Paradox

To be fair to JW, he is almost always able to sell before the growth ceases and the price drops. And he often argues that, for a huge market like mainland China, a good company may continue to growth for 10 or 20 years.

(The famous saying of Humphrey Bogart in Casablanca suddenly occurs to me: "Tonight ? How can I tell ? I never plan ahead for that long.")

My argument against that long period of growth is not as philosophical. Take the hypothetical company I put up yesterday. How much equity does it have - at the time with a price $30 and earns $1 per year ?

If it is $10, the return of equity (ROE) would be 10%. The earning of the next three years are $1, $1.3 and $1.69. If the company does not pay any dividend, the equity 3 years later would be $14. In other words, the ROE would become 15.7% ($2.2 - the profit next year - divided by $14) - a nearly 60% improvement. But, ROE reflects the nature of a business and it should remain similar. The above calculation implies that either the profit in the forth year becomes $1.4 (10% of $14) - the growth stops - or, in order to sustain a growth, the ROE improves dramatically. How ? Either the company is doing an entirely different business, or the debt ratio increases exponentially !