The most important activity of an investor is to be able to estimate with confidence the profit rate on buying stock in a company and holding it for your investment time frame. And you want to be able to do this based on numbers that you can see and adjust such as the growth rate of earnings.

You can do this and more in a few minutes with the Valuesoft Investment System.

Valuesoft provides essential tools for investors of all levels, from those just getting started to the most experienced professionals.

The building blocks of Valuesoft are investment functions. You can use these functions on their own. Or you can use them to build templates to suit your own needs. With these functions and templates you will be able to focus on the important aspects of investing and not get hung up on jargon, rumors, and complex calculations.

All the functions are clearly explained in the manual along with examples of different types of templates. The following is an example of how to use one of the Valuesoft functions to analyze a company.

Let's do an analysis on Johnson & Johnson, the health care product company. After having done some research on the company (its products, competitors, and so on), you are ready to crunch some numbers. (For an example of an Australian company, click here.)

• http://finance.yahoo.com/q?s=JNJ (Summary page),

• http://finance.yahoo.com/q/ae?s=JNJ (Analyst Estimates page).

You might find it easiest to print these pages before you start. The following is the list of the required data and the page where you can find it. (More details of these terms can be found in our glossary:  click here. For the financial glossary at Yahoo, click here.)

Current price: this is the last price at which the stock was sold (Profile page)
Earnings per share (EPS): the total earnings of the company divided by the number of shares outstanding (profile page). Think of this as the amount of money that the company is earning on your behalf for each share that you own (Profile page).
Price to earnings ratio (P/E ratio): the current price divided by the earnings per share (Profile page).
Projected growth rate of earnings: this is a forecast of the average growth rate of earnings. Use the figure in the column "Next 5 Years" on the Analysts Estimates page even though you may have a longer time frame in mind. If you are not given a figure (perhaps because no analysts are following the company), enter the average percentage growth rate for the past 5 years. If this is also missing, then beware of investing in this company. With less than five years of data, it is very difficult to make any forecasts. (In the Level 2 Templates you will see how to avoid having to rely on analyst forecasts.)
Years: the time frame of your investment. Generally this will be 5 years or more.
Payout rate: this is the percentage of earnings that the company pays out in dividends. You can get this figure at the Key Statistics page, under the 'Dividends & Splits' table. You can also calculate it by dividing Dividend by Earnings per Share. For example, if the dividends are $1.66 and the EPS is $3.51, then the payout ratio is 1.66 / 3.51= 47.3%. (Even simpler is to type "= 1.66 / 3.51" in the appropriate cell and Excel will do the calculation for you.)

For things like the P/E ratio and the projected growth rate, don't worry too much about decimal places. It is likely that you will change them to more conservative figures when you have everything all set up.

The last two requirements are:

Tax rate on dividends: this is your marginal rate of tax.
Tax rate on capital gains: for simplicity I will set these at 0% in the following examples.

When you have done this you get the following numbers.

Now enter this data into an Excel page to get something like shown in the following figure:

I have formatted some of the cells as percentages. Otherwise you can leave them as decimals.

In the cell I3 type =STRETD(A4,B4,C4,D4,E4,F4,G4,H4) and press return. (You don't need to use uppercase letters. And if you are more familiar with Excel, you can get the same result by using the function button and going to the function STRETD, which stands for STock RETurn with Dividends reinvested.)

When you have done this you will get:

In this case I have formatted the cell I3 as a percentage. If you did not do this you would get a decimal number. In this case I have put the cursor back into cell I3. Notice that =STRETD(A4,B4,C4,D4,E4,F4,G4,H4) has appeared in a box at the top of the page.

The number 11.17% is an estimate of the before-tax annual return by purchasing JNJ for $63.05 and holding it for 5 years.

At the time of writing this, Valueline estimated that the 3 to 5 year return for JNJ would be in the range 12% to 18% per year so you can see that the figures are similar. The huge advantage of Valuesoft is that you can put in your own estimates of the P/E ratio so that you can see exactly the effect on the final result. We will demonstrate this below. The other major benefit of valuesoft is cost: around $75 instead of thousands of dollars.

Of course, the above only works when you have purchased and loaded Valuesoft. Without Valuesoft, you will get the result #NAME?

Margin of Safety
Remember,  none of the inputs can be totally accurate. It is up to you to adjust them to allow for a margin of safety and other outcomes of your investigations. (In the Level 2 Templates we show how Valuesoft has built-in finctions for calculating a level of safety as a staring point for your own margin of safety.)

In the 1999 annual report of Berkshire Hathaway, Warren Buffett said that he employs "a range of values, rather than some pseudo-precise figure." With Valuesoft this is a snap since each time you enter a new number and press return, the answer is automatically recalculated.

For example, you may think that a projected P/E ratio of 17.98 is too high so you replace it by 15. Also you are not sure about the projected growth rate of earnings so you replace it by 6.0%. Now you get the results:

This time the estimated after-tax return is 5.47% per year. What this means is that under a margin of safety you will make at least 5.47% per year over the next 5 years. At the same time it leaves the upside open so that the final return could be much higher.

With more experience, you can do the above in a few minutes. Once you have set it up for a company, it is a simple matter to update that data as new information becomes available.

STRETD is only one of the 25 functions in Valuesoft. One of my other favorite functions is TARGD. This calculates the price that you would need to pay to achieve your desired return. When you do this, you set yourself up to wait until there is a dip in the price. At that moment you can buy the stock you want at your price to get your return.

Click here to purchase the Valuesoft Investment System.

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Level 2 Templates Click here