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I am wondering: What if the company needs to invest to adapt to long-term market changes? It would then make some investments with a return lower than S&P 500 in the next year but which would save the business in the long run. Would than be an exception to this rule then?

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Thanks for your comment. The reasoning still works for companies that are investing heavily to survive a market change. I will give an example adding a time dimension and non-linearity in earning growth. Consider a company with a P/E ratio of 10 facing a challenging market change in year 2.

Year 1: $1m invested, generating $200k of earnings meaning $2m of additional market value (OK)

Year 2: $1m invested, generating $50k of earnings meaning $500k of additional market value (NOT OK)

Year 3: $2m invested, generating $100k of earnings meaning $1m of additional market value (NOT OK)

Year 4: $3m invested, generating $100k of earnings meaning $1m of additional market value (NOT OK)

Year 5: $2m invested, generating $10m of earnings meaning $100m of additional market value (super OK)

Although nonlinear, this company has excellent returns on reinvested earnings. The challenge is for the CEO to justify why it makes sense to invest with a below-average-returns in the short run to win in the long run.

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