3 ms·

it very directly means --to a rough order of magnitude-- that you will need to wait 30 to 100 years to break even Only if earnings stay flat. Which won't be tr

by harryh 6y ago

it very directly means --to a rough order of magnitude-- that you will need to wait 30 to 100 years to break even Only if earnings stay flat. Which won't be true for many, many companies. For example Startbucks (which you mentioned upthread) is currently growing earnings at a rate of 15% a year or so. The fact that you are ignoring earnings growth is at the heart of your mistakes in reasoning especially for technology companies, many of which have the ability to grow very fast.

robomartin 6y ago
You are making my case. Please do the math. Assume 15% YOY growth for ten years (almost impossible). Then figure out the breakeven time for buying the company at various multiples of earnings today. If you want to be more realistic, don’t assume a constant earnings growth slope and allow for market tracebacks and competition. Very important: Do not look for companies to fit your model. The fact that there might be outliers that buck the norm does not modify reality. The vast majority of companies (public or private) don’t have never-ending constant high earnings and market share growth, far from it. I invested in a modem manufacturer many decades ago. Imagine valuing that company at 20 or 30 times earnings! They were out of business five years after I bought the stock. I actually do buy stocks valued at crazy multiples. The difference is I buy them based on a prediction that others will be willing to pay more in the future. The decision has nothing to do with ROI based on company fundamentals. If you can identify what the sheep are hot for, you can make a lot of money. And, when they scare, it’s priceless. EDIT: In your calculations you have to account for the fact that you can’t take 100% of earnings from a company every year. If you did that you would implode it. You’d be lucky if you could take 25%. Breakeven is very distant in the context of real math.

by harryh 6y ago

robomartin 6y ago

You are making my case. Please do the math. Assume 15% YOY growth for ten years (almost impossible). Then figure out the breakeven time for buying the company at various multiples of earnings today. If you want to be more realistic, don’t assume a constant earnings growth slope and allow for market tracebacks and competition. Very important: Do not look for companies to fit your model. The fact that there might be outliers that buck the norm does not modify reality. The vast majority of companies (public or private) don’t have never-ending constant high earnings and market share growth, far from it. I invested in a modem manufacturer many decades ago. Imagine valuing that company at 20 or 30 times earnings! They were out of business five years after I bought the stock. I actually do buy stocks valued at crazy multiples. The difference is I buy them based on a prediction that others will be willing to pay more in the future. The decision has nothing to do with ROI based on company fundamentals. If you can identify what the sheep are hot for, you can make a lot of money. And, when they scare, it’s priceless. EDIT: In your calculations you have to account for the fact that you can’t take 100% of earnings from a company every year. If you did that you would implode it. You’d be lucky if you could take 25%. Breakeven is very distant in the context of real math.