In his latest interview with The Value Investing Channel, Chuck Akre explains how to calculate the ‘real’ rate of return. Here’s an excerpt from the interview:
So when I say what interests we talked about games or Facebook or tractors or the mall or all kinds of things. How do you know whether this will work for your benefit and the answer is it goes back to this very simple concept of rate of return.
And you need to try to figure out what the rate of return of that business can be and we do posit in fact and use it as a primary part of our research. We make a calculation about the rate at which the company is growing the real economic value per share, that’s a pretty serious thought.
We do that on a per share basis because that’s how we have our ownership, and if a company is growing at 20% but it’s issuing 10% new shares every year it means it’s diluting our return, we’re not getting 20%. So we’re paying a lot of attention to what’s happening in growth in real economic value on a per share basis.
We do posit that our return in that investment over a period of time will approximate the rate at which it’s growing real economic value per share. That’s the really central idea that is our investment will grow at a rate that approximates the rate at which the company is growing real economic value per share.
You can watch the entire interview here:
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