Final Decision

Do we buy the stock or not? How to make the crucial decision

The Idea behind the calculations!

I am truly convinced that what we have here is the heart of the whole Buffett method. Yes, after some pages you will finally get what you need.

I want to present to you a method of determining if our good consumer monopoly stock / equity bond (or whatever you call it) is worth buying.

1. We go back several years, preferably 10 and calculate the earnings per share growth. To do that we click at our calculators (you will find the links to the calculators on the page entitled the magic of compounding) and then, put the first available earnings per share figure (our year 1) as PV (present value), than enter FV - the final earnings per share (our year 10) value (Future Value), enter the number of years, and click to calculate the annual per share earnings growth. Ta-da...there you have it.

(I have a strange feeling I will need to make a you tube video to show it to you, but for the time being just try to read it, re-read it and hopefully you will get the point. If you really focus its really simple, trust me, I'm no genius and I got it pretty fast).

2. Now, if we have the earnings per share growth rate, we can do the same calculations but run them for the next 10 years to see what the company is likely to earn in 10 years! We click the current earnings per share as PV, the growth rate is what we calculated in point 1, enter number of years of 10 and what we do is we calculate the future earnings per share, click, click boom there you have it!

3. We need to check the average P/E for the company, we need to either see what it has been for the last 10 years, some services prvide that number for you (I use 10 years as a rule of thumb).

4. We calculate the future price by multiplying the future earnings per share (point 2) and average price to earnings ration (point 3), in other words FP (fut. price) = Future Earnings x Average P/E.

5. Next we calculate the annual growth, to do that we need to discout the Future Pice to Present Value, this means that we put the Present price as PV and Future Price as FV, we enter the number of years as 10 and we calculate the rate of return.

6. We compare the rate of return to the Treasury Bond, we can easily compare which is better.

That's about it. If got it, trust me you can too. I strongly urge to read Marry Buffett's book, I really like Buffettology workbook because it has the case studies plus a decent explanations of how buffett thinks. Plus Michael Burry recommended it in his reading list along "Intelligent Investor" by Graham and "Common Stocks, uncommon profits" by Philip Fisher, so thats all the recommendation a book needs.

That's all from me for now. If I have time I will try to make things even clearer by putting videos, but I don't see that happenening anytime soon, there is stuff that I need to do so as not to starve to death, you just don't get many rich people in the country where I come from. I'm no richmen yet either. Hopefully this will change one day. I wish you the same.