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Conclusion

Every investor dreams about buying a young growth company and riding the growth to huge returns. There is no denying that growth can add value to a company, but it is not always true that higher growth translates into higher value. The value of a company will increase as expected growth increases, but only if that growth is generated by investment in assets that earn high returns on equity.

Even if a company's growth is expected to be value generating, its stock may not be a good investment if the market has overpriced growth. In other words, even the best growth company can be a bad investment if you pay too high a price and if the actual growth does not measure up to your high expectations. The essence of successful growth investing is to buy high growth companies at reasonable prices. In fact, a prudent growth investor will consider not only the magnitude of expected growth but also the sustainability of this growth rate—there is a tendency for high growth rates to converge toward normal levels over time—and the quality of this growth. Since growth companies tend to be risky, you will also need to control for risk in designing your portfolio.


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