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Monthly Archive for September, 2006
In his 2005 letter to the shareholders of Berkshire Hathaway, Warren Buffett states the following about calculating growth rates:
When growth rates are under discussion, it will pay you to be suspicious as to why the beginning and terminal years have been selected. If either year was aberrational, any calculation of growth will be distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but meaningless, growth rate.
When performing Big Moat calculations it is always worth taking second look at the results for the year on which you are basing your calculations. If the starting or ending year you select is grossly out of line with the preceeding and/or following years, your calculations will have little meaning and this could result in a false margin of safety for the stock you’re analyzing.
