies in formation. "Wait for earnings," he cautions.
- Though Lynch has done very well with some initial public offerings in particular (he was an original investor in Federal Express, "I'd say three out of four have been long-term disappointments."