In order to figure out what fair value you ought to pay for a stock, you need to know four things: the current profits, the number of shares outstanding, the capitalization rate, and the expected growth rate. You already know two of those things: the current profits and the number of shares outstanding. In other words, the value of any security comes down to figuring out the relationship between the capitalization rate and the expected growth rate.
Let’s imagine then, if you are familiar with Coca-Cola’s history of dividend growth dating back to 1963, know that it sells over 10,000 products per second in over 200 countries, and derive some solace from the fact that the most famous investor in the world has made a lot of money owning Coca-Cola for the long term. But even though overpaying for great assets can eventually work itself out over an extremely long … Read the rest of this article!