Intelligent Investments: Beat Down

Monday, December 18, 2006

Beat Down

Over the past several trading sessions, small cap stocks have fared poorly while large caps have performed at least partially well. This may just be cyclical or could be a new trend downward for small caps- we'll have to wait and see.

January is typically a very good month for small caps and micro caps in general. Whats known as the January Effect usually sees stellar returns in the smallest of market caps.

The portfolio pared back 0.90% ($2,244.06) on the day. Only the Russell 2000 did worse- by 45 basis points.

Started my journey to pass the second level of the CFA exam today. Im going to stick to the same routine I did last year for the first level since that seemed to do well for me.

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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.