To this point we've decided we want to own Google and that its almost a wonderful company (a wonderful company by definition is predictable and therefore possible to put a value on and Google isn't - see below). It is also available at what might turn out to be an attractive price (but I can't be certain). Now we want to buy it as if it is a business and not a stock. To do so, we have to calculate Yield. But first a word about Mr. Market:
6. Mr. Market: Mr. Market is my partner. He's going to sell me all the Google I want, but he names the price. Mr. Market is often quite lucid and rational. He usually prices the companies he is buying and selling at reasonable prices that reflect a reasonable estimation of future value. I say 'usually' because sometimes he gets emotional. Giddy actually.
And, being overly enthusiastic about the future, starts pricing businesses at higher and higher prices relative to value. Often Mr. Market's gets overly enthusiastic just because the price went up the day before.
Nothing rational about that, but there you have it. This is, of course, fabulous if I'm selling something; but it isn't so great if I'm buying. And since I'm a business buyer, I'd much rather see Mr. Market in his other state - abject and total fear.
When he gets like that, the sun, contrary to Annie's contention, is NOT going to come up tomorrow. And so, he puts wonderful companies up for sale at really sick prices.
As a buyer I want Mr. Market to get terrified about something and let me steal a company at a great price. But in this current situation, Mr. Market isn't terrified at all. At best (from a buyer's perspective) he's being kind of timid -- and because of that he might be pricing Google way below its value.
I'm thinking the timidity is because of the beating Mr. Market got in the last big tech stocks he owned. Bloodied him up something awful and he hasn't forgotten. So Mr. Market is cooperating with us by pricing this below value. How nice.
7. Yield: Yield is calculated by dividing EPS by Price. If the EPS is $5 (I'm using $5 because of the latest EPS report) and the price is $200, the Yield is 2.5%. That ain't great considering I can buy a t-bill for 4.5%. So why do it? Because Google can make the Yield bigger and the t-bill ain't going anywhere.
As the earnings grow, so does the Yield, based on our original price. Lets assume the 30% growth in earnings again and see what the annual Yield will be in 10 years: =FV(30%,10,-2.5). In this formula for PV I'm using the current Yield instead of current EPS. If it all works out I get an annual Yield from Google in ten years of 34%. Per YEAR! And growing! Dang, man! That's a pretty good deal compared to a t-bill that is still paying out 4.5% in ten years! If I can see a Yield of over 30% a year in 10 years, that is a good looking investment. (Growing Yields, by the way, is the secret of Buffett's incredible rates of return.)
So. Google is nearly YUMMMMY. Management is an issue. Margin of Safety is a big issue since I can't be certain that Google will be in business in ten years. But the MOS is big enough that I can probably make a big mistake and still make money on this at $200.
So I bought it. Could I be wrong? Yeah. But since the only thing that will make this stock price go up is institutions pouring money into it, I've got to watch them carefully to protect myself from the downside. That's my dirty little secret. Knowing how to use tech tools to get out if either Google, or its group or its sector or the whole market start to go down.
Rule #1 is all about not losing money. First find a wonderful company at an attractive price. We just did that, admittedly aggressively on predicting value (but then this is going in the 'Risky Biz' portfolio - the 10% speculative money.) Now I'll watch the short term indicators and bail if it turns against me aggressively. That bit we'll discuss later. Thank you, God, for a tax free Defined Benefit Plan and cheap commissions!
Now I'm going to go Google the theaters around here and see if there is a movie on that I want to see tonight. And by doing that, I just put some more money in my company's pocket! How cool is that!
