When Genius Failed is an interesting read about the rise and fall of Long Term Capital Management, a hedge fund founded by Nobel Prize winning economists. It ended badly, which makes for interesting reading. The fund focused on arbitrage situations using a vast amount of leverage. There was a quote in the book where one of the economists described their strategy as picking up nickels the market had left lying around. After the failure of the fund, somebody amended the quote to include the oncoming bulldozer. The Long Term crew completely miscalculated the risks involved in their trades and paid the price.

There is an article in the most recent issue of the Economist about the rise of growth investing. It includes the following quote from a Merril Lynch strategist:

“When growth is scarce, it becomes more valuable.”

This is the perfect sales pitch. It's short. It seems to make sense. It's a positive message that doesn't ment ion the risks of following this strategy. Yes, growth stocks keep getting larger and larger multiples until they disappoint. When they disappoint in earnings or outlook, they get crushed and revert to the mean. There should be a caveat of, "Look out for the bulldozer when following this strategy."

I'm not against growth investing in principle. I just question whether now is the best time to be getting into growth stocks. I've written before about the super-multiples given to the growth darlings (RIMM, GOOG, AAPL, and AMZN). Disappointment seems more likely than a continuation of multiple growth at this point. Then again, maybe some trees do grow to the sky. Maybe a recession will not stop the American consumer. Maybe these companies can continue to grow at 50 times the rate of the economy as a whole. Time will tell.

SunTzu