1. When I buy shares of a company, I am a partial owner of the business entity, hence I'm entitled to get a part of the earnings generated by the entity. Hence, EPS (earnings per share) of the company is also my earnings, though the earnings can either be put back into the business to generate more future earnings, or it can be distributed to shareholders like me as dividends. 2. The market will someday price the company at the right value.We can calculate the earnings yield of a business, which is also the inverse of the P/E ratio. Supposing that the PE of a company is 12, then the earnings yield will be 8.33% (1 / 12 = 8.33%). This will be like a bond where you pay the price of the stock and expect to get an earnings of 8.33% with 2 major exceptions. First is that you might not get the principal back at the end of the period - which is both a good or bad thing because you might get more or less than the principal you put in. Second, the returns of 8.33% per year can vary - it can go up or down. Read more...
By: La Papillion
Buffettology is really a good book. I think I'm going to get this book for sure, as I think I'll re-read 12 times. I made an important realisation when I'm a quarter into the book. This realisation is handy to quickly get a rough value of a business entity that sounds promising. First of all, I need to assume 2 things: