Rate of Return

These are 2 examples to demonstrate the principle of rate of return (from Buffetology Workbook):

If you buy a house for $200,000 and put $50,000 down, that $50,000 is your equity on the property. When renting out the property the profit obtained (rent collected minus expenses, tax, mortgages, etc.) is your return on equity. If you rented a house for $15,000 and had $10,000 in total expenses, then you would earn $5000 on your $50,000 in equity. This would be a 10% return on equity.

If you own stock in a business, who had $10 million in assets and $4 million in liabilities, the shareholders equity in the business would be $6 million. If the company earned a net profit of $1,980,000 the business’s return on shareholder’s equity would be 33%. ($1,980,000 % $6,000,000 = 33%)

The average shareholder return for the stock market for the past 40 years has been around 12%.