Updated: Oct 6, 2018
Let's start with a simple question: is growth good or bad?
The answer seems obvious, a resounding, "Good!"
Well… it depends.
Growth, in itself, is not inherently good or bad. It just is.
Under the right conditions though, growth is incredibly important. Under the wrong conditions, however, it can be detrimental.
Before putting some context around this idea, there are two types of growth and we'll mainly be talking about the latter.
1) Inevitable growth - (Ex. A tree or a child's limbs grow longer.)
2) Capability growth - (Ex. Your biceps increase in size after lifting weights, your company hires more people, you challenge yourself to learn a musical instrument.)
In this second type of growth, "capability growth", there is an element of struggle. Without resistance, there is no progress.
Think of it. It's just the way things are. When you lift weights, you are literally breaking down the muscle so it can heal and become bigger and stronger. Without resistance, there is no progress.
Compare this to "inevitable growth" where things grow naturally. Here, we make efforts to limit this type of growth (Ex. Cutting the grass, shaving, etc.)
So there is this natural opposition between inevitable and capability growth. We can try to limit the former but we need to kick-start the latter to make progress.
Why Does This Matter?
I make the distinction because I think we are prone to lump these two types of growth together. We put no effort into growing up throughout our childhood so we project that onto other parts of our life. We think our cognitive abilities, our social skills, our attitudes, our lives are fixed; a result of our genetic code.
There's a book named Mindset: Psychology of Success that explores this topic.
The author is a Stanford psychologist named Carol Dweck and in short, she performs experiments with children and concludes something that is simple yet profound.
The finding is that our mindsets control our growth trajectory.
The first type of mindset is fixed. This is where the children believed they couldn't get smarter by trying harder. Their smarts were a result of their DNA. Kids with this mindset were more worried about protecting their self-image of looking smart rather than actually getting smarter. And this makes sense. If we believe we can't change, then we need to protect that piece of our fixed identity.
A fixed mindset is one of preservation, needing to protect yourself because you don't believe change is possible. So you either become defensive when someone challenges your insight or you become apathetic because that's just the way it is…you'll never be good at math.
The second type of mindset is growth. The children that displayed these characteristics believed their intelligence was fluid, capable of improving. These kids were not as focused on protecting their image of intelligence but on actually retaining and understanding information. They weren't afraid to look dumb because they could always improve and get smarter.
A growth mindset is one of exploration, needing to seek out truth and improvement. If you get challenged, you'll be more likely to say, "That's a good point, let me think about that" because your intelligence isn't fixed, it's not part of your identity. Your identity, instead, is more tied to improving.
Children with the growth mindset were more likely to achieve higher test scores and be more successful later in life.
The fixed mindset, I believe, is a result of not making the distinction between inevitable and capability growth. Inevitable growth is fixed, that's just the way things are. But capability growth is dynamic, we hold an element of control. Therefore, when we focus on what we can control, we'll improve.
So Growth is Good?
After all this talk of growth mindset, you might be thinking, "So how can growth be bad?"
Like I was saying at the beginning, growth is indifferent. It's how you leverage it that determines whether it is good or bad.
Let's take a business example.
You are the owner of an e-commerce company named "Nozama." Your mission is to, "Sell everything at the lowest prices, period."
Your first year in business, sales grow a mind-boggling 1,000%. That's awesome, right!?
Well, what about profits?
If you are selling products at such low prices that you are losing money on each sale, you'll eventually run out of money. There is an old business joke that goes something like, "We lose money on every sale, but we make up for it in volume."
Growth for the sake of growth can be detrimental. There needs to be a purpose behind it.
Growth with a Purpose
In today's world of technology, a lot of companies appear to be unprofitable. After accounting for all their expenses, it looks like they are losing money on each sale. But why would they do this?
One approach is to sell at a loss to get a customer in the door and then upsell and cross-sell other products. This is particularly relevant with software companies. But as long as you are acquiring a customer for a lower cost than he or she is worth to you in the long run, then you should be good.
Let's say you acquire 50 new customers by running an ad on TV for $10,000.
Your acquisition cost per customer would be $200 (10,000 / 50).
If, after five years, each of those customers resulted in $500 of profit, you come out ahead! (500-200 = 300!)
However, it looks weird initially because you spent $200 to get a customer that hasn't paid you anything yet.
It can be the same way in life.
Capability growth can be difficult and at the start, we won't see any of the benefits.
Let's use a simple example.
You have a full-time job but you think it would be good idea to get your MBA to fast-track your career growth. Initially, you won't see any benefits of tacking on more work for yourself, but you have a purpose that will be worth it in the end.
If you had just sought to get a degree that wouldn't help you at all in the long run, that is similar to the idea of growth for growth's sake.
*[Tangent, feel free to skip] - Albeit, the life situation is different, because more knowledge can be useful, even if it doesn't directly benefit your career. In a business, there are capital constraints to stay afloat. In short, if you sell at a loss, you'll go out of business. I guess you could lose your job if you got your PhD in biology at the same time. [end tangent]
Growth requires purpose to be most effective. Without direction, growth actually can become a detriment.
What Does This Have to Do with Investing?
There are several reasons why understanding growth is important.
To start, a growth mindset will empower you to actually become a better investor. Don't believe the lie that you can't learn how to invest by yourself.
Next, it's important to understand the dynamics of growth in a business context.
For instance, one of my favorite things to look for in a stock is high sales growth. But I've been wondering, at a fundamental level, why does this work?
For one, demand is strong. Customers like the products and there is a big enough market to support the high growth.
Two, innovation is present. Whether that be disruptive pricing, technology or marketing wizardry, something is resonating with customers.
Three, employees are being stretched. If you work in a company that is growing quickly, and you aren't, soon that'll catch up to you. Capability growth is challenging and I would rather invest in a company whose employees are constantly being tested rather than sitting around, waiting for the next big thing to happen.
Getting better at playing the piano, learning a language, and becoming more emotionally aware are all examples of capability growth. It's hard. It takes discomfort, struggle and pain. But the result is an increase in capability, an added value.
It starts with the belief that your capabilities are malleable but is supercharged when you have a purpose behind the growth.
Then you become dangerous, real dangerous…in the best possible definition of the word.