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Buffett's Magic 15% Rule

Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Buffet, Lynch and other legends - Investing Strategies
Forum Discription: DIscuss about the strategies followed by the great investors. Share an idea which would have impressed the masters. Try and bring their International experience into the Indian Markets.
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=1782
Printed Date: 04/Apr/2025 at 5:28am


Topic: Buffett's Magic 15% Rule
Posted By: vijayM
Subject: Buffett's Magic 15% Rule
Date 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


Replies:
Posted By: smartcat
Date 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.

Posted By: furkanalam
Date Posted: 20/May/2008 at 7:39pm
Absolutely, the problem lies in predicting long term growth rates.....
 
 

Posted By: basant
Date Posted: 20/May/2008 at 8:17pm
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

Posted By: vijayM
Date 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


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If a business does well, the stock eventually follows:Warren Buffett

Posted By: smartcat
Date 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.
 
 
 
 

Posted By: gwhunting
Date Posted: 21/May/2008 at 11:07am
I highly doubt that Warren Buffett uses this method ;). Looks like one of those authors trying to cash in on his name.

Posted By: vijayM
Date 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

Posted By: kiran mankame
Date Posted: 14/Jun/2011 at 1:21am
Dear Sir,
 
how they arrive the $30.30  figure , will u please help with the calculation
 
 


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kiran

Posted By: vijayM
Date Posted: 15/Jun/2011 at 7:39pm
Originally posted by kiran mankame

Dear Sir,
 
how they arrive the $30.30  figure , will u please help with the calculation
 
 


x * (1.15**10) = 122.57 (i.e. price + div after 10 years)

solve for x which is 30.3

[note ** refers to index or power of a number]


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If a business does well, the stock eventually follows:Warren Buffett

Posted By: LearningToFly
Date Posted: 15/Jun/2011 at 6:14am
Vijay
There is nothing in this method that should be looked seriously into. This is what we all do. We take last 5-10 years EPS data and find out CAGR. Then project the same EPS growth rate in future (if there is no drastic change like IT companies where past EPS growth rate will not be the right measure for future EPS).
 
Once you project EPS for next few years, you can discount at the rate of return that you want. It could be 15% in case of Buffet. You can discount at 20% for Indian market.
 
Where does brokerage estimates come into picture though. Why would you even bother about what brokers estimate. Most of the brokers go by technical analysis. In that case, EPS etc hardly makes any sense.


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