Bruce Greenwald calculation on earnings yield

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Bruce Greenwald discussed the importance of considering earnings yield in considering an investment.  He rightfully things that DCF is far too sensitive to inputs

His method for evaluating a companies growth is well outlined in this group of articles for those of you unfamiliar with the method

 

http://luminouslogic.com/bruce-greenwald-on-valuing-a-franchise-pt-3.htm

 

http://luminouslogic.com/bruce-greenwald-on-valuing-a-franchise-pt-4.htm

 

My question:

 

This process of calculating your return on growth all seems logical exempt for the last part where you simply add the 5% organic growth.  Irrigardless of what the perfect number is for organic growth (GDP or otherwise) its the only number in the equation which has NO relation to the price paid.  It implies that if I pay 100x earnings or 1x earnings I still get the same % return on my investment from the organic growth.  This seems wrong    Love to hear your comments  thanks

[Patmo]

The market will let you buy companies that they don't care about at a major discount to current earning power. That includes companies with a growth history and growth expectations. The simple method would be to just dump growth into your margin of safety. There might be foregone opportunities this way, but no need to break your head and you get to play safer. Wait for the fat pitch they said.

[peter1234]

It implies that if I pay 100x earnings or 1x earnings I still get the same % return on my investment from the organic growth.  This seems wrong    Love to hear your comments  thanks

 

In Theory:

As long as PE multiple stays the same (big assumption), this is correct.

Think about it: your profit just increased by 5% (or whatever growth it is), so now the company is worth 5% more.

 

In Practice:

Use a margin of safety (as previous post suggests) and think about the probability of the multiple changing.

 

;)