The Greatest Contributions From Mario Farina, Peter Lynch, Buffett-Munger and Li Lu In Valuation
The Greatest Contributions From Mario Farina, Peter Lynch, Buffett-Munger and Li Lu In Valuation
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The person who links P/E to Growth (P/E∝G)
— Mario Farina
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The greatest advocator of P/E∝G, making it a PEG Valuation Concept and GARP Doctrine
— Peter Lynch
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The persons who link Growth to ROIC (G∝ROIC)
— Warren Buffett and Charlie Munger
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The greatest advocator of G∝ROIC
— Li Lu
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The Linkage :
P/E∝G∝ROIC
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Leads to :
P/E∝ROIC (PEROIC)
as G≈ROIC over the long term
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Mental Model References:
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“The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
— Warren Buffett
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“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
— Charlie Munger
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The P/E ratio of any company that’s fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
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“Over the longest period of time, if you do own [the company] through the ups and downs, your return roughly approximates basically the actual business return to actual capital invested in the business itself over the long term. The two tend to really converge pretty closely.”
— Li Lu