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INTRO

Do you want to make money? Be an owner. Not a worker.

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By putting yourself in the tough position of being in control, you’ll quickly learn the mechanics of making money. And you have two choices.

          A: Start your own company

          B: Take a stake in existing companies

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In my opinion, the second choice tends to be preferable for most people. Why? Because once you buy a stock, you’re automatically a shareholder (an owner), and this approach allows you to benefit from the upside in a more passive way. However, that doesn’t mean it’s easy finding the right companies. Pick the wrong ones and you’re throwing money down the drain like most “investors” tend to do.

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In the latest article, we’ll learn how best to identify growth opportunities, along with the different types of growth relative to value creation. Of course, identifying companies with solid growth potential would be the first step. More due diligence and research is certainly warranted before making any investment decisions.

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Importantly, it's recommended that these growth companies also have a demonstrated track record and the ability to hold a durable competitive advantage. Read more on how to assess competitive advantage in companies in a prior article here: Identifying Competitive Advantage.

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Let’s dive in.

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Why Companies Grow

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Human nature is such that we’re never really satisfied. And this tends to be especially true when it comes to making money. A comfortable lifestyle requires money to afford all of the wants and needs to accommodate that, and the impact of inflation is constantly suppressing the buying power of the money we do make. As such, we’re constantly seeking ways to make more and more money.

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Companies are similarly under constant pressure to produce more value to shareholders (owners). If they can’t, they’ll go bankrupt sooner or later. I always come back to this bold quote.

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          “Innovate or die.” – Peter Drucker

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That being said, so many companies are dying these days, especially those that operate in dynamic industries with an inability to keep up with prevailing trends and shifting consumer preferences.

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We don’t want to get associated with such businesses. Let's look for good companies—ones that create value. That's what really counts and drives returns.

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As such, aim to identify companies that maintain excellent business economics, allowing you to hold on to that investment while letting its retained earnings increase the underlying value. This will aid in creating wealth for you as a shareholder.

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How Companies Grow

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There are 5 types of growth. Gaining an understanding of that will firmly aid you with making money in the stock market.

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Introducing New Products to Market: Companies can grow by constantly innovating and bringing fresh products to the market. Whether it's a revolutionary invention or an improvement on an existing idea, tapping into new needs or desires can expand a company's reach and revenue.

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Expanding Market Reach:

Sometimes it's not about reinventing the wheel but rolling it further. By finding new demographics or geographical areas to sell existing products or services, a company can sustain growth. This might involve marketing strategies or adapting products to suit new audiences.

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Increasing Share in a Growing Market:

In a booming market, there's often room for multiple players to thrive. By capturing a larger slice of the pie through effective marketing, superior product quality, or competitive pricing, a company can grow alongside the market's expansion.

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Competing for Share in a Stable Market:

Even in markets with stable growth, there's a constant battle for market share. Companies can grow by outmaneuvering competitors, whether through aggressive marketing campaigns, offering better customer service, or providing unique value propositions that attract customers.

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Acquiring Businesses:

Growth through acquisition involves buying other companies to expand operations, customer base, or product offerings. This strategy can be particularly effective when

entering new markets quickly or consolidating power within an industry. However, it also comes with risks such as integration challenges and cultural differences.

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If you’re anything like me, you’re probably thinking…

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The Best Way To Grow

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Back to the old quote.

          “Innovate or die.” – Peter Drucker

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Growing through developing new products often brings the biggest returns. It's cost-effective since companies can use their current facilities and distribution networks to introduce these products without needing a lot of new money.

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On the other hand, acquisitions need an upfront payment covering the whole expense. This includes expected cash flows from the target company plus extra to beat out competitors. Let’s take a look at the numbers.

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Equally important, companies with high returns on invested capital (ROIC) generate more cash from each dollar of additional revenue than those with low ROIC because high-ROIC businesses have higher margins, lower capital intensity, or both. Learn more in this article Different Growth Strategies Create Different Value

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CONCLUSION

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So, in short, if you're an investor that seeks out growth opportunities, you'll want to seek companies that constantly develop new products. And avoid those that grow solely by acquisitions. Acquisitions can be a value-add if the company being acquired also has a competitive advantage to complement the competitive advantage of the acquiring company. But as a whole, acquisitions tend to create less value for companies seeking to grow versus bringing new products to market.

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Before you go, I want to mention one more thing. Every company is unique. So, while this information is generally accurate, it might not fit every company.

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Approach each company like you would a new partner. With curiosity, enthusiasm, and a good dose of common sense. To level up your investing game, feel free to join the world’s most powerful stock market newsletter for wealth, stability, and happiness.

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Disclosure/Disclaimer

As a Tykr affiliate, Raising InvestorIQ earns from qualifying purchases. As a Seeking Alpha affiliate, Raising InvestorIQ earns from qualifying purchases.

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.

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