The Truth About The Earnings Power Value

Video Length: 00:12:09

Since the rise of the internet, anyone with access to a computer, and now a mobile phone, can blog or vlog just about anything.

Globally, this has given rise to a number of people teaching others how to invest in the share market.

Before the internet; newspaper editors, radio producers, book publishers and TV producers were the gateway, which held back or promoted people, who wanted to teach investing to the general public.

This gateway served a useful purpose, as most of the time it filtered out those who weren’t qualified to speak or who are bat shit crazy.

The internet blew off the doors to this gateway, creating in effect, a large market place of ideas in the internet sphere.

This market place of ideas is also useful in filtering out those who know what they are talking about compared to those who think they do.

In the market place of ideas; no idea or mental model, is off-limits, nor should they be. Every idea, we as Bloggers and Vloggers place out in this market place, is and should be, subject to critique.

Especially, considering that the advice we are providing could result in severe consequences for the person listening and acting upon our advice.

And, one idea used in practice by value investors, that we need to critique, is the Earnings Power Value concept. In this article, we will look at why parts of the equation need changing, and in doing so, how it would better suit your needs.

What is EPV?

And the formula looks like this:

EPV = Adjusted Net Earnings X (1 / Cost of Capital)

Bruce Greenwald summed up why this formula is important:

The second most reliable measure of a firm’s intrinsic value is the second calculation made by [Benjamin] Graham and [David] Dodd, namely, the value of its current earnings, properly adjusted. This value can be estimated with more certainty than future earnings or cash flows, and it is more relevant to today’s values than are earnings in the past.

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Disclaimer: This article represents the opinions of Mr. Parris. Mr. Parris is not a licensed investment advisor. Mr. Parris may hold either long or short positions in securities of various companies ...

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