You are spot on. I used to have similar thoughts and realized that it’s a short-term cost one pays for being late in the money compounding party of a good business.
Most of the good businesses sell at multiples of BV due to above average and sustainable ROE. Incase the business continues with it’s past performance and keeps reinvesting most (90% +) of the earnings, the immediate ‘low looking’ ROE for our capital starts to become respectable (20%+) from 5th yr. onwards.
On the other hand, market cap/our capital should (for idealistic scenario) more or less mimic the earnings growth all these yrs.
FYR:
| Yr-0 | Yr-1 | Yr-2 | Yr-3 | Yr-4 | Yr-5 | Yr-6 | Yr-7 | Yr-8 | Yr-9 | Yr-10 | Yr-11 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NI | 45 | 63 | 89 | 125 | 175 | 246 | 346 | 486 | 683 | 960 | 1349 | 1895 |
| Equity | 100 | 141 | 197 | 277 | 390 | 547 | 769 | 1081 | 1518 | 2133 | 2998 | 4212 |
| ROE | 45% | 45% | 45% | 45% | 45% | 45% | 45% | 45% | 45% | 45% | 45% | 45% |
| Dividend Payout % | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% | 10% |
| Investors. ROE | 4% | 5% | 7% | 10% | 15% | 21% | 29% | 41% | 57% | 80% | 112% | 158% |
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