I've came across quite a number of times where friends and family members or so and so told me about a stock which they claimed that, or they heard from someone that, or they knew that it will be the next 10 bagger counter in the next coming century, but when I asked them that what's price which is considered cheap, and the time that I should buy in, most of the reply I got is a blank stare, follow by a question ...

"What you mean when? I just told u it's gonna be a 10 bagger. Just buy it anytime when u have the money !!!"



I'm not saying that this is the best method, or the golden rule for evaluating what is the best price to get in, but, it's the method that I've learned, and is still using to determine what is a good price when buying a stock.

Anyway, before I start, mind you that this is gonna be an extensively own-website promoting post, so for those that can't swallow it, please do not continue :P hahahahaha :D

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Ok. Here's the summary of the steps. If you don't understandat first, it's ok. I've experienced that before, and trust me, it's get clearer and clearer once you've completely read everything, and then re-read, and re-read again. so... let's move on.

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1. Make sure the EPS for the past 10 years is consistently growing.

2. Calculate the growth rate of the EPS for the past 10 years.

3. Determine the annual return that you want from this investment

4. Determine the price value of the stock that u should buy if u want to achieve your rate of return you just set in step #3. (for me it's 15%

5. Only buy at a margin of safety from the determine price tag, not the street price

______________________



... and here's the description on each of the points.

(Don't worry about the calculation if you are still blur, or how to get the values which we'll be going thru, as I've got everything settled on the later part)
^_^

 

1. Make sure the EPS for the past 10 years is consistently growing.

Well, first of all, the basic concept of it is to find a company which has a consistent growth in their EPS (Earnings Per share). I won't be going on the topic of whether this company is worth buying or not etc ..... That will be a discussion for another day. For now, Let's just dwell on how to determine the PRICE TAG for the stock of a company, assuming that you've done your own research on determining whether it's a good company to hold for a very long term. The key word here is CONSISTENTLY GROWING. Consistently, so that we can predict that it will be consistently growing in the future like this too. Remember... consistency is the key here.

 

2. Calculate the growth rate of the EPS for the past 10 years.

We want to calculate the growth rate for the past 10 years for this solid/steady company. Because we know that if the company has been growing at this rate steadily for the past 10 years at this rate, it has been proven that it's a good and strong company, and most likely that it will be continue growing at this rate in the next 10, 20 or 30 years.

 

3. Determine the annual return that you want from this investment

Determine what's the annual rate that you desire. Remember, even the most successfull investor, Warren Buffett, the annual rate of return for his past 23 years is 23%, consistently every year. So, be more realistic. For me, I would be very very content if I can get a consistent 15% annual rate of return every year.

 

4. Determine the price value of the stock that u should buy if u want to achieve your rate of return you just set in step #3. (for me it's 15%)

And how do you do that? Well, say, the stock price is $10 right now, and you've predicted that the company is gonna grow at a rate of 10% every year. so, for the next 10 years, what will the price of the stock be if it were to grow10% a year? Answer: $23.50. And so, if u were to buy that stock at the current price now, at $10, after 10 years, when it reach $23.50, what will be your annual rate of return? Correct. 10%. It's not 15%, as what you've desired !!! So, keep this in mind, the price that you paid for the stock determines your rate of return. The lower the price u pay for, the high the rate of return it will be.

 

5. Only buy at a margin of safety from the determine price tag, not the street price.

say, after determining that you shouldn't be paying for anything more than $10 in order to achieve your yearly 15% rate of return, should you dive straight away and buy the stock when it hits this price? Of course not. We have to always allow some tolerance for mistakes. We call that, margin of safety. I'm comfortable with a 50% margin-of-safety, and so, if i determined that the price for the stock that i should be paying is $10 in order to achieve my 15% return every year, then I will be only buying into that stock when the stock dip down to $5, 50% margin of safety from $10.

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Now, after you have a brief idea on the theory, let's get into the how-to part, where we will go thru each and every step on how do we get the values and data that we need all the way from step 1 to step 5. On this example, we will be looking at the stock GARMIN, which has the symbol 'GRMN'.


1. Make sure the EPS for the past 10 years is consistently growing.

Here's how you get the EPS for the past 10 years.
Click [here] and then key in the symbol for GARMIN, GRMN.
You will notice that the page looks something like this.



The EPS for Garmin for the past 10 years can be found at the 2nd row, 2nd column frame.

This is what I see ...

 

 

2. Calculate the growth rate of the EPS for the past 10 years.


How do you calculate for that? Here's the [calculator].

From what we get in step one, we would like to calculate the rate of return from year '98 to '07 (9 years), which it's EPS grew from $0.18 -> $3.89. From the calculator, key in these values in these fields:-

Current Value: 0.18
Future Value: 3.89
Period: 9


... and this is what i get... RATE: 40.7 %

Yes ! You are right. Garmin has been growing at 40% for the past 9 years. Fromo experience, I'm not saying that Garmin won't be able to keep growing at 40% for the next 10 years, but, it really doesn't seem realistic at all. Let's give it a discount. Let's assume that Garmin will grow at 12% for the next 10 years, shall we?

 

 

3. Determine the annual return that you want from this investment

This one, we've already decided that, which will be 15%. So, let's move on to the next step...

 

 

 

4. Determine the price value of the stock that u should buy if u want to achieve your rate of return you just set in step #3. (for me it's 15%)
and
5. Only buy at a margin of safety from the determine price tag, not the street price.

For step #4 and #5, we will just need one calculator, and [here] it is.

From step #1, we've seen that the latest EPS is $3.89.
From step #2, we've calculated, and predicted that Garmin will be growing at 12% every year for the next 10 years.

Now, let's plug in these numbers into these fields and see what we get:-

Current EPS: 3.89
Growth: 12

... and this is what we get ...




If Garmin were to grow at 12% per annum, with it's current EPS of $3.89, it will be earning an EPS of $12.08 10 years from now (Future EPS). With that EPS, the stock price during that time should be trading around $289.96 (Future Price).

If, knowing that the stock price 10 years from now would be $289.96, what is the price that we should be paying if we want to earn 15% every year?

From the step #2 calculator, key in

Future Value: 289.96
Period: 10
Rate: 15%

And you will get $71.68.

And knowing by buying the stock at $71.68 right now, you will be getting a 15% rate of return every year for the next 10 years, we still wanna further reduce our risk by demanding a further 50% margin of safety.And what will that price tag be?That would be the MOS(with Div): $35.84 that you see on that calculator page.





Now ..... isn't that pretty neat and easy?

^_^

 

• Back To 7 Steps To Long Term Investing

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tag: stock, market, investing, fundamental, analysis, economic, moat, value, growth, investor , warren, buffett

 

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