Consider two investments which are being considered for a long term investment (10 years or more).
Investment one has a top line growth rate of 40% (i.e., expected to grow its revenue by 40% per year every year), but is expected to lose money for the next 10 years, (albeit decreasing the rate at which it loses money over time), as it funds expansion and plans to grow market share over the next decade.
Company two has 10 years of established earnings, a reasonable dividend of 3% per year, and grows its earnings at a respectable 10% clip each and every year for the next 10 years. The company earns enough to repay the investment (dividends included) over approximately the ten year window of the prospective investment.
I don’t know about you, but investment number two is the one which appeals to me, despite the obvious story company 1 is able to tell investors.
All else held equal, I would argue that in this current market, company one is likely to be the real growth trap for long-term investors, given the lack of balance sheet stability and the heightened risk such a company would pose to an investor, considering its sensitivity to economic changes (both companies would likely take a hit in a downturn, however company 1 is so tethered to its growth rate, that the resulting dip would likely be a disaster for its valuation).
In this market, companies which fall under category one are the ones which are being highlighted and touted as “great” long-term investments, with the “oldies but goodies” largely ignored. Invest smart.
Invest wisely, my friends.
