What is Trees Don't Grow To The Sky?

John Spacey, updated on September 03, 2023

Trees don't grow to the sky is a German proverb that suggests that there are natural limits to growth and improvement.

The proverb is associated with investing and banking where it is used to describe the dangers of maturing companies with a high growth rate. In some cases, a company that has an exponential growth rate will achieve a high valuation based on the unrealistic expectation that growth will continue at the same pace as the company becomes larger. For example, if a company has $10 billion in revenue and a 200% growth rate it's easy to think that it will achieve 100s of billions in revenue within a few short years.

Generally speaking, the larger a company becomes the more difficult it becomes to achieve a high growth rate. For example, a firm that has a 1% market share might easily achieve 2%. However, when a firm has an 80% market share, doubling sales requires growing the market or entering new markets where it isn't as strong. Firms also tend to become less efficient and innovative as they grow due to diseconomies of scale.

Modeling how quickly a growth rate will slow as a firm becomes larger is amongst the most difficult elements of equity valuation.

Notes

Trees don't grow to the sky is a literal translation of the German "bäume wachsen nicht in den himmel."

Overview: Trees Don't Grow To The Sky
Type	Investing
Definition	A German proverb that suggests that there is a limit to how large things can grow.
Often Confused With	Law of Large Numbers
Related Concepts	Risk Management Exponential Growth Diseconomies Of Scale