Why was Benjamin Graham cautious about "growth stocks"?

Answer:

Okay, regarding Graham's cautious stance on "growth stocks," I'll share my understanding to help clarify things.

Why Was Graham So Wary of "Growth Stocks"?

Think of going to a fruit market to buy apples.

Stall A has apples that are big and red, ready to eat right now. The quality is visible and tangible. The seller asks for $5 per pound. You know the market price for such apples is around $5 – good value.
Stall B has apples that currently look small and green, completely inedible. But the seller tells you: "These are grown from magical seeds! In three months, they'll become sweeter than honey and double in size! Future value is $50 per pound! Buy now for only $20 per pound."

Which would you choose?

Most cautious people would choose Stall A. And Graham was that most cautious buyer. For him, investing was like buying apples from Stall A, while buying growth stocks was often like buying those "future apples" from Stall B.

He stayed suspicious of growth stocks primarily for these reasons:

1. Core Principle: "Margin of Safety" is Challenged

This is the cornerstone of Graham's investment philosophy. Understand this, and you understand it all.

What is Margin of Safety? Simply put, it means the price you pay should be significantly below the true value of the asset. For example, if a company's intrinsic value is $10, it's best to buy it for $5 or $6. The $4-5 difference is your "safety cushion." If something goes wrong and the value drops from $10 to $7, because you bought cheaply, you still don't lose money.
What's the Problem with Growth Stocks? Growth stocks typically come at very high prices. The market, anticipating high future growth, has already bid up the price significantly. When you buy, the intrinsic value might be only $10, but the stock price could be $50 or even $100. 90% or more of the price you pay is for that elusive, uncertain "future."

In this case, your "Margin of Safety" is almost zero, or even negative. If the expected future growth doesn't materialize, the stock price can plummet, leaving you "holding the bag" at the peak with no buffer.

2. The Future is Full of Uncertainty

Graham was a very pragmatic person. He trusted data and facts much more than stories and predictions.

"Growth" is Often Just a Promise: Will a company actually sustain high growth in the future? There are too many variables: strong competitors may emerge, technology can be disrupted, management can make mistakes, industry policies can change... Any "black swan" event can shatter the growth narrative.
The Pitfall of Predictions: Wall Street analysts love predicting the future, but history shows these forecasts are notoriously inaccurate. Basing your hard-earned money on someone else's unreliable prediction, in Graham's view, is extremely dangerous. He preferred to focus on tangible things like a company's current profitability and asset base.

3. You Pay Too High a Price for "Growth"

The market is efficient. A widely recognized "growth stock" won't be cheap – everyone already knows it's promising.

It's like everyone knowing a house in a certain area will have a subway built nearby soon; the price has already skyrocketed. Buying now means you've essentially priced in all the future benefits for the next decade. You're not getting a bargain; you're paying a premium for mass optimism.

Graham believed that paying an excessive price for future growth is speculation, not investment. Your profit no longer depends on the company's fundamental value, but on whether you can find the next "greater fool" willing to pay an even higher price.

So, Did Graham Completely Oppose Growth?

Not at all! This is a common misunderstanding.

Graham didn't dislike "growth" – who doesn't like a growing company? What he truly opposed was "paying an excessive price for growth."

If a stock with solid growth potential was available at a very cheap price due to temporary market panic or neglect, offering a sufficient "Margin of Safety," Graham would be very willing to buy it. We might call this the "Growth At a Reasonable Price" (GARP) strategy today – it's very much an extension of his philosophy.

To Summarize

Think of Graham as an experienced, somewhat conservative pawnbroker.

He cares solely about what the item is worth right now, not your stories about its glorious past or promising future.
He wants to buy something worth $1 for 50 cents, leaving ample room for error (the Margin of Safety).
A growth stock is like an antique studded with "future gemstones" – expensive, but no one can truly tell if those stones are real or what they'll be worth later. Too risky – he avoids them.

Therefore, Graham's caution towards growth stocks stems from his unwavering commitment to the core principle of his system: the Margin of Safety. He sought that hard-won certainty in an uncertain world.