A RULE #1 investor can figure this out by knowing what this company is worth and checking your Internet tools regularly.
Here’s how. There are analysts whose job is to figure out how fast Bed, Bath & Beyond or Whole Foods are going to grow. They set up a system, available on your computer now, where you click a button and it gives you that information.
The only other part of the equation is: How much money do you want to make per year? Personally, I want to make 15% a year. That’s my minimum acceptable rate of return. So, if I know how fast the company is going to grow then it’s easy to grow today’s current price forward ten years and figure out what it’s going to be worth. The computer does that for me automatically. Then it tells me that if I want to make 15% a year, here’s the retail price, or what I call the sticker price. But I never pay retail, and neither do you.
You don’t go down to the car dealer and pay the sticker price. So, we take 50% off of that sticker price; this is our on-sale price. I also call it a margin-of-safety price, because it is half of what the business is worth.
Finally, it’s time to look at the actual market price and see if you’re going to be buying this business right away or not. You buy it when the market price matches or is below your on-sale price, your margin-of-safety price. Then you sell it when the market price gets back up to the sticker price.