What kind of company is the most worth investing in? If only one condition can be used to decide, then Davis double-click is likely to be a good choice.
Davis double-click on mind map
What is Davis double-click? First of all, we need to understand that there are two things to decide the stock price.
1. Profit
2. P/E ratio
We use three scenarios to understand this:
Scene 1: Suppose we want to buy a breakfast shop, which can make 100,000 yuan a year, how much will the breakfast shop owner sell you? When you discuss the price, you must discuss how long it takes to make a profit after buying it, such as 10 years. If you make a profit in ten years, you have to spend 1 million, and then ten years are price-to-earnings ratio.
Scenario 2: In the first year, you thought 200,000 was a bit expensive, and there was no transaction. But I was always unwilling to give up. After the second year, I decided to raise 1 million and go to the breakfast shop owner to negotiate. As a result, the breakfast shop business was better this year, earning 120,000 yuan a year and increasing the profit by 20%. If you want to spend 1 million yuan to buy it at this time, the boss will definitely stop doing it, because if you pay back the capital in two years, you will have to spend 1.2 million this time. That is because the profit growth has increased from 1 million to 1.2 million, which is called Davis Click; if it suddenly increases by 200,000, you will definitely feel sorry for it, and then the transaction will fail. But after a year of transfer, you also wanted to open it. 1.2 million yuan is a bit expensive, but it doesn’t make a profit of 120,000 yuan a year, right? As a result, in the third year, you went to talk to the breakfast shop owner again. At this time, you saw that the breakfast shop business was even more popular. The boss made 180,000 yuan a year and the profit increased by 50%. At this time, you thought, don’t wait for the boss to ask for a price increase? It will take ten years to make a profit, and this time it will be OK. But this time the breakfast shop owner started the price again. At a growth rate of 50%, you can make a profit in 10 years. The ten-fold price-to-earnings ratio is obviously not good, you have to do it at 20 times. At this time, you have to give me 3.6 million;
combined with scenario one and scenario two, profit growth and market value also increases. This is called "Davis click". But if your profit growth rate increases, the price-to-earnings ratio will also increase, which is called Davis double click.
For example, like Chacha Food, before 2017, its profit growth rate was only about 10%, and its price-to-earnings ratio was only 20 times. By the end of 2020, the growth rate reaches 30%, and the market can accept a 40-fold price-to-earnings ratio. In the past three years, we will simply calculate: the profit increased from 220 million to 480 million, so the stock price should have risen more than twice, but with the effect of Davis' double-click, the price-to-earnings ratio increased from 20 to 40, and the stock price increased more than four times;
