![]() At the end of five years, the stock price is still at twenty dollars, and if you decide to sell, you’ve doubled your money and made a fifteen percent annual return on your one thousand shares. That means that you can’t buy any more shares with your ten thousand dollars because we don’t use Dollar Cost Averaging to buy it at any price. In this video I share an update on stocks to buy Monday as well as a homework assignment related to Put Options.WEEKLY OPTION PLAYS 1 WeekWhen They Sleep. Nothing has fundamentally changed in its long-term value, but it no longer has the Margin of Safety or Payback Time we’re looking for. Six months later you’ve managed to save another ten thousand dollars and are looking for something to invest in, so you reconsider this business you love.īut now it’s priced at twenty dollars, with a Payback Time of thirteen years. You have ten thousand dollars to invest and you buy one thousand shares. Dollar Cost AveragingĪssume that you find a business you really understand with a great Moat and Management you can get behind. Assume it has a conservative value of twenty dollars a share, it’s selling for a Margin of Safety price of ten dollars, and it has a Payback Time of eight years. ROIC is a measure of how effectively a company uses the money invested in its operations.Īs Rule #1 investors, we want to see at least ten percent ROIC per year and we don’t want to see it on a downward trend. That gets us a fifty-percent ROIC, which is a pretty amazing capital gain return! You divide the dividend, one-hundred dollars, by the total capital, two-hundred dollars. Subtract the invested capital of two-hundred dollars, they made a hundred dollar profit. That is their “investment capital.”Īfter a week, they’ve made three-hundred dollars. divide that number by total capital.įor example, let’s say your kids finance a lemonade stand for two-hundred dollars to get it up and running. One way to calculate this is to subtract dividends from net income. ROIC is the percentage return you get back from the cash you’ve plowed into your business… Return on Invested CapitalĪnother term you’ll always hear is Return on Invested Capital or ROIC. We never make purchases at the sticker price. So in this example, we want to buy this business for seven dollars. That means whatever a business is worth, we want of buy it for half of that price. ![]() The difference between the sticker price and how much we want to buy a business for is the Margin of Safety.įor Rule #1 investing, we use a fifty percent margin. Let’s say that’s fourteen dollars. Then there’s how much we want to buy it for. ![]() Then there’s the price it’s actually worth. Let’s say this business is going for twenty dollars. Margin of Safety is how we provide room for error when we invest. There is the sticker price that a business is going for in the market. You’re going to hear Margin of Safety a lot. What's your Investing IQ? See how you stack up against other investors.
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