What is windage growth rate?
- Windage growth rate is a conservative estimate of future earnings growth.
- It starts with historical growth and subtracts 20 percent as a safety buffer.
- Town caps the forward growth projection at 20 percent, even if historical growth is higher.
- Using a conservative growth rate helps you avoid overpaying for a stock.
What is windage growth rate?
Windage growth rate is the conservative growth projection you use to value a business. It starts with the historical growth rate and subtracts 20 percent as a safety buffer. That's the Rule #1 way to avoid overpaying.
Phil Town, the Rule #1 investor, calls this the windage growth rate. It's the number you plug into your discounted cash flow analysis. You want a conservative estimate so you don't pay too much for future earnings.
How to calculate windage growth rate
Start with the historical growth rate of earnings per share over the last 10 years. Then multiply that rate by 0.8 to get the windage growth rate. That's a 20 percent haircut.
But there's a cap. Town never uses a forward growth projection above 20 percent. Even if historical growth is 30 percent, you cap it at 20 percent for your windage growth rate.
Example: Say a company's historical growth rate is 15 percent. Your windage growth rate is 12 percent. If historical growth is 25 percent, your windage rate is 20 percent. If it's 30 percent, you still use 20 percent because of the cap.
Why windage growth rate matters
Using a conservative growth rate builds a margin of safety into your valuation. You're buying a dollar of future earnings for less than a dollar. That's how you avoid overpaying for a stock.
The windage growth rate also protects you from companies that lose their moat. Historical growth only predicts future growth when the business holds a durable advantage; without a moat, the past does not matter, because someone can take the whole business. A conservative estimate gives you room for error.
In Rule #1 investing, the windage growth rate is your reality check. It keeps your growth projection honest. You'd rather be pleasantly surprised than disappointed, and a conservative figure earns that surprise.
Why it is called windage
Town borrowed the name from shooting. In marksmanship, windage is the sideways adjustment a shooter makes so the bullet lands true despite wind drift. The growth projection gets the same treatment, because forecasts drift too.
Most investors aim their valuation at the raw historical number. That assumes the past will repeat exactly, which it rarely does. Windage is the correction that keeps your aim honest when the market is blowing optimism your way.
The cap exists because hot growth rarely lasts. History shows few businesses compound above 20 percent for long, and most slow back to a far lower mean. Using the cap keeps you from paying today's price for tomorrow's fantasy.
This single number runs the whole Rule #1 chain. It sets the future value, the future value sets the sticker price, and the sticker price sets your margin of safety. Windage makes every step downstream conservative, so you only pay for growth you can believe.