Wednesday, February 28, 2007

Ouch...

The week started off just fine with a unchanged Monday in the portfolio while the major indexes were slightly down. Then came Tuesday and the markets plunged along with my portfolio. For the day, it finished down 3.15% vs. 3.84% for the S&P. That wiped away half my gains for the year in a mere few hours. Painful to see.

However, there may be a silver lining. The cause of this market drop was mostly due to a slowdown in China and a forecasted slowdown here in the U.S. This may cause the fed to lower interest rates by late spring or summer which would be a boon for the market. I'm still very bullish on the markets as valuations are not far from there mean.

6 comments:

TJF said...

Why did you stop updating this blog?

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QUALITY STOCKS UNDER FIVE DOLLARS said...

Nice blog a bunch of useful stuff.

IV Calc

Warren Buffett Intrinsic Value Formula (?)
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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:

 

Earnings
Earnings per share (last 12 months): $
Growth Assumptions
Earnings are expected to grow at a rate of % annually
for the next years,
before leveling off to an annual growth rate of % thereafter.
Confidence Margin
How confident are you that these expected future earnings will really materialize?   %
Discount Rate
Best available return that you have 100% confidence in (like a Treasury bond):   %
 
Results
Stock Value per share: $

 

       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.

 

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Also See
Valuation Formula