To Warren Buffet's way of thinking, companies with durable competitive advantage have such consistent earnings that their stocks become a sort of bond. He calls the stock an equity/bond, and it pays an interest rate equal to the yearly return on equity that the business is earning. The earnings-per-share figure is the equity/bond's yield. If the company has a shareholders' equity value (book value) of $10 a share and net earnings of $2.50 a share, Warren would say that the company is getting a return on its equity/bond of 25% ( $2.50 / $10 = 25%).
But since a business's earnings fluctuate, the return on the equity/bond is not a fixed figure as it is with other bonds. Warren belives that with an equity/bond, one is buying a variable rate of return, which can be positive for the investor if earnings increase, or negative if earnings decrease. The return on the equity/bond will fluctuate as the relationship of equity (book value) to net earnings changes.
http://books.google.com.my/books?id=COhQRkmYD_sC&pg=PA215&lpg=PA215&dq=equity+bond+of+buffett&source=bl&ots=_eVqbLzNyw&sig=uRfYVkjehVk5rrjw1v0l-vvo-hs&hl=en&sa=X&ei=55_uT5erGo_zrQfi4vm9DQ&ved=0CFMQ6AEwAjiCAQ#v=onepage&q=equity%20bond%20of%20buffett&f=false
But since a business's earnings fluctuate, the return on the equity/bond is not a fixed figure as it is with other bonds. Warren belives that with an equity/bond, one is buying a variable rate of return, which can be positive for the investor if earnings increase, or negative if earnings decrease. The return on the equity/bond will fluctuate as the relationship of equity (book value) to net earnings changes.
http://books.google.com.my/books?id=COhQRkmYD_sC&pg=PA215&lpg=PA215&dq=equity+bond+of+buffett&source=bl&ots=_eVqbLzNyw&sig=uRfYVkjehVk5rrjw1v0l-vvo-hs&hl=en&sa=X&ei=55_uT5erGo_zrQfi4vm9DQ&ved=0CFMQ6AEwAjiCAQ#v=onepage&q=equity%20bond%20of%20buffett&f=false
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