WHY DO INVESTORS AVOID INNOVATION AND GROWTH ORIENTED COMPANIES

ML - The way the world works - analyzing how things work - A podcast by David Nishimoto

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The main reason behind this is that many investors prefer to invest in "safe" businesses They believe that safer investments are less risky and give high returns as compared to growth businesses This assumption is incorrect and it is supported by the performance of growth-oriented companies during the financial crisis Growth companies are safer than other businesses because they have solid management, strong brands, and loyal customers Therefore, in a recession, customers may not increase their spending, but they will still buy from a company which has a great reputation They may spend less, but the company still earns higher profits It is also interesting to note that growth companies outperform other businesses in bull markets This is because, as the market goes up, growth companies continue to grow at a steady pace, and their stock prices rise too On the other hand, the stock prices of stable businesses may rise but their growth rate may slow down THE PERFORMANCE OF GROWTH COMPANIES DURING THE FINANCIAL CRISIS During the financial crisis, growth companies outperformed the broader market by a wide margin The S&P 500, which had given an average return of 4 1% during the previous five years, had a negative return of 37 9% during the financial crisis The Russell 1000 Growth Index, which had given a return of 12 8% per year during the previous five years, managed to give a positive return of 11 3% during the crisis The main reason behind this performance was that growth companies had stronger fundamentals than stable businesses They had sound management, great brands and loyal customers Therefore, even in a recession, the demand for their products remained steady As a result, their stock prices rose In fact, the average return of the Russell 1000 Growth Index during the financial crisis was more than double the return of the S&P 500 Although growth stocks had outperformed the broader market, the performance of individual growth companies varied widely The problem with growth companies is that some of them do not have a clear "road map" to growth They may have a good product, but they do not have a clear strategy to cash in on the product This was the case with Palm, which had a great product, but it was not able to capitalize on it and its stock price fell by more than 75%