The ten cap analysis is a quick and easy way to figure out a decent price for the business. It does not require that i come up with this growth rate or this p e ratio, both of which are really speculative. So we don't have to worry about that part of it. We just have to get a relatively conservative growth rate that we could live with. And we can come up with a price where we'd get our money back out of free cashfull over a certain number of years. That's how we use em. All three of these valuation methods comeup with a price that i could pay to day, that's in the ball park, not each other.
In Rule #1 investing, we call “buying on sale” purchasing stocks with a Margin of Safety. All you have to do to get a big MOS is know the value of the business you are buying—as a business—and then wait to buy it until the market drops much lower than the value. Today, Phil and Danielle dive deeper into Margin of Safety valuations, and explain why understanding how to value a company is critical to stockpiling.
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