One of the oldest sayings on Wall Street is, "Let your winners run, and cut your losers". It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. There are two ways investors can fake themselves out of the big returns that come from great growth companies. The first is waiting to buy the stock when it looks cheap. Throughout its long rise from a split-adjusted 1.6c a share Wal-Mart has never looked cheap compared with the overall market. Its price:earnings ratio rarely dropped below 20, but Wal-Mart’s earnings were growing at 25% to 30% a year. A p:e of 20 is not too much to pay for a company that’s growing at 25%. Any business that can manage to keep up a 20% to 25% growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years. The second mistake is underestimating how long a great growth company can keep up the pace. In the 1970s I got interested in McDonald’s. A chorus of c...
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