Find Bargain Stocks Like Buffett With These 4 Value Ratios

"Price is what you pay. Value is what you get." -- Warren Buffett

Putting his finger on this difference between price and value in stock investing is essentially what made Warren Buffett the third-richest person on Earth, according to Forbes. Today he's worth more than $44 billion.

 

What Buffett means is simply this: Every stock on the market trades for a certain price, but it's more important to know how much you're actually getting in return for paying that price. That's value.
To better explain, let's scale stocks down to lemonade stands. Say you want to make some money and you're deciding between buying one of two different lemonade stands to do it. Both stands are being sold by their owners for the same price -- $100.

If you're thinking, "What's the difference between the two stands?" then you're already thinking like a smart investor. Let's say one stand earned $20 profit last year, while the second stand earned $100 profit last year. Which stand gives you more value (i.e. more in return) for your $100 investment?

Let's look at your two investment choices: If you invested $100 into the first stand, then you could earn $20 each year and make back your original investment in five years. But if you instead invested $100 into the second stand, then you could make back your money in one year and start earning profit after that. That's a 20% annual return versus a 100% annual return on investment. It's clear that the second lemonade stand is a much better value.  (more)


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