Lesson 02 — Where Do Long-term Returns Come From?
Week 02 · Lesson 2 of 7 · Week 02 — Foundations: Thinking Like a Long-term Investor
Over the long term, your returns come from just two things: 1. Earnings growth — the company makes more profit year after year 2. Dividends — the company sha...
The two sources of stock returns
Over the long term, your returns come from just two things:
- Earnings growth — the company makes more profit year after year
- Dividends — the company shares a part of its profit with you
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"Business ka profit badhega toh share price bhi badhega — simple."
Key insight
Short-term returns = noise + sentiment + speculation.
Long-term returns = business performance + dividends.
Why this matters for you
| Time horizon | Main return driver |
|---|---|
| 1 day – 1 month | News, sentiment, speculation |
| 1 – 3 years | Earnings + valuation re-rating |
| 5 – 10+ years | Earnings growth + dividends (valuation noise washes out) |
Visual: Returns decomposition
Real example: HDFC Bank (10-year view)
- Earnings grew ~18% CAGR over 10 years
- Stock price grew ~16% CAGR
- Difference? Valuation compression (PE went down slightly)
The stock price followed the earnings. That's how it works for most quality companies.
Key takeaway
"Stock price is a slave to earnings in the long run." — Peter Lynch
Focus on businesses that can grow earnings consistently. Everything else is temporary.
Apply it
Open InvestingSamjho → pick any company → check 5-year revenue and profit growth. Does the stock price roughly follow?