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Core of the Story

The sales pitch for growth stocks is easiest to make in buoyant markets when investors believe that growth is not only likely but also inevitable. In such optimistic times, investors are willing to listen to growth stories, and there are at least three themes they will hear:

  • If you want big payoffs, buy growth stocks. If you want cash flows today, buy bonds. The allure of equity is that companies can grow over time, doubling or tripling revenues and earnings. While you may not receive an immediate payoff in the form of dividends from such growth, you will share in the success as the value of your stockholding increases. For the high returns that can make your small portfolio into a large one and you from a poor to a wealthy individual, you should be buying growth companies.

  • If you buy the right growth companies, there is no additional risk. Anticipating your concerns that growth companies are riskier than mature companies, proponents of growth stocks will argue that there is no additional risk if you pick the right growth companies to put your money in. After all, there are companies like Coca-Cola, Microsoft and Wal-Mart that seem to be have found the key to delivering consistent growth. If you can find common patterns or themes across these companies, you can look for them in the younger growth companies of today.

  • Buying growth stocks is more tax efficient. Historically, price appreciation has been taxed at much lower rates than were dividends. Since the bulk of the returns on high growth stocks take the form of price appreciation, not only can you delay paying until you sell your stock taxes, but when you do, you will pay less.


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