Buffettolotgy?

[Sarge85]

Buffett Way – is it a good valuation technique.

I’ve read Buffettology and have taken to the principals listed in the book.

Basically the style supports finding companies that are “Consumer Monopolies”. I think the trend is to call consumer monopolies companies with large moats. The company is basically offering a service or good that a consumer is almost required to buy, or a reseller is “required” to have.

Furthermore the companies must have solid financials, with predictable earnings. Looking at the last 10 years, there needs to be growth each year. Warren is looking at companies compounding at a rate of 12% or higher. Generally these companies have an above average Return on Equity. I would say over 20%.

Now his valuation technique seems to be this.---

Take current Book Value (Shareholder’s Equity per Share), multiply by average ROE over the past 10 Years. This will give you your forward EPS.
If the company pays a dividend, figure out how much of the EPS will be retained by the company, and how much will be paid out in a dividend.
Add back into the Book Value the retained EPS.

Repeat the equation. I generally do it for ten years, to get a predicted EPS for 5 and 10 years.

Now using the average, high, and low PE’s over the past ten years – you can forecast what a price may be in 5 and 10 years. With the forecasted price, you can figure out what your rate of return is based on the current price.

So a few questions:
[*] If you are familiar with this method – what am I missing?[*] If I’m not missing anything – is this a “good” way to value a company?[*] I find that my forward looking EPS seem to be grossly high – to the point of almost unrealistic. Ok not a question, but why is this happening?

Sarge[img]/images/graemlins/diamond.gif[/img]