The Elliott Wave Principle by: inspired Group
The Elliott Wave Principle
Warren Buffett is sometimes referred to as ‘The Sage Of Omaha’, such is his ability to
invest and build wealth.
A self-made billionaire, he has bought a lot of stocks, over time, as well as whole
Apparently, not once has he ever bothered to look at what Wall Street or the
financial papers or the news or the experts say about the valuation of a company (its
He simply applies his mathematical formula to calculate the worth of an asset (e.g. a
business, or a stock, or a property) based on a multiple of its cash flow.
For example, if a property (an asset) brings in $5,000 a month in net rental income,
he will calculate that, say, that property is worth 100 x $5,000 = $500,000.
Similarly for a business, if it brings in $1,000,000 a year in profits, that business will
be worth, say, 10 x $1,000,000 = $10m.
I’m oversimplifying things for the sake of the example, but the point I am making is
that he doesn’t get swept up by hysteria over a stock or panic or ebullience because
of a fad or fashion.
Instead he looks at the underlying value of that asset, and calmly assesses it’s
potential for producing cash flow.
Similarly, Robert Kiyosaki, another sophisticated investor, says that people have got
the property game all wrong.
They focus too much on capital gains, he says, rather than cash flow.
If you are buying 10 properties, you should focus on making sure those properties
are cash-flow positive (they bring in more than they cost, every month), rather than
looking at whether the property is going up or down in value.
A lot of people are in a lot of trouble financially at the moment because of this
Personally I never really got into the property game, because I looked at the
valuation of properties around the world, in 2004-2010, and they made no sense to
For example, how can a property be worth €1,500,000 if the annual rental income is
That’s just 1.33% annual return on investment (ROI).
Would you buy an asset that brings you just 1.33% returns per year?
In the UK, The Economist was calling this property price increase in the market ‘the
biggest financial bubble in history’.
The price/earnings (P/E) ratio (the price paid for a share relative to the annual net
income or profit earned by the firm per share) of stocks in the USA was 32.
Historically, that average has been 18.
(stocks issue dividends to the stock owner – a part of the profits the business has
earned – a P/E ratio of 32 means it would take 32 years of earnings to pay back the
purchase price of that stock… )
Furthermore, historically the average house price in the UK was 2.5 times annual
income – by 2006 it had risen to 4 times annual income.
The valuations of stocks, properties, and assets were making no sense to me
whatsoever – they were clearly way overvalued.
Warren Buffett says that in the Buffett household, they rejoice when the price of
hamburgers goes down, because it means they can buy more hamburgers for the
same amount of money.
He never understood, he says, why investors pile in to buy expensive stocks (i.e.
stocks with high P/E ratios) simply because everyone else is buying that stock. Clearly
those stocks are more expensive, so they’ll be able to buy less of it with their money.
In 2003 I attended a ‘Wealth Mastery’ seminar by Anthony Robbins.
One of the speakers there talked of Robert Prechter Jr.’s book, ‘Conquer The Crash’,
and talked about this upcoming financial crisis that was just around the corner.