Let's say Amazon. If the market's overall earnings growth rate is 6%, but Amazon can grow earnings at 15%, why doesn't it essentially have an infinite valuation? Because, no matter what price you pay, growth at 15% will eventually overtake the growth at 6%. Obviously its better to pay less, to get more growth per dollar, but if one assumes Amazon can grow faster than the market, more or less indefinitely, is any price really clearly too much to pay for Amazon? Seems like it could just keep going up forever. Thanks.
Well, it looks like you are starting from the premise that he market, economy, and earnings are a constant that only go one direction. I am not positive, but, that looks like a pretty strong bias to me. Do you only buy and hold?
Thanks Todd. Sorry, I was not trying to say that earnings never expanded and contracted. Obviously that is going to happen. But let's say that, with that happening, its going to be an average of 15% growth for Amazon but 6% growth for the rest of the market. So, for Amazon for example, it might have -10% growth one year but then like a 25% growth the next year (or whatever it is so that the average growth is 15% over time). Hope that makes sense. Thanks.
Any tips on how to get coffee out of a keyboard? Cause I just sprayed mine when I read that sentence.
It’s threads like this that make me want to go to cash in all my accounts. It’s not supposed to be this easy. 9 straight years with barely a hiccup. A never ending party with no hangovers.
Simple, every outsized growth rate eventually comes to an end. Ask GE, GM, Walmart, Msft. At some point in the past, those were the place to be in growth names. But now no more. Trying to predict when that will happen is what makes it interesting.
The index tends to rise and even it does not have an infinite valuation. Because at some point there would be only one stock left which qualified for membership.