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Growth stocks Michel Pireu     | Business Day Tuesday, November 27, 2018
From Peter Lynch:

One of the oldest sayings on Wall Street is "Let your winners run, and cut your losers." It's easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds.

There are two ways investors can fake themselves out of the big returns that come from great growth companies.

The first is waiting to buy the stock when it looks cheap. Throughout its long rise from a split-adjusted 1.6 cents a share Wal-Mart has never looked cheap compared with the overall market. Its price-to-earnings ratio rarely dropped below 20, but Wal-Mart's earnings were growing at 25 to 30 percent a year. A p/e of 20 is not too much to pay for a company that's growing at 25 percent. Any business that can manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.

The second mistake is underestimating how long a great growth company can keep up the pace. In the 1970s I got interested in McDonald's. A chorus of colleagues said golden arches were everywhere and McDonald's had seen its best days. I checked for myself and found that even in California, where it originated, there were fewer McDonald's outlets than there were branches of Bank of America. McDonald's has been a 50-bagger since.

These "nowhere to grow" stories come up quite often and should be viewed sceptically. Don't believe them until you check for yourself. Look carefully at where the company does business and at how much growing room is left.

Whether or not a company has growing room may have nothing to do with its age.

And, sometimes, even depressed industries can produce consistently high returns. The best companies often thrive even as their competitors struggle to survive.

 
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