In order to learn from Buffett, the author imitated PEG and invented a valuation parameter called “price-earnings ratio”. The formula is: price-earnings ratio = price-earnings ratio/return on equity (PR=PE/ROE). When the price-earnings ratio is equal to 1PR, it is a reasonable valuation, and if it is greater than 1PR and less than 1PR, it is overvalued and undervalued. In addition, there is a second derived formula for the price-earnings ratio (PR=PB/ROE/ROE). When investing in cyclical stocks, the current PB and multi-year average ROE can be substituted into the second formula to calculate the relatively conservative price-earnings ratio valuation of cyclical stocks. To sum up, more than 80% of Buffett’s investment cases are in line with the price-earnings ratio valuation system.
Using the price-earnings ratio first formula, it can be explained that Buffett used “40 cents to buy a dollar of Coca-Cola with intrinsic value” ( web link ). Using the second formula of price-earnings ratio, it is possible to explain why PetroChina, whose total market value was only $37 billion, should have an intrinsic value of $100 billion ( web link ). For companies that “make fake money” in the domestic stock market, the author also introduced the dividend payout ratio into the price-to-earnings ratio formula, so as to more fairly value Moutai and banks ( web link ). From 2016 to 2019, the annualized income is 20%. From 2020 to 2021, the annualized income will be 15%.
After learning the valuation method that suits me, the author started to “squeak”. In the face of his own weak circle of competence, he even tried to improve quickly in a short period of time. The most typical one is to buy COSCO SHIPPING Holdings, a “long-cycle” stock that has not opened for ten years and has been open for ten years. As mentioned earlier, the P/E ratio comes from Buffett. In Buffett’s investment case, there are only “short-cycle” stocks (such as PetroChina) that do not open for five years and eat for five years. Obviously, COSCO SHIPPING Holdings is not within the capability circle of the market-to-earnings ratio. At the same time, the author’s holdings of stocks are also increasing, even for the sake of dispersion.
A series of “squeaky” behaviors have led to the return of the Year of the Tiger to zero, and the investment income in 2022 has also dropped to less than 10%.
After thinking through the pain, say the important things three times: obey the discipline, obey the discipline, and discipline.
It is best not to be too envious of others talking about various stocks, and improving the ability circle is not overnight.
Stronger than Warren Buffett, he didn’t buy technology stocks in 2000. He was folded in IBM in 2011. It was not until 2016 that he made a lot of money on Apple.
The last thing to say is that you can also make money by guarding the stocks within your circle of competence. If you follow the rules strictly, you can even make a lot of money.
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