29. What is Return On Equity - Warren Buffett's Favorite Number
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- Опубліковано 15 чер 2024
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Preston Pysh is the #1 selling Amazon author of two books on Warren Buffett. The books can be found at the following location:
www.amazon.com/gp/product/0982...
www.amazon.com/gp/product/1939...
In this lesson, we learned the importance of buying a company that has a strong return on equity. Since the market price of the stocks you buy is dependent on the dividends and the growth of the book value, we can quickly learn that a company that grows it's book value at a faster pace is more valuable.
When we assessed two different companies in the video, we created a situation where both companies had the exact same earnings. The difference between the companies was the size of their equity (or book value). When a company with a large amount of book value is compared to a company with less book value, the percent change in their growth will be much more difficult if earnings are similar.
When a company consistently has a strong Return on Equity, we know as investors that the management of the company is properly reinvesting the earnings of the business into assets that will continue to grow the capital earned. This is very important since most of the earnings produced by a company are retained and not paid as a dividend. When a disciplined investor purchases companies with a sustained high ROE, their investments compound at a much higher rate than other assets. The great thing with purchasing companies with high ROEs is that it helps alleviate capital gains tax if the security is held for a long period of time.
9 years later and it is still extremely helpful. Thank you Mr. Pysh 🙏
Keep these video's online forever. This is really important.
Well said 🤘
Your tutorials are among many I've watched and I must say that yours stand out in how simply they are presented and their thoroughness. All I can say is GREAT JOB and keep up the fantastic work!
I'm nearly at the end of lesson 3, great! I have to rewatch all again, to internalise this treasure. Thank you for break things down to common people like me 🙏🏿🙏🏿🙏🏿
Your method in teaching is simple and clear which suits me as an amateaure in this field of finance. Thank you so much
HI preston, I'm french and i want to say thank you for your tutorials!!! really, reallly good work. More instructive than other channels!
Thank you for helping me with my investing knowledge, you have a real talent for explaining in plain English what is potentially a complicated subject.
my brother, this is gold! thank you for sharing your knowledge! Very appreciated God Bless
Thank you. Super helpful and important. I will be coming back to this often. I wish I learned this when I was younger. I have a much better grasp of the subject now.
You are very good in explaining concepts. thanks.
It's 2021 and your video is still awesome after 9 years of posting.
Amazing courses and website!
This is the best one among cloud of articles
This is a super video!
Thank you Preston,
Vera
Great video, love this channel
Thank you Preston pysh... Can't thank you enough for making my life better
Thanks for the vid man this was really cool!
Your videos are great. Excellent work. Thank you very much!
Incredibly informative. Thank you. I wish I came across this 40 years ago.
Excellent. Thank you!!!
Dude , I love You. This is a game changer.
The best investing teacher
Great video Preston. Shout out from a big fan from Australia :)
Terrific content !!
Thank you very much man
Great video!
Thank-you for all these videos Preston. Ps, no article link here? Thanks again! 😊
Great video.
Thank you very much! 😑🙏🏼
Also a fav of ROIC, but man ROE is super important as well, thanks for the knowledge.
Hi Preston ! First thanks for all the videos, i watched everything so far, and i'm on your book "buffet's three" as well at the same time and have your second book on accounting waiting to be read after this one. And i'm pretty excited with all of what i'm learning though this. Well, and besides that I just wanted to point out that the link for the article of Buffet from 1977 is dead.
Are you referring to the book Tap Dancing to Work? I haven't read this, but plan to look at this soon. Thank you!
Thank You so much ...
Love from India 🇮🇳🇮🇳🇮🇳
Great work. There is one question I have for you though.
Return equity could just decrease because the no. of shares increase more than the increase of equity.
How would you deal with that in your calculations?
I saw all the content and become your subscriber , now I wanna know how much u made after this much knowledge?
thanks for the great info. is there a US stock screener mobile app which can scan stock base on ROE, PTBV (price to tangible book value) etc?
thx thats a great site !!
Finally, somebody who speaks english to the mere middle class mortals...Praise Be.
Fantastic videos, also the intrinsic value course in your web, I recommend it 100%, but why do you only speak about ROE, is not ROIC also important? In Mary Buffet's books she explains that Warren look at both
Great vid ***** !!!
Im reading a book called the neatest little guide to stock market investing by jason kelly. Regarding ROE there is no mention of book value the calculation that he provides is net profit/ shareholder equity *100 is my book wrong?
Hi preston I read that Buffet article you pointed to in the book here is a quote that's puzzling to me, "For the moment, let's think of those companies, not as listed stocks, but as productive enterprises. Let's also assume that the owners of those enterprises had acquired them at book value. In that case, their own return would have been around 12% too."
How is it possible aquire at a book value and only get a measly 12%? Or maybe I don't understand what he is talking about.
So, lately, I've been looking at some of the foreign stocks, in particular, Korean stocks. I realize that our analysis is based on 10 years of past book values, however, how do we analyze stocks that don't have such long of a history or it's very tedious and difficult to find the 10 year history? I was using the Hyundai Security's tool, and this only goes back 3 years . . . .
Thank you so much for this useful data! Greatly appreciated.
Brother. Let's connect. I am also doing the course. 👍
RANABIR GHOSH sure my email is global3xchange@gmail.com
@@tinnguyen2219 I have also started with stocks and watched these courses twice. Would be good to connect as well.
Hi Vinh,
Nice meeting you, I am delighted to connect with any investors and share knowledge with each other.
You can email me at valuesnip.com@gmail.com
Thank you,
Tin N
@vinh nguyen
To piggyback onto y last comment, as I look around I am getting different EPS data from different sources. Any Help on a truly reliable place to get my data to analyze?
Hi Preston, great videos and great work..in this video (29) you say looking for company with ROE up to 17% or 78%?
Thank you
Hi WsWs,
Preston said in his video that he prefers to invest in stocks with 7% or 8% ROE.
Regards.
@@ilidiomcbarros p roe acima de 10% esteja ja esticado pdoe impactar na empresa macroeconomica
Hi Preston, great videos. I'm learning a lot. You have mentioned twice, however, that you and Warren believe price changes based on book value. I ran the data through multiple different sources and it's not adding up. Price does not change consistently with book value, or ROE. Can you please show some non-anecdotal data (not just one hand picked stock example) to prove this theory? I'd really appreciate it, as it seems odd Warren Buffett would be wrong about anything.
hi there, is there a similar way to analyse index funds?
Would equity also increase from taking debt?
In Warren Buffet's Accounting, Return on Equity refers to the ROE achieved by management of the company. I.e. an indicator of how efficiently the company is able to gain a return from investments, such as in machinery or an acquisition. This video appears to take ROE figure as a direct perspective of the investor into that particular company's shares, vs. another?
Hi Alex, I was just reading the article now and I think the answer to that question is just in the paragraph above, where Buffett analyses the return of stocks for around 20years before the article and it seems the stocks were returning around 12 year on year:
" ...but over the years, and in the aggregate, the return in book value tends to keep coming back to a level around 12%."
Please create more content
Hi Preston.
Even after subscribing, I could not download the check list.
Any thoughts?
Is there a link to the 1977 article?
A+ TY!!!
Sir hou mych can i pay price to book for 20%roe company and30%roe company
Just want to confirm sir. is it the book value or the book value per share?
Hey Preston - The vid says there is a link to Warren's article on ROE for Fortune Magazine. I cant find it. Is it still available? Can you email it to me? I've already subscribed to your Podcasts service! Thanks.
Could someone tell me where is the link for Warren Buffett article for Fortune Magazine?
Here you go fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/ And I'd like to say that the link to the article on buffettsbooks.com isn't working.
Love these videos, but, as a math guy with little investing experience, this explanation of RoE scares me a little. The equity is in the denominator, so as equity goes to zero, RoE goes toward infinity, so companies with little to no equity can produce outstanding RoE numbers. Lets use the intrinsic value calculator to assess two companies that are identical, with one exception, debt.
Company A, debt free:
BV - $10,
% annual change in BV: 10% (assume 10% RoE creates corresponding growth in equity)
years: 10
discount rate: 5%
Calculated intrinsic value: $15.92
Company B, $5 in debt per share (or debt/equity of 1):
BV - $5
% annual change in BV: 20% (ignoring interest expense, same EPS generates 20% RoE)
years: 10
discount rate: 5%
Calculated intrinsic value: $19.01
So the calculator confirms the hypothesis that higher RoE produced by increased debt should be rewarded, only I cannot wrap my head around how this would be good. This is two identical companies with the exception that one has debt that the other one does not. Why would I want the company with debt?
As an engineering guy, this thing also made me a little bit confused. Imagine a company such that its book value steadily decrease but its earning per share statys the same. Would we label such company as a good company or a bad company?
Great
wouldn't a better indicator of how well a company reinvests its earning be eps/change in book value, as compared to eps/bv (roe)?
+atribecalled solitude I was kinda confused and thought the same thing after watching too... think of it like the company's equity is their pool of money and you have your own. If they can generate a return (ROE) of 20% with their money, that's likely better than you can do on your own. Even if all of that 20% doesn't go directly into their book value the next year the company is clearly smart with their money and is using it efficiently.
Jeffrey McNeary I think ROE is 5 to 10 year average which takes into account the eps and bv change over that period. It is like when we use the intrinsic value calculator to see the average change in book value over ten years except in this care we are seeing the averagr eps/bv over 5 or 10 years (depending on the years u want to use)
Great videos and very useful for beginners.
High or low ROE doesn't mean a high or low change in BV. ROE is interesting for the management and the owner of the majority of shares who can decide how the net income will be allocated. It is also interesting to bankers as well as to new investors who are willing to buy all the shares or a big majority. ROE only means that the company is able to make high or low profit compared to the equity and if the company is capable to distribute dividends and or reinvest. It doesn't mean that the BV will necessarily change.
The conclusion of the video seems to be confusing: There is no correlation between the ROE (could be high) and the return of a share (could be low). Thus, other ratios are more useful for minority stakeholders such as Yield or PER (price earning ratio) and MTB (market to book).
Why a net increase of BV could be higher than EPS within a year?
The link to the article on the BuffetsBooks-website does not work for me.. Does anyone have a working link? Thank you
Nevermind, someone has already posted the working link in a comment, here it is: fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/
So the company should pay dividends and have a high ROE or is it okay if a company pays dividends but keeps a low ROE.
striker9915 I believe ROE only becomes more of a factor as the dividends go down and the amount of money the company reinvests into the business goes up.
Another thing to consider is that if the leaders of the company can't reinvest their money properly then what else are they poor at irregardless of their dividend yield? I think a low ROE may indicate poor leadership despite paying a high dividend
Hello Preston, i'm outside of the USA. Would the 10 year federal note still apply for my 0 risk investment when doing the intrinsic value calculation?
@Preston Pysh pls reply to this. I also wanna know.
@@awinjun3502 please search the 10 year bond rate in your country. It's available on Google
Sir I have a doubt unlike in US where interest rates are typically low around 2-3 %, India has a bit higher interest rate , we get roughly 7-8% return on fixed deposit in any bank. So does this mean we can grow money a lot faster in India than in US at much lower risk? So finding a company that provides 7-8 % returns is of no use in India ? Please reply
Of course! If you manage to earn 8 percent by investing in an Indian company it's below average because you can get the same compounded returns on a FD and with tax benefits too! 12 to 15 percent is an average in a growing nation like India!
So maybe I don't understand this correctly, but why is Buffet assuming that earnings will only be12% of Book Value? Couldn't this number be much bigger due to higher earnings and lower Book Value?
All the taxes fees apply if i'm not american?
OK, I swear I'm not trolling you, lol. I just realized...Earnings was in argentinian currency, BV was in USD....
Shouldn't we divide Owner Earnings/ BV for the real ROE
I totally disagree on the relevance on ROE, I acutally think it is one of the most irrelvant ratios you can come up in a company. Banks for example, pump up ROE by simply levaraging to absurd amounts. So the ROI could actually be small, and the ROE huge because of all that liability. It is rather more interesting knowing about the Revenenue and diving it by the price of the share. That is how much money is being generated and how much you have to pay to be part of it! P/E with E growth!
What is book of value?
Its 'book value'. And its the total equity of the company divided by the number of shares. Simply put, its the equity of a company you will hold if you buy one share of the company.
You should really look st his playlist/courses he made on his channel
basically ROE is P/E or better E/P , am i right?
In PE instead of book value market price is used
Where can I find Thomas Yin so I can finally put an end to his annoying trading webinar ads?
So equity means value???? Like the real hardcore value?
Equity is the value of s shareholder's claim in the business after you minus liabilities from the assets. so yes equity is the real hardcore value
drinking a cola while watching this!
7-8% ROE??? Thats bullshit :-D average roe is 12%, he must mean 17-18 that would be above average
D
If ROE is high. The better the company?
Well u need to see the risk also like ...debt equity ratio, the intrinsic value of the company, the product of the company..will it still be sound for next 10 years?
Wtf is wrong with UA-cam ? So many advertisements these days
Diffrence between intrinsic and book value
Thx for break it down for morons like us. ;$
Be more practical mate! Real companies