How to Use This Calculator:
The Rule #1 Sticker Price and Margin of Safety Calculator helps you use Big 5 Numbers and Price/Earnings to determine the Sticker Price (or value) of a company. It then calculates the Margin of Safety price at which a Rule #1 investor could safely buy the company in order to make a 15% return over a period of 10 years. This is sometimes referred to as 'buying $1 of value for just $.50'.
Margin of Safety:
|Current EPS||Est. EPS Growth Rate||Future P/E||Sticker Price||Margin of Safety|
When entering the Estimated EPS Growth Rate, remember to choose the lower of either the historical Growth Rate or the Analysts’ Earnings Estimate.
This will be the rate at which you will grow the Current EPS into the future. See Chapter 9 of Rule #1 for a refresher on choosing a historical growth rate.
The Importance of Margin of Safety for Investors
Because the Margin of Safety is just 50% less than the Sticker Price, or value of the company’s share, it allows you the ability to purchase into the business with lower risk. Setting this limitation on the value of a business before you buy it helps protect you by providing an extra 50% cushion off of the value of the company and its cost to purchase.
Since RULERS do a lot of research into businesses before buying into them it should always be something you’re confident in purchasing. However, anything can happen with the stock market and it makes sense to allot yourself an extra measure of protection. Buying at 50% off does just that.
What is the Margin of Safety?
The Margin of Safety is the rate you can buy a wonderful business at as a Rule #1 investor that is generally 50% off of the Sticker Price.
The Margin of Safety Formula
To find the Margin of Safety, you first need to find the Sticker Price of a business and its stock. In order to evaluate the Sticker Price you want to find the Growth Rate, the P/E Ratio, and the Minimum Acceptable Rate of Return. You can find these numbers on financial statements and plug them into the calculator above to see value of the company.
Next, you simply cut that price in half (or take 50%) and that is your Margin of Safety price. For example, if you wanted to buy into a business that was worth $80, you would look for a Margin of Safety of $40. If the company cannot be bought at $40 then you should add it to your watchlist and exercise patience.