However, there is a catch. While businesses may remain in a positive feedback loop, valuations do not. Valuations operate under a negative feedback loop.

Take Asian Paints as an example.

This chart captures the two feedback loops at work very clearly. Over nearly two decades, Asian Paints’ EPS has followed a positive feedback loop, compounding steadily through cycles. But the PE ratio has behaved very differently, swinging in a negative feedback loop, compressing to 20x during the 2009 global financial crisis and expanding to nearly 120x during the post-Covid quality and consumption mania of 2021, before moving back toward balance again.

Businesses can compound. Valuations eventually mean-revert.