There isn’t any "blue book" for stocks, so how do you know the value of a business?

Here’s the key: you have to know that it is a wonderful company before you can figure the value. You simply can’t figure the value of a company that isn’t wonderful, no matter how much you want to.

A wonderful company has some sort of durable competitive advantage (Moat) and its future is predictable.

Once you find a wonderful company (and there are lots of them) that you understand (there are less of those), there are tools that will do the math for us, but if you don’t own them, you get out an Excel spreadsheet and do the following formulas:

1. =FV(): put in 10 yrs, the growth rate and the current EPS. You get EPS in ten years.

2. Multiply the future EPS by 2 times the growth rate. You get the future stock price.

3. =PV(): put in 10 years, 15% and the future stock price. You get what I call the sticker price – the value.

Understand that this is all useless if you don’t understand the Moat or if the business future isn’t predictable. In that case, move on. There are 14,000 businesses to look at. You’ll find a few that you want to own, that you understand and that you can put a value on.

If you don’t find any, don’t buy any. Staying in cash does not violate Rule #1. Buying something you aren’t certain about does.