What actually compounds
Not earnings. Not revenue. Reinvestment at a high return on capital, for longer than feels reasonable.
There is a version of long-term investing that is really just patience with extra steps: buy a good company, wait, hope. Compounding is not hope. It is a mechanical process that requires two specific conditions, and a company that lacks either will not compound no matter how long you hold it.
Condition one: a return on capital above the cost of capital
Not once. Structurally. If a business earns twelve percent on capital and capital costs nine, three points of every dollar reinvested belongs to the owner. If it earns seven percent, growth destroys value — the faster it grows, the worse it gets. This is why we spend more time on returns on capital than on growth rates.
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