Edward Quince's Wisdom Bites: Trees

 

Every market cycle begins with a compelling story. This one usually starts with the phrase “structural change.” New technology. New productivity. New rules. And sometimes, the story is even true.

But cycles do not disappear simply because the narrative improves.

Mean Reversion Never Retires

The old rule—trees don’t grow to the sky—is shorthand for a deeper truth: excess returns invite competition, and competition erodes margins. This is not ideology; it is arithmetic.

High profitability attracts capital. Capital attracts competitors. Competitors compress returns. Rinse. Repeat.

Yet every cycle produces its own “New Era” argument. Railroads. Electricity. The internet. Cloud computing. AI. Each genuinely changed the world. None abolished valuation gravity.

When the Exception Becomes the Rule

There are rare exceptions—companies that evade mean reversion by deliberately suppressing short-term profits to widen their moat. Nomad called this Scale Economies Shared. Amazon and Costco didn’t grow because they were expensive; they grew because they refused to extract maximum margin.

But here’s the catch: most companies claiming to be structural winners are not.

The Lesson

Mean reversion is the most powerful force in finance because it is rooted in human behavior and incentives. Betting against it requires overwhelming evidence—and paying a price that still allows for disappointment.

If you’re paying peak-cycle multiples for a cyclical business dressed up as a revolution, the cycle will eventually remind you who’s in charge.

XTOD

“There are two great sayings. One is, ‘If a thing can’t go on forever, it will eventually stop.’ The other… ‘People who expect perpetual growth in real wealth in a finite earth are either madmen or economists.’” — Charlie Munger