value
Twin Engine Of Returns
The rule
The biggest winners have two forces multiplying together: rising earnings, and the market paying a higher price for those earnings at the same time.
Where it flips
Chasing a rising price-tag alone tempts you into already-expensive hype stocks, where the tag can only shrink from here. The fix: insist on real earnings growth as the main engine, and treat a rising price-tag as a bonus you did not overpay for.
A share price is roughly earnings times the price the market pays for them. If earnings grow ten times, and the market also decides to pay three times as much for them, the price moves thirty times, not ten. The rare huge winners get both engines firing at once. Buying a strong business when it is still cheaply priced gives the second engine room to lift you, on top of the profits it earns.
A worked example
Rohan buys a company at ₹50 when it earns ₹5 a share and the market pays a modest 10 times that. Over a decade earnings grow to ₹25, and, as the market notices its quality, it starts paying 30 times. So the price reaches ₹750, as both engines multiply. [illustrative]
How to spot it
- ·Cheap price-tag on a growing business
- ·Earnings and the market's price both improving
- ·Quality not yet widely noticed
Christopher Mayer · 100 Baggers