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The Dangers of Growth Manias

Wall Street’s mantra is “anything worth doing is worth overdoing,” and growth versus value is no exception. In the uncertain times of the last 40 years, growth-stock investing has twice been taken to extremes. In the early 1970s, Wall Street became enamored with one-decision stocks: Companies such as IBM, Xerox, and Polaroid were projected to grow at above-average rates indefinitely, and analysts believed that stock valuation was irrelevant. Investors merely had to make the one decision to purchase and hold. Of course, they were blindsided by the 1970s inflation that drove up expenses faster than revenues. Rather than growing, profits declined and so did stock prices, as much as 80 to 90 percent in many cases.

In the second episode of growth stock mania, the advent of the Internet drove huge demands for technology products. On top of that, as the year 2000 approached, corporations had to deal with the dreaded Y2K issue and the fear of global software malfunctions. It was a perfect storm for the demand of technology products and services. However, January 1, 2000, came and went, leaving behind a tremendous supply of unneeded products and services. The result? Stock price declines of 80 to 90 percent for many.

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