Question
In Warren Buffett's approach to value investing, a 15% rate of return is significant as it is used as a benchmark for determining the current reasonable price of a company's share. This is done by working backwards from a projected future share price, assuming a 15% rate of return each year. The calculated present value is then halved to establish a margin of safety. This approach helps in making investment decisions that are likely to yield a good return while minimizing risk.
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Now, work backwards to find out what the price should be today, assuming a 15% rate of return every year. Take your future ten-year share price and divide it by 4; the result is today's reasonable price for that company. Finally, take that sticker price and cut it in half: that's your margin of safety.
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