In practical terms, this means that when you buy a stock, you should know exactly the growth rate required in the underlying earnings for it to meet your expectations. It is insufficient to say, “I bought shares of McDonald’s because I believe in ten years, they will be worth 400% more than I paid for them.” Instead, you should say, “Based upon the company’s currently low p/e ratio, improved earnings, plan to sell of locations in Latin America, and cash dividend and share repurchase programs, I think that 15% growth per annum, on average, is very likely over the next ten years. The result is a total pre-tax gain of 400% on an investment today.” The difference between the first and second statements is night and day; throwing a dart toward the stock tables versus making an informed, analytical decision based upon underlying fundamentals.
I’ve put together an entire Value Investing category filled with articles and resources to help you get started.
