Quote for the Week
While the classic growth companies may continue to generate new sources of earning power, the question is: Can they do this rapidly enough to justify the valuation placed on their current earning power?
One can repeat the question just asked: Is a growth rate triple the potential growth of the economy sustainable indefinitely? If a company can double its earnings over the next 6 years but then needs 10 years before its earnings double again—and perhaps 15 years the next time—then its present P/E ratio will fade with the passage of time. In other words, the price will rise more slowly than the earnings.
And at every moment the investor runs the risk that a change in management, a spry competitor, a shift in customer preferences, or a fundamental economic or social change may slow earning power a lot faster than anticipated. Admittedly, pleasant surprises may come along too, but 40 times earnings already anticipates those. — Peter Bernstein (source)
From the Archives
- Compounding Optimism – M. Housel
- Welcome to Fantasyland – H. Greenberg
- Consumer Sentiment Is Low, That’s a Good Sign for Stocks – J. Rekenthaler
- Hidden Forces – T. Morgan
- Intangible Value: A Sixth Factor – Sparkline Capital
- Sharing Memories of Ben Graham with Warren Buffett – Beyond Ben Graham
- Learning from Dollar Tree’s Macon Brock – Investment Master Class
- Nature, Nurture, and Randomness – Knowable
- We Found 650,000 Ways Advertisers Label You – The Markup