During his recent interview with the Investors’ Chronicle, Joel Greenblatt discussed how to compare apples and oranges with potential investments. Here’s an excerpt from the interview:
Greenblatt: If you’re going to buy a stock, the first hurdle you want to pass is: over time, are you going to beat the risk-free rate of 6 per cent?
That’s obviously a lot higher than the risk-free rate’s been for a long time, and as you suggest that’s one way to put in a margin of safety.
That doesn’t mean a company has to have a 6 per cent earnings yield right now. If you think it’s growing, a 6 per cent earnings yield would be really good, so that’s a little over 16 times earnings.
But even something that’s earning 4 per cent – if you think earnings are going to double in the next couple of years, then you’ll be over that 6 per cent rate we’re looking at.
So it’s a good way to look at the world of investing, how to compare apples and oranges: what do I pay, what’s my yield.
You can read the entire interview here:
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