(4 of 10)
Each of these companies has one prime asset: inventive brains. The ability to develop new ideas and products is more prized today than such old measuring rods as a stock's book value. To Sherman Fairchild, the reasons for buying growth make good sense. When he decided to buy stock in Minnesota Mining & Manufacturing Co., which was a growth stock ten years ago and still is, he called up the Wall Street office that he set up just for investment purposes. "They asked me if I didn't want to see the balance sheets of the company," says Fairchild. "I said no, I've met their people, and that is good enough for me. Everyone I met seemed to know his business, what the company objectives were, and how they proposed to get there. Why look at the books? In growth companies, you need people with vision and organization." The new growth and glamour stocks, selling at up to 100 times earnings (blue chips average a mere 16 times earnings), are of such dubious value by older stand ards that Wall Street has its own jokes about them. Jack Dreyfus, head of the $109 million Dreyfus Fund, recently satirized the glamour business: "Take a nice little company that's been making shoe laces for 40 years and sells at a respectable six times earnings ratio. Change the name from Shoelaces, Inc. to Electronics & Silicon Furth-burners. In today's market, the words 'electronics' and 'silicon' are worth 15 times earnings. However, the real play in this stock comes from the word 'furth-burners,' which no one under stands. A word that no one understands entitles you to double your entire score.
Therefore, we have six times earnings for the shoelace business and 15 times earnings for electronic and silicon, or a total of 21 times earnings. Multiply this by two for furth-burners, and we now have a score of 42 times earnings for the new company." Concluded Dreyfus dryly: "In today's market, studying securities can be fatal. While you're studying them, they're apt to double, and by the time you find you wouldn't have bought them in the first place they will probably have tripled."
A common complaint about growth stocks is that they rarely, if ever, pay dividends, thus do not provide a steady income. But, says Sherman Fairchild, "this question of dividends has been given much more importance than is due it. If a stock doubles in value every five years, it actually pays a dividend of 20% a year if you sell half your stock at the end of a five-year period, and it is taxed as a long-term capital gain. There is no point in making artificial distinctions between stocks that pay income and those that do not pay income but have growth."