I can't see how numbers should work in investing

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I will use Warren Buffett and Berkshire Hathaway as an example of the problem I am trying to figure out because he/they are obviously well-known and successful.

Berkshire Hathaway purchased See's Candies in 1972 for $25 million, which at the time had annual profit of $4.2 million. This is a "P/E Ratio" of appr. 5.95.

The most recent annual income figure I could find was $82 million in 2014.

Therefore, I will convert the 1972 dollars into 2014 dollars to adjust for inflation...

$4.2 million in 1972 income = about $23,445,709.70 in 2014. The purchase price of $25 million in 1972 would equal about $139,557,795.83 in 2014. (This is according to Westegg.com's inflation calculator).

According to these numbers, profits have risen about 249.7% over these 42 years, or about 5.95% per year. For simplicity, I will assume that it grew at a steady, constant rate of about 5.95% each year.

This means it will be about 5 years (1977) before you see your initial investment back and break even. You would have to wait until Year 9 (1981) until you doubled your initial investment and are able to buy another company of this value.

And this does not even account for the fact that you had to put a portion of the profits back into the company in order to make it grow at 5.95% every year.
 

ckyap

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tastes like chicken may contain nuts, that sums up investing. same old risks with classic flavour. amazing how formulaic the world is.
 

VirtualGlobalPhone

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farmerjohn1324 , Book of accounts is the derivative of the hard work put forth by people of the company. Warren Buffet will never invest looking into some number i am sure the success of his stories are those ppl he invested.

Does this help you in your decision ? Do share
 
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