Chuck Carnevale explains the Rule of 72 and shows how earnings growth can compound over time. Using FAST Graphs and real stock examples, he explores how growth and valuation affect long-term returns.
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Chuck Carnevale explains how the power of compounding can help investors understand the relationship between a company’s earnings growth and long-term returns.
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He starts with the Rule of 72: divide 72 by an annual growth rate to estimate how many years it takes for a value to double. At 10% growth, that’s about 7.2 years; at 20%, about 3.6 years. Over a long period, those extra doublings can create a much larger difference than the rates alone might suggest.
Using FAST Graphs, Chuck compares the historical earnings growth and investment returns of Raymond James Financial, Edison International, Meta Platforms, and Aflac. He also looks at analyst forecasts for Advanced Micro Devices to show how rapid projected growth could affect future returns if those estimates are met.
The lesson: look at a business’s growth rate alongside its valuation. Earnings growth can be a powerful driver of long-term returns, but actual results can differ from a simple compounding calculation as earnings, dividends, and P/E ratios change.
Learn how to use the Rule of 72 and FAST Graphs to put a stock’s growth potential into perspective.
Disclosure: Long RJF, EIX, META, AFL
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
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