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Stock Prices Follow Earnings

If you buy a business whose earnings are higher in the future, it’s likely the share price will be as well. Consider a simple example. You buy a 100 stock earning 10, ie an undemanding P/E of 10X. If its earnings grow at 12%pa, in ten years it will be earning almost 28. Providing the P/E’s unchanged, it will be trading at 280. If it is still trading at 100, the P/E would be just 3.6X, an unlikely scenario.

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