STRET and STRETD provide the answer to the most important question for every investor. This question is, "What returns can I expect on a stock purchase under reasonable assumptions?" You can even calculate the expected return under different margins of safety.
The output of STRET and STRETD is an estimate of the annualized percentage profit return or rate of return from owning the stock. For example, if the output was 10 percent, then it is expected that over the prescribed holding period the average total return would be 10 percent per annum.
It is calculated in a compounding manner. This means that the value of your holding would rise by 10 percent in the first year, and then by 10 percent of the new total value in the second year, and so on.
The difference between STRET and STRETD is that STRET assumes that the dividends are invested at a specified rate while STRETD assumes that the dividends are reinvested in the stock.
For more details, refer to the e-book, The Conscious Investor Approach: http://www.conscious-investor.com/articles/ciapproach.pdf
The calculation of STRET or STRETD proceeds in a number of steps. In broad terms, if you estimate the future PE of a stock and its future EPS (via the growth rate), then you have an estimate of its price. Next you need to make adjustments for the proceeds that come from dividends either through investing them or reinvesting them in the stock itself.
Now you have an estimate of the total wealth from your investment at the specified time in the future. (Adjustments are also made to allow for tax on the capital gains and the dividends.) Finally, you can calculate the average return that this represents based on the current price. Of course, the actual code to implement this is quite complicated. This is why we registered STRET/STRETD and TARGD as trademarks.
The functions STRET and STRETD represent a major breakthrough in evaluating stock profitability. They far surpass the traditional discount cash flow methods for determining value which are imprecise and impractical.
You can read about the flaws of the discount cash flow methods at: http://www.conscious-investor.com/articles/ar04value.html
