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vijayM
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Joined: 21/Dec/2007
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   Topic: Buffett's Magic 15% Rule
Posted: 20/May/2008 at 1:14pm |
Dear Basantji,
Recently I was reading a book on Warren Buffett where in I came across with a topic : Buffett's Magic 15% Rule. In this topic he has given a quick stock analysis method called rate of return analysis. I had posted this case earlier in equity analysis strategies thread. The method seems easy to understand. I wish to get your expert comment on limitations of this method and also where it is more effective.
case: Coca Cola Stock; Year:1999.
Price: $89 Growth rate: 14.5% EPS: $1.3 P/E: 68
Avg P/E:22 Div:40% Nature of company: steady growth
OBJECTIVE: TO GET 15% CAGR
Year EPS
2000 1.49
2001 1.70
2002 1.95
2003 2.23
2004 2.56
2005 2.93
2006 3.35
2007 3.84
2008 4.40
2009 5.03
total 30.79
Price you need in 10 years to get 15% : $ 360.05
Expected 2010 price : $ 110.77
Plus dividend : $ 11.8
total return : $ 122.57
expected 10Year rate of return : 3.3%
Highest price you can pay to get 15% rate of return: $ 30.3
CONCLUSION: 3 TIMES OVERPRICED. WB didnot add this stock during 1999-2000.
*Ref: How to pick stocks like WB by Vick.
Regards
vijayM
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If a business does well, the stock eventually follows:Warren Buffett
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smartcat
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Posted: 20/May/2008 at 6:12pm |
um.. why not just look at P/E?
A P/E of 68 for a 15% growth rate stock implies that the Coca Cola was 3 or 4 times overpriced.
Buy a 15% CAGR stock at a P/E range of 15 - 20.
And anyway, the problem is predicting long term growth rates of companies.
Edited by smartcat - 20/May/2008 at 6:14pm
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furkanalam
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Posted: 20/May/2008 at 7:39pm |
Absolutely, the problem lies in predicting long term growth rates.....
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basant
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Posted: 20/May/2008 at 8:17pm |
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There is a tool called the PEG which explains this as well as anything.
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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in
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vijayM
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Posted: 20/May/2008 at 11:16pm |
Perhaps teddies have taken this analysis too lightly. Let me point out that, to arrive at eps growth rate figure, WB considers the eps of a company for last 10 years and calculates growth rates in eps for those years and then takes the average growth rate for prdicting future eps. ][ In bull markets, it is quite common to project very high growth rates by brokerages. If this was not true then how infy and wipro quoted at 250 P/E in 2000?] Similarly he referes to historic P/E band for the stock to arrive at avg P/E data. The best part of this method is: it does not depend on any brokerage estimate of eps to predict future eps. I request TEDies to go though the method bit seriously. I think it is a great tool to analyse stocks. Further, consider my query of applying this method to what kind of sectors, any limitations etc.
vijayM
Edited by vijayM - 20/May/2008 at 11:23pm
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If a business does well, the stock eventually follows:Warren Buffett
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smartcat
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Posted: 20/May/2008 at 12:17pm |
Most Indian companies are constantly evolving and trying something new every few years (diversification). Take Adani Enterprises for example. They have been trading in commodities for a long time notching up 15 - 20% growth rates. But now, thanks to diversification into power and real estate, the next 10 years growth rates will be very different.
Basically, the last 10 years CAGR growth rate might not be similar to the next 10 years growth rate, unless its a stodgy FMCG company or if its a HDFC Bank/RIL perhaps.
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gwhunting
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Posted: 21/May/2008 at 11:07am |
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I highly doubt that Warren Buffett uses this method ;). Looks like one of those authors trying to cash in on his name.
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vijayM
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Posted: 26/May/2008 at 8:46pm |
Originally posted by gwhunting
I highly doubt that Warren Buffett uses this method ;). Looks like one of those authors trying to cash in on his name. |
I don't post wrong informations. You may refer the book I mentioned which is authentic.
vijayM
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If a business does well, the stock eventually follows:Warren Buffett
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