A wise man once said, “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”

The author of this quote is Benjamin Graham, mentor to Warren Buffett.

Graham understood investing. He stressed knowing a company’s intrinsic value. He focused on the business, not the stock.

Graham often shunned the term “investor.” Most so-called investors were truly nothing more than speculators. They were individuals looking for a “shortcut” to superior returns.

He understood that most investors lacked patience. They lacked discipline. They lacked the basic tools needed to succeed.

In essence, Graham understood human nature.

He called attention to the airline industry. The 1940s and ‘50s gave birth to commercial air transportation. Everyone knew the potential. It didn’t take fancy analysts in pinstripe suits to forecast enormous passenger growth rates.

Before long, airline stocks were “it.” Cocktail parties offered the sound analysis. Soon, every portfolio needed Pan Am.

But even simple puzzles have many pieces. Profits require much more than double-digit growth rates.

Fuel costs and fierce competition crippled industry margins. Labor disputes added fuel to the fire.

Passenger growth rates, indeed, proved true. But the business never offered significant returns. As Graham wrote, “In 1970, for example, despite a new high in traffic figures, the airlines sustained a loss of some $200 million for their shareholders.”

And that’s the point of the opening quote. A great growth story does not inevitably equate to a great business.

What was it that English entrepreneur Sir Richard Branson said? “If I was a businessman, or saw myself as a businessman, I would have never gone into the airline business.”

Good point. Let’s hope, dear reader, you don’t make the same mistake.

So take this. Yesterday, they offered you Pan Am. Today, they’re serving up Google. Same suits…same premise.

“Growths rates and more growth rates,” they scream. Everyone uses Google.

Maybe they do. So what?

“Everyone” used to use Yahoo. That’s until Google came along. And within a lunch break, everyone switched to Google. It didn’t cost much. It didn’t take Madison Avenue.

In fact, it cost less than your lunch. It cost nothing.

Google may make a great growth story. But does it make a great business?

I’ll let you decide.

Until next time,
Christopher Hancock
September 21, 2007

P.S.: To make money in the stock market, I mean REAL money, you can do two things: Find the Googles before Wall Street (not as impossible as it sounds) or invest in under-the-radar opportunities that offer BOTH growth and great businesses.

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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