Question: How do you think about growth rates when you value businesses?
Buffett: When the [long-term] growth rate is higher than the discount rate, then [mathematically] the value is infinity. This is the St. Petersburg Paradox, written about by Durand 30 years ago.
Some managements think this [that the value of their company is infinite]. It gets very dangerous to assume high growth rates to infinity – that’s where people get into a lot of trouble. The idea of projecting extremely high growth rates for a long period of time has cost investors an awful lot of money. Go look at top companies 50 years ago: how many have grown at 10% for a long time? And [those that have grown] 15% is very rarified.
Charlie and I are rarely willing to project high growth rates. Maybe we’re wrong sometimes and that costs us, but we like to be conservative.
[Munger: If your growth rate is so high that you conclude the business has an infinite valuation, you have to use more realistic numbers. What else could anyone do?]
Source: BRK Annual Meeting 2004 Tilson Notes