Types of Growth and Growth Traps

Professor Greenwald, in Value Investing: From Graham to Buffett, discusses different types of growth and growth traps, which I found fascinating. Here’s a summary for fellow investors.

Types of Growth

Greenwald categorizes growth into three types: organic growth, accidental growth, and entering new markets.

1. Organic Growth: Driven by natural market demand (e.g., rising consumer incomes), not aggressive investment or market-share grabs.

2. Accidental Growth: Temporary surges from external shocks (e.g., COVID-19 boosting mask, test kit, and vaccine firms like Winner Medical and Intco Medical).

3. New Market Expansion: Diversifying into untapped sectors (e.g., Gree Electric venturing into EVs and smart manufacturing).
   
   

Greenwald stresses that all growth must be protected by competitive advantages—otherwise, it’s meaningless.

He also notes that in shrinking markets, firms with competitive advantages suffer most, while those in low-barrier industries face less impact—a counterintuitive but logical insight.

Growth Traps

Greenwald outlines three pitfalls:

1. Overpaying for Growth

   • Investors often overvalue high-growth stocks, yet data shows growth portfolios underperform the market globally.

2. Unassessed Growth Quality (ROIC ≤ Cost of Capital)

   • Companies may overestimate project returns. Investors must scrutinize whether returns justify costs.

3. Growth Without a Moat is Illusory

   • My key 2023–24 takeaway: Sustainable growth requires moats.

   • Example: Sunner Development (poultry leader with 700M+ annual output, full supply chain, and blue-chip clients) remains profitable even in downturns. Yet its ROIC (historically ≤23%) suggests moat isn’t dominant. Thus, quantitative + qualitative analysis is essential.