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Dirty Little Secrets with Growth Stocks

For the layman, financial planning has always been a tricky endeavor. Although professionals are available to help with this process, in many instances individual investors must follow a caveat emptor philosophy when it comes to decision making. However, even when investors are cautious and attempt to make the best decisions, problems can arise as a result of basic misunderstandings. For instance, the term “growth stock” seems to imply that growth is a prominent and notable feature of these investments. As such, based on this implied understanding, investors place their confidence in the fact that these investments will grow and produce substantial returns. Interestingly however, when one looks at the history of specific investments labeled as growth stocks, there is ample data to suggest that this term implies much more than it actually delivers.

Growth Stocks—An Overview

With the realization that the term growth stock may indeed be a misleading misnomer, it is imperative to understand how this situation occurred. A review of what has been written about the basic definition of growth stocks reveals that these investments are simply stocks that are projected to grow at a relatively rapid pace in a relatively short time period. Unlike dividend stocks which pay a specific amount each quarter, “Growth stocks don't pay dividends; they grow revenues and earnings by 20% to 50%, and are rewarded by the stock market with P/E ratios of 30 to 50.”[1] When framed in this perspective, growth stocks appear to be a panacea for all investors. With the potential for high earnings in a short period of time, growth stocks should be able to provide investors with a solid foundation for building a nest egg.

Arguably, growth stocks sound too good to be true. Unfortunately, this is because in most instances these investments do not live up to their promise. Analysts examining ongoing trends in growth stocks note that there are a number of pitfalls when it comes to these investments.[2] In particular analysts report that while some growth stocks can produce notable earnings in a relatively short period of time, others often fail to perform as well. In order to understand why this is so, investors need to consider how these investments are structured and evaluated by financial planners.

Currently, there are five common metrics that are used to evaluate and classify growth stocks: per-share earnings, cash flow, sales, per-share tangible book value and per-share dividends.[3] While these metrics provide solid benchmarks for assessing the growth of a particular stock, they are not always viable predictors of how much growth will be achieved. To illustrate this point, analysts report that of the five metrics, per-share earnings are most commonly correlated with shareholder returns. However when the 40 top growth stocks from the S&P 500 were examined with respect to this specific variable, the top performers “delivered an average annualized return of 22.8%, versus 5.1%” for the lowest performers.[4] What this effectively suggests is that what can be classified as a “growth stock” presents a wide range of variation on return.

In addition to the fact that there is a wide spectrum of variation that exists when it comes to the performance of these investments, analysts also note that a review of growth stocks and value stocks indicates that “growth stocks have underperformed value stocks over the past 14 years—and over the past 80 years.”[5] Experts further note that because growth stocks have such high projected growth rates they often receive higher valuations than value stocks. In the end, this process only serves to drive down the valuation of value stocks, making them more viable investments for purchase.[6] Thus, even though a growth stock may have the potential to yield substantial results, there is little evidence to suggest that these investments will provide investors with the financial success they are seeking.

Putting Theory Into Practice

With a general overview of growth stocks and their pitfalls elucidated, it is now possible to put theory into practice and examine how growth stocks have failed to live up their hype. To accomplish this goal, it is helpful to consider the historical development of both dividend stocks and growth stocks. Only by examining the actual returns that have been garnered on these investments will it be possible to demonstrate the paradox that is created by using the term “growth stock.”

A critical review of current literature on growth and dividend stocks shows that Jeremy Siegel examined the performance of both IBM (a growth stock) and Exxon Mobil (a dividend stock) from 1950 to 2003. According to Siegel, based on the projected growth value of IBM stock, investors that purchased IBM stock in its early days should have seen substantial returns on their investments when compared to the dividends that were being paid by Exxon Mobil during the same time period. Surprisingly however, this has not been the case. While Siegel reports that both stocks did notably well during this time period, the total return for Exxon Mobil was much higher over the long-term. Specifically, Siegel notes that:

…Investors in Jersey Standard earned 14.42 percent per year on their shares from 1950 through 2003, more than half a percentage point ahead of IBM's 13.83 percent annual return. Although this difference is small, when you opened your lockbox fifty-three years later, the $1,000 you invested in the oil giant would be worth over $1,260,000 today, while $1,000 invested in IBM would be worth less than one million dollars, some 25 percent less.[7]

As such, if the dividend from Exxon Mobil were reinvested each quarter, it would have cost the investor $13 to buy $1 of earnings in the company. In comparison, IBM investors would have to pay approximately $27 for the same $1 of earnings.[8]

Conclusion

Synthesizing the data, it seems reasonable to conclude that the term “growth stocks” engenders significant misconceptions about the performance of these investments. While it is evident that growth stocks do indeed demonstrate significant returns, when the returns they yield are compared to dividend stocks, there is no real evidence to suggest that growth stocks provide a clear cut advantage for the investor. Thus, investors must be willing to look beyond their perceptions of what they believe growth stocks can achieve. Clearly “growth stocks” are not always what they appear to be.

Bibliography

Dodge, Dan. “Microsoft.” Dan Dodge, [2006]. Accessed September 12, 2006 at: <http://dondodge.typepad.com/the_next_big_thing/2006/04/microsoft_growt.html>.

Paplava, Jim. “The investment constant.” Financial Sense Online, [2005]. Accessed September 12, 2006 at: <http://www.financialsense.com/stormwatch/2005/0408.html>.

“The problem with growth stocks.” Dow Theory Forecasts, 61(7), (2005): 5-9.

Siegel, Jeremy J. The Future for Investors: Why the Tried and True Triumph Over the Bold and the New. New York: Crown Business, 2005.

© 2006 Go-Essays® All Rights Reserved

Salvaging Russia’s Foreign Investment Problems

           As the world’s financial institutions pushed for globalization, and as the free market mantra in the early 1990s prevailed, countries following policies pursued by the International Monetary Fund and the World Bank were left with nothing to show for their efforts except a complete financial collapse. The case in Russia epitomizes this failure. As the country broke away from its communist regime and pursued liberalization policies, capital flight escalated to insidious levels; indeed, economists report that the losses totaled $15 million dollars a year (Stiglitz 2002). This occurrence in and of itself was enough to strip the economy of its power, but coupled with other issues, such as prevalent bureaucratic corruption and comprehensive investment ambivalence toward Russia, foreign capital was certainly not an integral aspect of Russia’s economy (Bonell 2001). Since this horrendous financial blunder, Russia has been trying to recuperate from the disastrous effects.

          Thus, with the realization that the country is still suffering from low investment levels which are necessary to stimulate the economy, it is crucial to devise a pragmatic strategy that addresses Russia’s investment dilemma. Some options, such as working with China or Japan in the energy sector are attractive, although recent reports have noted that Russia is in the process of drafting new laws that would “limit foreign investments in ‘strategic sectors’” (Agence France-Presse  2006) of the economy. This move is both arbitrary and monopolistic, and such a law will not help Russia stimulate its level of investment. Provided that it is crucial for Russia to maintain its relations with Japan (Ivanov & Smith 1999), a more practical approach for the respective nations is to devise a bilateral investment treaty (BIT) on the energy sector. Countries that enter into these agreements accept foreign participation in their economies (Lopez-Perez & Diaz 2001) and, since the 1950s, BITs have been vigorously pursued by developing and non-developing nations.

          While it is not within the scope of this report to provide an overview of BITs, it is necessary to give a brief look at what these treaties cover. Peterson (2004) noted that while BIT’s encompass a number of different elements to stimulate a country’s economy, there are some general features which have emerged. In particular, the treaty will include provisions on treatment (for example, “fair and equitable treatment), standards of treatment (National treatment or Most-Favoured Nation); protections against expropriation or nationalization, and recourse to dispute-settlement (state-to-state and investor-to-state)” (p. 2). In addition, the treaties stipulations may include protection clauses for civil wars and social/political unrest. The economic sectors that the BIT will cover are not limited in scope; indeed, any sector, unless otherwise stipulated in the terms of the agreement, can be included within the BIT (Peterson 2004).

          Fundamentally, bilateral investment treaties are designed to increase and protect foreign direct investment (FDI). Peterson (2004) reports that the underlying principle that sets these treaties in motion is due to the fact there “there is a straightforward expectation that the

treaties will encourage new investment, which will, in turn, contribute to the economic development of the host state” by increasing investment flows (Peterson 2004). The plethora of research on FDI attests to its importance (ADO 2004; Fischer 2000; Peterson 2004), especially as the world moves to a global, interdependent economy. In the case of Russia and Japan, FDI levels have not had a significant macroeconomic impact because of market restrictions, but if these were broken down, higher FDI flows would significantly impact the respective economies (Fischer 2000).

          However, the factor determining the applicability of a bilateral investment treaty between Japan and Russia is the level of attraction in foreign investment between these respective countries. Put simply, it must first be discerned why Japan would want to invest in Russia and Russia in Japan. To this end, research has provided evidence that both countries would benefit greatly by such a relationship. Japan’s technology sector, in particular, could greatly expand by expanding on the entrance into European markets whereas Russia could increase imports on products such as timber, non-ferrous metals, marine products, and coal (Ivanov & Smith 1999), but the energy sector is especially attractive since Japan is dependent on Russia for oil resources. Moreover, the availability for joint projects within this sector is abundant. Gas can be tapped and transported to the Irutsk fields in Siberia and brought to the Asian markets, drilling for gas and oil can occur on Sakhalin, and Fischer (2000) notes that “there can be mining and petroleum refining projects in Siberia, and the joint exploitation of wind and solar energy on the disputed Kuril Islands” (p. 421). The author goes on to note that the region of Eastern Siberia could be developed into an energy and raw materials base for the Southeast Asian economies (Fischer 2000), but this can only happen under the direction of an agreement.

          While there remains some ambiguity over Russia’s current move to limit economic cooperation within the energy sector, economists emphasize that the energy sector is a central area of bilateral cooperation (Ivanov & Smith 1999). The Sakhalin gas and oil projects have attested to this fact, as this effort has already brought in a number of different investors such as Sodeco and Rosneft' and Rosneft', and, naturally, these projects will lead to an increase in trade. There have been some discussions regarding the possibility of energy exploration in other areas of East Asian proveniences, which serves to bolster the possibility of the establishment of a mutual relationship (Ivanov & Smith 1999), and the advantages for both countries are extensive.

“Russia-Japan cooperation will be enhanced by the revival of volumes of transit transportation from Japan to Europe and Central Asia over the Trans-Siberian Railway, which will be modernized along with ports, roads, and other infrastructure. This will contribute to Russia's internal integration as well” (p. 224).

          Some policy instruments that would assist in regulating this process could include the establishment of an investor information system, the creation of an FDI agency and special incentives for SDI in designated constituencies and/or industries (Fischer 2000). In regards to the “special incentives” mentioned, there are diverse options that the governments could create. For example, Fischer (2000) explains that China and India offer “generous tax holidays for joint ventures and wholly-owned subsidiaries in high-tech industries with high export, employment, technology and local sourcing content” (p. 482). On the other hand, sectors that are focused on domestic products (or on serving local industries) are excluded from the incentives mentioned above because the government wants to have an edge in brining in foreign capital. Financial incentives are not the only option though. Russia and Japan could also establish non-financial incentives that could be measures to improve the overall infrastructure of the country.

          More than 50 years ago, Japan and Russia negotiated on a BIT agreement in the fishery sector, as each country came to the realization that they had to share the same resources—particularly the Sea of Okhotsk and the Sea of Japan—and this treaty has proved to bring economic cooperation between the respective nations (Ivanov & Smith 1999). Given that this economic tool has been useful in the past, a new BIT in the energy sector of the nation’s economies will ultimately prove to be a pragmatic strategy. Moreover, the opportunity for a stronger and centralized economy offers numerous benefits that both nations need to stimulate financial capital.

References

Agence France-Presse. (2006). Russia plans limits on foreign investment in 'strategic' sectors. Industry Week. Retrieved March 6, 2006, from http://www.industryweek.com/ReadArticle.aspx?ArticleID=11555

Bonnell, V. E. (2001). Russia in the new century: Stability or disorder? Boulder: Westview Press.

Lopez-Perez, J. & Diaz, M.F. (2001). Contribution of BITs to Cuba’s foreign investment program. Law and Policy in International Business. 32(3), 529

Fischer, P. (2000). Foreign direct investment in Russia: A strategy for industrial recovery. New York: St. Martin's Press.

Foreign direct investment in developing Asia. (2004). Asia Development Outlook. Retrieved March 7, 2006, from http://www.adb.org/Documents/Books/ADO/2004/ADO2004_PART3.pdf

Ivanov, V. & Smith, K.S. (1999). Japan and Russia in northeast Asia: Partners in the 21st century. Praeger Publishers: Westport

Peterson, L. E. (2004). Bilateral investment treaties and development policy-making. International Institute for Sustainable Development. Retrieved March 6, 2006, from http://www.iisd.org/pdf/2004/trade_bits.pdf

Stiglitz, J.E. (2002). Globalization and its discontents. New York: W.W. Norton Company

© 2006 Go-Essays® All Rights Reserved

Gilman's Critique of Intellectual Patriarchy

          Feminist authorship has been an apt forum for protest throughout literary history.  By its very principle, the notion of a female writer flies in the face of conventional gender expectations, with a prohibitive patriarchal perspective long depriving women of educational, social and occupational opportunities.  In Charlotte Perkins Gilman’s 1899 narrative, “The Yellow Wallpaper,” the narrator employs an almost absurdly servile sentiment and an emotional bluntness that, in concert, constitute an articulate critique of society’s rampant sexism.  The narrator, a woman who suffers from boredom and depression, is quite clearly an well-adjusted and self-aware individual who is, therefore, prone to introspection, ambition and intellectual inquisitiveness.  These are all qualities that were regarded in her time as distinctly male, with the socially proscribed roles of women providing no outlets for such inclinations.  By satirizing the cruel condescension and arrogant disregard of men toward these impulses, Gilman submits a sharp and well-conceived criticism of gender inequality.

          Her marriage serves as a perfect vessel for exploration of the imbalance between the sexes, with the extremity of her husband John’s chauvinistic proclivities starkly highlighting the story’s central thrust.  John is a caricature of the haughty, dismissive and unconsciously malicious 19th century male, demonstrating callously the ill-treatment to which female emotion was subjected.  A physician, John recommends that his wife sleep all day in order to revive her ‘nervous’ health.  The narrator, for at least the first half of the piece, characterizes frequently her depression, her misgivings about her life and her grievances with the ‘big room’ all as personality faults, encouraged in this belief by her husband.  She remarks, with no small degree of irony, that John “is very careful and loving, and hardly lets me stir without special direction.”

          Such special direction includes an insistence that she cease thoughts of a career, adventure, visits with stimulating acquaintances and especially writing.  These prescriptions only drive the woman further into depression, invoking a sense of guilt over the inconvenience of her condition to her loving husband.  She laments at one point, “I meant to be such a help to John, such a real rest and comfort, and here I am a comparative burden already!”  It is the author’s intent to draw a response of disgust from the reader here, effectively forcing a recognition of the institutionalized prejudices which barred women from even expressing themselves emotionally, let alone growing according to their wishes.  The narrator’s description of her sister-in-law provides a telling foil to her own crushing malaise.  Noting it in explicit contrast to herself, the woman observes that “she is a perfect and enthusiastic housekeeper, and hopes for no better profession. I verily believe she thinks it is the writing which made me sick!”  This provides a useful point of inflection as to the limitations truly placed upon women.
 
          When the metaphor of the yellow wallpaper comes into play, shapeless and revolting but quite visibly falling away from the walls, its representation of female docility and domesticity is clear.  Here is where the author not only cites a problem, but offers a solution.  First, it is reflected in her obsession with a figure, theretofore unseen, now becoming gradually more apparent within the tasteless wallpaper pattern.  The narrator notes that “the faint figure behind seemed to shake the pattern, just as if she wanted to get out.”  Soon, the woman that has consented to her husband’s poor medical advice, disinterested emotional partnership and intellectual disrespect is no longer. 
 
          Fixated on the figure behind the pattern, the narrator begins to see her everywhere from her isolated spot in the room.  In response, she commits to tearing the yellow wallpaper recklessly aside, declaring symbolically a liberation for women forced to hide behind a hideous and repetitive pattern of bland, unimaginative and unfulfilling lives.  When her husband, so stolid and emotionally inconsiderate through the story’s duration, faints at the site of his emotionally disturbed wife manically shredding the room’s wallpaper, there is a crucial shift of roles.  The husband has shown himself to be vulnerable, and his subjugated wife is for the first time beginning to feel the power of self-determination.

          The author’s message may still have a great deal of relevance, more than a century after its composition.  The narrator’s emotional dilemma is perhaps still more common than one might hope or imagine.  Detained in a cyclical pattern of uninspired banality and its resultant disruption of motivation, the woman in Gilman’s story offers an exemplar of resistance.  For the reader, her husband’s infuriating absence is ultimately countered by a rewarding confrontation in which he is perhaps finally made to understand that which he refused to see for so long.  In the resolution, Gilman has provided an allegory which is equally compelling in its treatment of man and woman. 

© 2006 Go-Essays® All Rights Reserved

Factors Leading to the Civil War

The legal case study of Dred Scott v. Sanford serves to elucidate the fundamental causes of the Civil War through an analysis of societal transformations. The friction created through Supreme Court rulings, most notably within the Missouri Compromise of 1850 and federal law, as well as the divide that occurred between slave states and free states provided the initial thrust towards hostile conflict. America’s ideological thoughts on slavery began to change, too. Indeed, as the abolitionist cause began to grow in strength and size, and as Abraham Lincoln spoke of freedom for all men and women, war began. Thus, the crux of the conflict that led to the Civil War was slavery, and Dred Scott v. Sanford finally brought the immorality of the institution to America’s consciousness. 

The first cause of the Civil war can be viewed through the territorial issues that slavery eventually brought to Missouri and California. In the former case, Missouri was entering the Union when there was a balance of both free and slave states (eleven, respectively). However, because Missouri was a slave state, there entrance would disrupt the balance in Congress (1). A compromise was made by creating Maine and labeling it as a free state, which thus kept the balance of free and slave nations, and the Missouri Compromise was born. With the Mexican-American War over, the United States once again had to deal with the issue of territory and slavery in California, but as the author of the text notes, “the Compromise of 1850 failed to resolve the question of how a nation committed in theory to principles of liberty and equality could tolerate chattel slavery on its soil” (1). The moral question hovered over some of the most thoughtful leaders who would begin the abolitionist movement.

The abolitionist movement was growing with power in the North, changing some of the nation’s opinion on slavery which either led to the call the institutions complete elimination or opposition to the abolitionist movement. Naturally, the tensions here beseech conflict. And after the Dred Scott v. Sanford decision, which stated black men and women whether free or slaves “could never be citizens of the United States”, and that, furthermore, “Congress had no authority to abolish slavery in territories controlled by the federal government” (1), America’s    consciousness had seemingly been awakened to the immorality of slavery.

Even so, the movement against slavery had not been inclusive. Some of the people had opposed the movement towards freedom, as naturally the slaves provided their owners financial capital and cheap labor. Slaves were an economic tool that would further the white man’s capital. In others eyes, some began to see the disparate and unequal treatment slaves received from a nation that preached ‘equality and justice for all’, which has truly never been the case, and fought to eradicate the institution of slavery for a greater purpose. The heated debate on slavery had serious implications because America was built upon forcible work and labor, and those who were reaping the benefits were numerous and wealthy. They would not just give their slaves over because of some ‘ideological conscious growing movement’; no, they would fight to secure their way of life and their revenues.

In review of these problems, it is clear that the Civil War could not have been avoided unless slavery was to remain in society. Those who fought against slavery were as equally as passionate as those who wanted it to remain, and it was up to the national leaders to demonstrate and implement those fundamental with which this country was built upon.