The rule of 20

by John Authers/ BS

Is the rule of 20 back in force? This measure was popular in the 1950s and 1960s in the US, stating that the price/earnings multiple to pay for a stock could be derived by subtracting the current inflation rate from 20.
The rule worked well, and was aligned with investment logic – if inflation is higher, a company’s future earnings are worth less now, and so they should attract a lower multiple.

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Additional Readings:

Additional Reports:

Off-Topic Readings:

Parting Thought:

  • Read Ben Graham and Phil Fisher, read annual reports, but don’t do equations with Greek letters in them. – Warren Buffett
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