Some of the most common posts on this sub are those asking for recommendations of growing sectors/companies and those arguing for the over-performance of growing sectors/companies. Most of these posts make the assumption that revenue growth implies higher future returns. I think that is at best a major leap of faith and at worst a dangerous mistake.
From my vantage point, there are two ways to argue for the over-performance of a sector or an individual equity. Either it’s undervalued, in which case you’re arguing for higher risk-adjusted returns — alpha. Or it’s riskier than the broader market in a way that is correlated with other prevailing risk factors and thus robust to diversification. In this case, your arguing for higher returns to compensate for the asset’s risk-elevating contribution to a diversified portfolio.
Do people disagree?
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