So lets start right away. Suppose you have identified a great company which makes a great product. The company itself owns a lot of shares and roce is over 20% and roe is about the same. Now market is going down by the day. Here is an example of XYZ corp
Price Rs 50
Eps 10
Roce (avg 5 years) 33%
Roce (avg 5 years) 25%
Enterprise value 98 crore ($14 million)
Profit before taxes 43 Crores($6 million)
Everything looks great and all till now. This is where exctiement gets in. Now lets add another layer to it. Suppose the economy goes down and now the earnings are slashed by 50 % and now the eps is 5 instead of 10.
If you calculate the intrinsic value with 5 and even then it makes sense. Your chances of sucess are quite high i believe.
There are lot of layers of hubris, folly and compalcency on all of us. The key is to remove them. Once i heard Charlie Munger say that each year you should beat your best idea. There is lot of depth in that line. So keep growing and keep learning
So how de we become the best we can, i believe by learning from other people’s mistake, reversion to the mean and a lot reading.
Books am reading
Trillion dollar coach by Eric Schmidt
Billions dollar lesson By paul b carroll
