Employed Capital

At the right price, any profit producing security could give me an initial rate of return of 40%.  The security could be a bond or it could be an equity.  Let's use CocaCola as an example, as its earnings growth is quite stable, and has been for some time.  So, there is a price as which Coca Cola will give me an initial rate of return of 40%. I chose 40% because that's highly likely to be the "once in a lifetime" buying opportunity.


So, let's say that CocaCola earnings are 400 (units).  When the share price falls to 1000, my initial rate of return will be 40%.  If the price is any higher, my initial rate of return will be lower.  For example, if the price was 2000, then the rate of return (400/2000) would be 20%.  Given today's average returns, the price would likely be around 6000 (400/6000), thus returning 6.6%. 

A price of 1000, in comparison to today's price of 6000, would be quite a bargain.  That is, a "once in a lifetime" opportunity.

Let's now say that this opportunity arises, and I can buy the shares for 1000.  How many should I buy?  As many as I can!  Let's say that I put 100% of my capital into CocaCola at 1000.

Next month, the buying opportunity has passed, and I'm now present with a selling opportunity.  The price is now 2000.  How much should I sell?  None!

I have the capital employed at a rate of return of 40%, which will only be increasing each year as the company continues to grow, and to recall that capital into cash would be to reduced the returns on that capital from 40% to 6%.  Why on earth would I want to do that, for the sake of "doubling my money" in the here and now, when I can get 40% pa for as long as CocaCola remains in business? 

Let me put it this way.  Should I take advantage of the "once in a lifetime" opportunity to double my money once only, or to double my money every 2.1 years, for the rest of my life?  

So long as the "employed capital" is chasing returns through earnings rather than through capital gains, the returns are locked in at the time of the purchase, and are unnaffected by any market prices changes of the security.