# Bruce greenwald value investing lecture 5 masters

**E FOREX PAMM ACCOUNT**

In the next chapter, I try to take a little more time to discuss all the variables. Some math: A closer look at all the variables In this section, I will discuss all the components of Bruce's formula. Most readers will be familiar with Gordon's dividend growth model, which looks like this: In this formula, P stands for the share price, D stands for dividend, R is the cost of capital and G is the growth rate of dividends. The simple formula basically discounts all the expected dividends "D" at the cost of capital "R" , while taking into account that the dividend grows at a constant rate "G".

One could rearrange the formula to get the expected return as the dependent variable "R" , as opposed to the share price "P". For readers with a background in finance, this is similar to the transformation from net present value What is the company worth when all the future cash flows are discounted at the cost of capital?

The formula looks like this: This formula essentially shows that there are two components of investment returns. The formula looks like this: Where b stands for the part of earnings that is distributed to investors hence: 1 minus b is the amount of earnings that are reinvested in the business , E is earnings, ROE is the return on equity and h stands for the organic growth rate. The formula looks a little scary at first, but if you look more closely, it is not that difficult to interpret: The first component, , represents the fraction of earnings that are distributed to shareholders via dividends and buybacks.

You can basically see it as the "dividend-plus-share-buyback-yield". It is extremely important to note that value matters! The second component, , represents the return a shareholders gets out of the fact that earnings that are not given back to shareholders can be reinvested. It basically puts a price - or rate of return - on all the earnings that are made on the money that is made on investments out of retained earnings in perpetuity.

If the ROE is exactly equal to R, growth neither destroys nor creates value. If the ROE is below R, investments destroy value. The last part "h" represents the organic growth rate, or the percentage return an investor gets because the demand for products, and thus, sales and profits increases as the economy expands. At first, I had difficulties in grasping this conceptually: How can you assume a company can just grow its earnings without any investments in the future?

Nonetheless, I advise you to be extremely conservative with the growth rate you pencil in, as most companies - note the lion share of companies that do not have franchise value - have much lower, and certainly more volatile, growth rates. I also had difficulties in grasping how can you translate a growth rate of earnings directly into expected share returns?

Look at this spreadsheet to see that if you assume perpetual cash flows, this is indeed the case. What returns can long-run shareholders of Wal-Mart expect? In the rest of this article, the long-run share return of Wal-Mart is estimated. The next section elaborates on the input variables for the three return components - dividends, re-investments and organic growth.

The dividend and share buyback return component In the first component of the formula, we need to have an idea of the return an investor gets in the form of buybacks and dividends. Earnings Power Value and Growth 2b. Private Market Value 3. Margin of Safety 13 Mr. Market and the Intrinsic Value Weekly data at adjusted close from to 14 Mr. One of your partners, Mr. Market, …. Often Mr.

Warren Buffett describes the mood swings of Mr. In other words, Mr. It is not that they are deficient in intelligence. The trouble is just the opposite. Too many clever and experienced people are engaged simultaneously in trying to outwit one another in the market.

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