Friday, February 16, 2007

Weekly Summary

This the week the portfolio finished up 0.90% but underperformed the benchmark by 30 basis points for the first time since the beginning of January. The reason for this underperformance lies squarely on my stock selections. EMVL, BRNC, ATRM, and RAND were the big culprits.

I finally sold off my energy fund as it recovered nicely from the December lows when oil was down near $50 a barrell. I hope to find some nice micro caps this weekend to roll this capital into.

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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Valuation Formula