Quote Originally Posted by winner69 View Post
Wasn't Buffett into saying that reinvesting earnings and returning the same return on equity (ROE) creates added Market value

Simple case -

Equity 1000 and 20% ROE gives 200 earnings = say PE is 10 then share price is 2000

Assume earnings retained - equity now 1200 - 20% ROE would give earnings of 240 - PE stays at 10 gives shareprice of 2400

The 200 retained has added 400 market value - 1 buck retained giving 2 bucks return ...as you say baller "Each dollar of retained earnings is translated into at least one dollar of market value."

Mr Buffett had a very simplistic approach eh. Give the 200 back to shareholders and still make 20% ROE the shareprice stays at 2000.
Now you into these things baller - have you heard of the price book (PB)? Price is share price and B(ook) is the book value or equity.

So above company has a PB of 2 - it's market value is 2 times its equity. The difference between the two is 1000 - that is the market value added, good for shareholders eh.

Seeing they maintained the 20% ROE the PB has stayed at 2 but the market valued added has increased to 1200 - even better for shareholders eh.

Very simplistic eh

Your homework - would you prefer this company to pay out 100% of earnings in divies or to retain the lot and make 20% on it?