Growth Rate and Valuation

growth is important becuase comanies create shareholder value through profitable growth. yet there is powerful evidence that once a company's core business has mature the pursuit of new platforms for growth entail daunting risk. roughly one company in ten is able to sustain the kind of growth that tranlates into an above-average increase in shareholder's returns over more than a few years.
consequently, most excecutives are in a no-win situation: eqty markets demand that row, but it is hard to know how to grow
----said by Clayton, Christensen. ( en, i donot know who the guy is)

the distrubition of firm sizes in industrizied contries like US is highly skewed--there are very few large firms and many small ones. so far no one has been able to explain the mechanism that lead to this distribution. like species: there are lots of ants, the combined weight of ants is larger than the combined weight of humans.

what does this have to do with the stock market? investors should pay attention to these distributions for three reasons---first, companies, like species, fit into nithes. thinking about these niches and how they change can provide some insight into a company's growth potential.

second, s strong body of evidence shows that the variance of growth rates is smaller for larger firms than for small firms (even though the median growth rate is fairly stable). further, growth for large companies often stalls, leading to marked share-price underperformance.

thirdly, investors often infer past growth rate into the future, leading to disappointing shareholder returns for companies that cannot meet the expectation. investors who are aware of patterns of growth may be able to avoide unfavorable expectation gaps.

FIND UR NICHE---
the idea that companies find niches is certainly not new. many aspects of competitive strategy literature in general and game theory in paticuar, address how and why companies should seek profitniches. the main message here is that environments and hence niches, change over time as the result of technigical development, regulatory shifts and industry entry and exit.
as a result, optimal firm size may not be fiexed for a particular industry, and comparing the valuations of companies with different economic models does not maksense.

some findings to share:
1 vairance of firm-growth rates decrease with size. median growth rates are stable across a large sample of US public companies that the vairance in growth narrows substantially. on one level, this oberservation is common sense--large companies represent a substantial percentage of GDP, so it is unlikely that they will outstrip it to any meaningful degree. the Fortuen 50 represent over 25 percent of the GDP.

2 the growth for large companies often stalls. once companies reach a sufficient sales leveal, they see thier growth rate stall. data show that comapneis often enjoy strong growth rate before making the top fifty but tend to have rather slow growth once they attain that group.

3 most industries follow an identifiable life cycle. early on, an industry tends to see substantial growth and entry, then exit and high economic return for survivors, followed by gradual growth deceleration. in mature stages, firms have muted growth and economic return returns close to competitive equilibrium.

a review of the evidence of firm size and growth rate suggests that investors should temper their growth expectations as companies get larger. but the reality is that investors tend to infer from the recent past and hence miss declining growth rs. firmt have achieved high growth in the past can get hih valuation, while firms with low past growth ae penalized with poor valutations.

to be continued.