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Growth as an Indicator of What?


Certainly, one might be excused for thinking that the measure of business success is growth. After all, individual stocks and other securities are analyzed and praised for showing year over year growth and panned when they fail to obtain those results. The same thing happens to businesses, sectors and practically anything we can measure in the world of business. If you are not showing growth, then you are a disappointment and the value of your business in the view of investors, analysts and the public will drop, sometimes precipitously.

Of course, this approach begs the question of how, despite all the variables in the world, the only thing one is expected to do is grow. That single minded approach makes no sense when tested by history, logic, common sense, or any other useful measure. There are cycles, changing tastes, periods of consolidation followed by growth spurts and other factors that make a year over year growth an unlikely and poor measure of long-term success. But that is what we face in many cases, even if it is not a good measure of value of a particular firm or sector.

This is not to say that there is a perfect measure other than growth to get a grip on the value of a particular business model. What is probably closest to the truth is that there is no single ideal benchmark and focusing simply on that growth year over year statistic is not a certain path to our goals of properly assessing the future success of a business.

In fact, an undue focus on growth and the pursuit of growth for growth’s sake can damage a business even to the point of bankruptcy.  We have seen that many times where firms expand their business too rapidly or on the basis of a mistaken view of what the economy and customers can or will actually support.

As an investor you should pay attention to growth in a business or sector you are interested in for investment purposes. However, remember that this is just one factor to consider and may not be the best measure of how your investment might do over time. Growth should definitely NOT be the sole factor you consider and be wary of those touting an investment because of growth or growth potential.

 

 


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