Intelligent Investments: Seesaw

Monday, January 8, 2007

Seesaw

The market was all over the place today with the portfolio finally ending the day in positive territory 0.22% (+$543.88). Funds boosted my overall performance with the price of oil and natural gas recovering a bit with talk about a new OPEC meeting on production cuts. I'm hesitant to sell at this point with oil mostly lower due to the unusually warm winter in the Northeast. I may hold it one more week as the forecast calls for a general cooling trend this week and a cold snap next week. I hope this will boost oil prices so that i can garner a few more percentage points on my energy fund.

Kent Brockman, "If 60 degree days is the "price" we have to pay for global warming, then pardon me if I don't get rid of my old pontiac."

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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.