Tuesday, March 07, 2006

Compounding Returns and Very Large Numbers

Since coming across a post on dripinvesting.org, the topic of discussion has remained with me for the last few days like - if you will excuse a cliche analogy - a splinter in my mind.

Consider this:

How large is too big? Can a company like a GE or an XOM [Exxon Mobil] ($345B and $372B in market cap, respectively) grow at 10-15% for a year? Five years? Twenty? At 12% we're talking about 3.5 trillion in market cap. Is there a point where growth past a certain size becomes too difficult to sustain? At twenty five years we're now up to 7 trillion ... and that's only assuming 'market average performance'.

I wonder whether we look at 'trillions' today as earlier generations gasped at the thought of 'billions' (or even 'milions'). Otherwise, is there a natural limit to growth akin to the way we are currently seeing Moore's Law, otherwise true since 1965, being tested by the physical limits of chip size? Just food for thought ...

Update March 9: Newsweek's Karen Miller also comments on this 'law of large numbers' and other challenges faces by large caps in "Too Big To Grow".


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