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-INFOTEC youtu.be/GUV3GHUePRk?si=lHLAJSyDMlfbbbzb
Joel Greenblatt has decrypted the secret of valuation, that there are 2 ultimate variables in determining the intrinsic value, namely ROIC (Return on Invested Capital) and E/P (the inverse is P/E).
This insight is in line with the essences enshrined in Warren Buffett and Charlie Munger's valuation mental models :
1. “Investors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesn’t count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.
- Warren Buffett -
2. “The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
- Warren Buffett -
3. “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
- Charlie Munger -
Which approach do you prefer?
Joel Greenblatt's ROIC:E/P approach or Peter Lynch's PEG approach?
Is it possible to merge Joel Greenblatt's ROIC:E/P approach and Peter Lynch's PEG approach into a single formula?
Kindly figure it out, it's worth to do so.