“Sticker price is what I call the value of the business.” — Phil Town
Why does Phil call it the Sticker Price? You know how you have a sticker on the window of a new car and it tells you what the price of the car is, and you never pay the Sticker Price? That’s why we named the value of the business the “Sticker Price.”
Rule #1 investors never pay the Sticker Price. They always want to buy it at a significant discount to its true value.
How do you find the Sticker Price? That’s the critical part of this whole equation of understanding what businesses to buy. First, you have to make sure it’s a business that you understand the meaning of. You understand it has a big, durable moat and it has a great management team. Now you can start looking for the value.
Next, in order to evaluate the Sticker Price you want to find the Future Growth Rate, the P/E Ratio, and your Minimum Acceptable Rate of Return. The Future Growth Rate is always an estimate, the other numbers you can find on financial statements and plug them into the calculator above to see the value, or Sticker Price, of the company's stock. Next, you simply cut that price in half (or take 50%) and that is your Margin of Safety price.
For example, if you wanted to buy into a business that was worth $80 per share (Sticker Price), you would look for a Margin of Safety of $40. If the company cannot be bought at $40, then you should add it to your watchlist, update your calculations periodically as new information becomes available, and exercise patience.
This week on InvestED, Phil and Danielle discuss Phil’s investing valuation checklist more in-depth and discuss why it’s critical to only purchase companies with a large Margin of Safety, at a discounted Sticker Price.
If you want to learn more about evaluating companies using the Four Ms of Rule #1 Investing, check out this guide where Phil explains these principles more in-depth: https://bit.ly/37hIOPv
Topics discussed in this episode:
- Valuation methods of investing
- Rational investing
- The Four Ms of investing
- How to pick stocks
- Chipotle Stock
- Warren Buffett
- Charlie Munger
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