Gromit
a week ago

Compounding the rule of 72

You just have to love the formula or a compounding table or compounding calculator

The other maths I like when looking at shares so many ways to come up with a valuation one of my first though is

Pe ratio as share price divided by eps

 Furthermore if you read your reports financials the projected  EPs averaged over the previous five years and add then look at the Dividend along with its payout ratio.

t's possible to formulate possible returns I always lower the projected EPs to create my margin of safety.

Won't go into debt ratios and revenues etc as they also come in or looking at the core fundamentals of moat characteristics management etc but as you can see I like profitable company's to begin with.

Always good to hear how others formulate their maths and what or how they gain their valuations from.

Happy compounding to the future may we all grow in knowledge of the ups and downs of each passing year

 

 

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Darling
2 weeks ago

If you haven't come across it there is a mathematical formula that calculates how long it takes to double you money in investing. It is interesting to discuss in the context of Warren Buffet's investment performance.

Warren Buffett turned 90 last August and one of the headlines that celebrated his birthday read “Warren Buffett made 85% of his $69 billion fortune after turning 65”. There is hope for us all, right? Truth be known he started this 25 year journey with $11 billion!

Buffett has not made a secret of how he has done this and in fact the results aren’t even that impressive. His compounding return has been 7.6% per annum over the last 25 years. Many Australian home owners will have achieved significantly better returns on their equity by buying a house 25 years ago. The important thing is that the money remained invested and that the return from the investment was re-invested, in other words: “compounding”. This is not a new concept. Benjamin Franklin said “Money makes money. And the money that makes money makes more money”

There is a handy quirk of maths used in finance called the “rule of 72”. This rule tells you how long it will take you to double your money at a given rate of return. The method is to divide 72 by the annual rate of return. For example:

72 / 5.0% = 14.4 years to double your money at 5% growth rate

72/10% = 7.2 years to double your money at 10% growth rate

By the way, the CBA’s best cash offer is 0.35% per annum:  so it will take a depressing 205 years (72/0.35%) to double your money if you save with CBA  (and that’s without paying tax!).  This rate of return goes some way to explaining the great exuberance being shown in the stock market currently.

For many years Buffett’s company was able to grow investor funds at over 21% p.a. Accordingly, for around 30 years or so at the end of the last century Buffett’s shareholders doubled their money every 3.4 years: 72/21% = 3.4.

His rate of growth has slowed. As his company has become bigger the amount of capital to successfully employ has become a drag on its growth rate. Should he return a comparatively meagre 7.2% p.a. over the next 10 years, when  he turns 100 the headline will be: “Buffett made 50% of his $138 billion fortune after turning 90.” The rule of 72 works for all of us, Buffett just starts with more!

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Rapstar
2 weeks ago

I taught my daughter this rule a few months ago for her year 10 math class.  She went to class, and showed her maths teacher herr workings.  He had never seen this before and had a bit of a chuckle about it......

 

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Tom73
2 weeks ago

I remimber my dad telling me about the rule of 72 about 35 years ago, it facinated me as a kid that I could put money in the bank (at around 10% at the time) and it would double in 7 years and you didn't have to do anything!!!  Mathamagic, why didn't it take 10 years... ah compunding!

I sitll don't understany why the magic of compounding and a simple rule like this arint widely known and understood...

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