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Good Growth Versus Bad Growth

Not all growth is created equal. There are basically two kinds of growth. And connoisseurs like Warren Buffett clearly prefer one kind to another. 

There are two ways your bank account can "grow." One way is if you periodically add money to it. The other is by earning interest on your existing deposits. While the first form of growth is a testament to your diligence and savings capacity, the second is the "lazy" person's form of growth.

Likewise, most corporations can grow by reinvesting some or all of their earnings. In retailing, that would be called new store sales; generating more sales by opening new locations. But the kind of growth the Buffett prefers is "same store" sales growth. That is what can occur with little or no additional capital. That is called autonomous growth by the economists.

Autonomous growth, unlike "bought" growth, stems from a competitive advantage. If it persists for a long period of time, it is a sign of "barriers to entry." The exact formula for Coke can't be duplicated, and more to the point, it is hard (though not impossible) to create close substitutes for not only the drink, but its brand name and marketing network.

"Bought" growth is not the worst thing in the world. Tech companies exhibit this kind of growth, being able to absorb, and reinvest capital in more technology. That is true until a certain technology reaches saturation point (steel, chemicals, textiles, autos among others). Then investment new money is just throwing good money after bad.

Most companies can create growth, or at least its verisimilitude, through investment. But Warren Buffett has been more exacting, looking at "autonomous" growth situations that can simultaneously generate, rather than use cash. That way, he has two "income" streams, growth and dividends. That is what he really pays up for.