Intelligent Investments: Stocks to the Rescue

Tuesday, January 16, 2007

Stocks to the Rescue

WIth oil down again, my funds performed poorly. However, my stock holdings which represent 26% of my portfolio, increased 1.78% today alowing me to beat the major indexes quite easily. Right now, I'm looking for a boost in oil given the forecast for the first major outbreak of cold weather in the northeast as an opportunity to sell my energy fund and decrease my mutual fund holdings.

While I'm always on the lookout for new stocks to buy, right now I'm focusing my attention on increasing the size of some of my individual stocks to increase their weight in the portfolio. Im currently buying ARTX, PXPL, ATRM, and RAND on any weakness they show.

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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.