Intelligent Investments: Weekly Summary: Not Good

Friday, December 22, 2006

Weekly Summary: Not Good

The portfolio for the week lost 1.66% (4,115.36). This was worse than most major indexes. Hopefully, the new year will reverse this trend. This is two weeks in a row of under performance. My new position of PXPL led the downward trend and is now down 10% from where I purchased it two weeks ago. There are a few bright spots like RAND, COH, and BUD which all bucked the trend and finished in positive territory for the week. Next week ill be away for Christmas vacation back east. Merry Christmas all!

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Buffett's Value Formula (?)

Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:

This calculator doesn't use fancier math than the original one did. Its advantage is that it forces you to be explicit about your earnings expectations. It also automatically provides you with a hard-headed investment strategy: always invest in government bonds, unless you can find something else you are confident will yield more cash.

One other hint that Buffett has dropped over the years is that he can estimate value in his head in about five seconds; so whatever he does he keeps it simple, slugger.