The Rule of 72 is a handy shortcut for estimating growthmore precisely it helps

# The rule of 72 is a handy shortcut for estimating

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The Rule of 72 is a handy shortcut for estimating growth—more precisely, it helps you figure out when your money (or any number) will double at a given interest (growth) rate. First, it helps to understand that it’s called the Rule of 72 because at 10 percent, money doubles every 7.2 years and when you divide 7.2 by 10 percent, you get 72. For example, if you want to know how long it’ll take to double your money at 9 percent interest, divide 9 into 72 and you get eight years. You can also do the reverse, and solve for the interest (growth) rate. For example, if
your money has to double in two years so you can buy a trip to Europe, you’ll need 72 / 2 = 36 percent rate of return on your stash. So the Rule of 72 is an approximation, but it’s a remarkably accurate one. Let’s try it here using Ralph Lauren’s BVPS numbers. RL’s BVPS goes from \$6.60 to \$24.02 in nine years. Follow along: Take the \$6.60 and roughly double it to \$13 (that’s one double). Then double again to \$26 (that’s two doubles). The most recent BVPS is \$24, which is less than the \$26 we reached with two doubles, so we don’t quite have two doubles in nine years. One more year of growth, though, and we’d have two full doubles, so let’s say it has doubled once every five years. Divide 5 into 72. You get 14.4 percent. Round up to 15 percent and you get the same answer as you would have in Excel or in my online calculators. And we can see from the graph that it’s also quite consistent over most all time periods. This is what we’re looking for. Now let’s see if RL holds that level of consistency through the other growth numbers: Sales, Earnings, and Cash.
On the left side of the page, under Financial Results, click on Statements. Click on the tab Ten Year Summary. On this page we can look at the growth rates for both Sales and Earnings. Earnings per share, EPS, grew from 91 cents to \$3.99 in nine years. I’m not going to worry about getting the latest earnings. I’m looking for the five-year view, not the six-month view. Calculate that growth rate using the Rule of 72 again. Let’s go step by step. 1. First, let’s round \$0.91, the EPS from 1999, to just \$0.90 for ease of calculation. 2. Now double \$0.90 as many times as you can and still not go over the 2008 EPS of \$3.99. \$0.90 to \$1.80 is one double (.9 × 2). And \$1.80 to \$3.60 is two doubles (1.8 × 2). So it takes more than two doubles to get to \$3.99 in nine years. 3. So how many years does it take to double one time? Well, if two doubles in nine years is 4.5 years per double, and we have more than two doubles, we can call it four years for one double. 4. Now we use the Rule of 72, which says if you know the number of years it takes to double once, divide the years into 72 and you get the growth rate. So now divide 4 into 72 and you get 18 percent for the EPS growth rate.
Check that with my calculator on the website, and you’ll see we’re correct.

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• Spring '20
• Warren Buffett

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