Intelligent Investments: Increased Volatility

Wednesday, December 20, 2006

Increased Volatility

Over the past couple of weeks, the volatility of the micro-cap world has increased substantially. Normally, this would be a good thing because I could capitalize on news less jumps in my positions and repurchase them when they come back down but my job prevents me from this sort of opportunistic trading unfortunately.

The portfolio finished up 0.05% with my stocks pulling some the weight of my funds, mostly the energy fund (down 1.45%) and Fidelity Leveraged (down 0.58%) which is highly correlated to the price of oil. Coach was a big gainer today, at one point over 3.5% before settling around 2.48%.

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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.