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Step 2: Valuation

In the late 1990s, growth investors didn't spend much time worrying about valuation. That's not as ridiculous as it sounds because growth stocks often trade at levels unjustified by their fundamentals during their glamour phase. It's usually slowing growth rather then valuation that knocks them off their pedestal.

For instance nobody cared much when Cisco Systems's share price reached absurd valuations in 1999 and early 2000. It was the news that Cisco couldn't achieve its expected growth rates that brought its share price down from $70 to the mid-teens. Step 9 (red flags) describes strategies for detecting slowing growth before the news sinks the stock price.


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