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Rule number one investing formula

If we assume our interest rate compounds annually, we can also replace n for 1. Next, use the power rule to bring down the exponent. The natural logarithm of 2 is about 0. In other words, we can say, 0. We can multiply both sides by so that we can use the interest rate as a whole number, instead of a decimal. So, we have Since What does the rule of 72 tell you? People like to see how their money grows — especially how their investment doubles. The calculation to figure out how much time it will take to double your money is related to the compound interest formula.

Instead, the rule of 72 uses compound interest interest on your original investment plus the interest earned on your previous interest. In other words, the rule of 72 assumes that every time your investment pays interest, you reinvest that money. Your interest is also working to earn more interest. Compound interest helps your investment grow faster. How do you calculate the rule of 72?

While deriving the rule of 72 requires a bit more math, the rule of 72 only involves division. You can estimate the doubling time of nearly any investment by dividing 72 by the annual growth rate. The rule of 72 can also tell you about money decay.

What is the difference between the rule of 69 vs. Walmart, Amazon and Costco all have price moats. In order to accurately value a company, you need to be able to predict their future earnings. Sustainable competitive moats make the future earnings of a company more predictable. If a company does not have a sustainable competitive moat then their future earnings are unpredictable.

The numbers should be stable or growing over the past 10 years if the moat is sustainable. Management When analysing the management of a company we are most concerned with the CEO. The CEO should be someone who lives and breathes the company. The CEO should show 2 key traits They should be owner oriented They should be driven If a CEO is owner oriented their personal interests should align with the shareholders owners.

It is what will get the CEO up in the morning. Here are some examples of BAGs. NASA — Land a man on the moon. Boeing — Become the dominant player in commercial aircraft and bring the world into the jet age. Margin of Safety In order for a company to be available at an attractive price, you must be able to buy it at a considerable margin of safety. Obviously in order to buy a company at a margin of safety we first need to calculate the sticker price. Calculating the Sticker Price The value of a business is equal to the money it will make its owners in the future.

In order to calculate the sticker price we need 4 things. We want to know what the company will be worth in 10 years time. In order to figure out what the company will be worth in 10 years, we need to estimate how much the company will be earning in 10 years. To figure out how much the company will be earning in 10 years we need to grow the current EPS by the estimated future EPS growth rate for 10 years.

We then need to work out what the market will be willing to pay. We then discount the future price by our minimum rate of return to find our sticker price. If we apply our margin of safety to the sticker price this is the amount we are willing to pay for the stock. Technical Analysis One of the most surprising things I learned from the book was how to use technical analysis to complement your fundamental analysis, mainly how to time your entry and exit.

He has two fundamental reasons. The company is overvalued The company is no longer wonderful. When the company is getting close to its sticker price it may be a sign that the company is starting to become overvalued. Using the technical indicators we can time our exit before the price comes back down.

A company may no longer be wonderful when it loses its competitive moat. A company will lose its competitive moat for two reasons.

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And the great news is that each one of these questions can be answered by simple investment formulas. Use A for working out what percentage of your portfolio should be invested in stocks compared to bonds. Use B to determine how much of your nest egg you can safely withdraw per year. The first is saving money.

The second part involves investing that money so that it grows at a quicker rate and the final piece of the puzzle is spending. In the beginning people often forget about the spending bit, but at some point you are going to reach a point where you need to start dipping into those savings…….. The question then becomes how much can I safely withdraw without running out of money?

Some people think you should be able to make a fortune. The name Buffett comes to mind! A few of my crypto currency trading mates come to mind! The most successful angel investors are not clairvoyant. Just like you, they face uncertainty. He took a calculated risk. Think about it this way. Would you make the bet? You should. Did you make a bad decision? They say, of course I made a bad decision. But the truth is you made a great decision.

You just got a bad outcome. The same holds true for investing. Would you then flip the coin again? You certainly should. Say you flipped the coin times. The statistical probability is you would win half the time and lose the other half. Would you roll the die? The answer should still be yes. But just one good roll can gain it. As an angel investor, asymmetric risk is the risk you want to take. You should always take the asymmetric risk if the probable return is higher than the probable loss.

Blue chip companies are established, late stage and have minimal risk not zero risk — even blue chip companies can fail. There is barely any potential for upside with them. But you do hear stories of angel investors who made a fortune by making a very risky bet in those same companies when they were just startups. Financial advisors lure you with the promise of building your wealth while hedging against their own risk.

The implicit goal is to protect themselves against liability. We have already established that the highest rewards come from the highest risk. They risk losing their jobs, getting sued and getting in trouble with regulators.

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Rule number one investing formula We then discount the future price by our minimum rate of return to find our sticker price. The strategy, which is value-based, was developed by investor and hedge fund manager Joel Greenblatt and published in The Little Book That Beat the Market in Calculating the Sticker Price The value of a business is equal to the money it will make its owners in the future. The rule of 72 was written nearly a century later. You read the business section of the daily newspaper, you get the bulletins from Wallstreet, and you wish you knew how to invest.
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So rule number one is about investing, not about speculating. Investing is about certainty. Who Uses Rule 1 Investing Principles? Who uses Rule 1 style investing anyway? Well, just about the best investors in the world are unanimously using this strategy.

Ben Graham started it all. Warren Buffett is the most famous proponent to Rule 1 investing. Eddie Lampert one of the best investors right now. Bill Ackman runs Pershing Square. These guys are hedge fund managers, some of the best investors in the world.

They just buy something and hope and wait. These are not Rule 1 strategies. John was the founding chairman and CEO of napster. He has an impressive track record as both a founder and startup investor. And he will be sharing his thoughts — and occasional startup recommendations — on an ongoing basis with the Early Investing community. John is one of the sharpest minds in the space. We hope you enjoy his insights!

There are only two surefire ways to acquire massive wealth in America: Inherit money, and Obtain ownership equity in a very early stage company that becomes a phenomenal success. Unless you won the genetic lottery, we can rule out the first option. That leaves option 2 — angel investing. Get Early Investing into your inbox Become a smarter investor in startups, crypto and cannabis by subscribing to our FREE newsletter filled with market research, trends and expert analysis.

In all kinds of investing the basic rule of thumb is buy low, sell high. Equity in early stage companies comes at a dirt cheap price compared to equity in late stage companies that are publicly traded. Back in , Peter Thiel acquired a That investment netted him almost 45 million shares. Although shares in the company were dirt cheap then, there was another hidden price: risk. Investing in startups is an enormous risk. Clearly, startup investing is high risk. For most people, the high risk is enough of a deterrent to prevent them from investing altogether.

But that is a massive error. The most important lesson in investing is this: To become a billionaire, you have to be willing to take risks for your high conviction ideas. The most successful angel investors are not clairvoyant. Just like you, they face uncertainty. He took a calculated risk. Think about it this way. Would you make the bet?

You should. Did you make a bad decision? They say, of course I made a bad decision.

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Investing Lessons from Formula One - InvestED Podcast

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