Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
you’re playing in a game, the only place you’re completely safe is at
home plate,” he explains. “If you’re on first, second, or third, you
might not get back home to score. The only place you’re 100 percent
safe is at home. Most people in this world think of cash as home plate
in the game of investing. If they hold stocks or other investments,
they never feel they are completely safe until they have turned their
money back into cash. My feeling is that the only time I feel comfortable
is when I’m in stocks. Cash is the unsafe place to be. Stocks are
the permanent place. That’s where the returns are. For many people,
this thinking is turned around. I admit I’m guilty of thinking outside
the box. But if you stop and think about it logically, you realize that
over the long term, stocks have been the best investment you could
ever make. They are your home plate.”
Davis has a similar view of bonds. He always starts out with the
premise that any investor can take his or her cash and put it in a
zero-coupon bond that will compound free of interest rate or default
risk through maturity. “That, in a sense, is the bogey of an equity
investor,” he maintains. “Stocks, in my view, also print a coupon, just
not on a certificate. It is a mystery coupon. Equities are just another
form of investment that compete with the risk-free rate of return you
can get in a zero-coupon bond. My job is to analyze companies and
figure out ahead of time what kind of coupon they’re going to print,
not this quarter or this year, but one, five, ten, or twenty years down
the road, just like a bond.”
Given that scenario, Davis is still much more optimistic about stocks
than bonds. The reason? Over the years, stocks have outperformed
bonds by about two to one. Granted, in certain decades, such as the
1970s, even ultrasafe bank certificates of deposit outperform both
stocks and bonds. In the mid-1980s to early 1990s, bonds did as well
as, if not better than, stocks. But over long periods of time, stocks
have historically made investors the most money. “Part of the problem
with comparing the performance of most bonds and CDs is that you
face reinvestment risk,” Davis adds. “That’s why I use zero coupons.
You lock in the coupon rate, as long as you hold on until maturity.
Obviously, that risk-free rate is always changing with interest rates.
That’s why multiples can expand and contract with the level of interest
rates, because you’re competing, at least theoretically, with this riskfree
rate.”
The growth investor’s job is to figure out what that “phantom” risk-
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