How Buffett Uses Clean Surplus Accounting to Determine the Future Target Price and the All-Important Purchase Price, or Buy Low and Sell High
Everyone knows the key to making money in the stock market is to buy low and sell high. In the past, we didn't have a clue as to what was high and what was low. In this chapter, you will learn how to calculate both a purchase price and a sell price in order to obtain your long-term required return. After all, this is how Warren Buffett became one of the richest individuals in the world.
In this chapter, I will show you, according to Mary Buffett and David Clark in their book Buffettology, how Warren Buffett determines a “target” price and a “purchase” price. A slight problem is even Mary and David don't know that Warren Buffett uses Clean Surplus Accounting. But thank you, Mary and David, for showing the world the target price and purchase price calculations.
Warren Buffett uses Clean Surplus Accounting to determine the level of operating efficiency (ROE) and the consistency of that operating efficiency. The more consistent a company is in its operating efficiency, the better he (or anyone) is able to predict a future price. If he can effectively predict a future price, he can then determine when the value (market price) of the company gets to a low enough level (purchase price) that will generate his required return over the next decade. The difference between his purchase price ...