tag:blogger.com,1999:blog-91938365170810591602024-03-13T10:36:55.370-07:00Investing StrategyKaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comBlogger501125tag:blogger.com,1999:blog-9193836517081059160.post-83849433661734703402012-04-16T18:50:00.000-07:002012-04-16T22:09:05.034-07:00The History and Rebirth of Growth Stocks Investing.<div dir="ltr" style="text-align: left;" trbidi="on"><br />By BetterInvesting On April 5, 2012 ·<br /><br />The editorial of the January issue of BetterInvesting Magazine features a letter from Ted Brooks of North Carolina, who provides a brief history of growth stock investing and the important role<b> BetterInvesting co-founder George Nicholson </b>played in popularizing this investing philosophy. In 1940, when Nicholson was just beginning his “bold experiment” of helping individual investors form investment clubs to pool resources and analyze stocks, growth stock investing was no longer in vogue, replaced by Benjamin Graham’s value approach in light of the 1929 crash.<br /><br />January 2012 vol 61, No. 5 BetterInvesting Magazine<br /><br />Reader’s Letter Provides Context for the SSG (The Stock Selection Guide)<br />In investing circles we tend to take some ideas for granted. In August 2005 we published an article discussing <b>the history of growth stock investing. </b>But a recent letter from reader Ted Brooks of North Carolina, spurred by our article on Better¬Investing’s 60th anniversary in the November issue, provides an excellent history lesson. Below is his letter, edited for Associated Press style and length.<br /><br />When the Dow Jones industrial average was introduced on May 26, 1896, the world of common stocks was beginning to evolve into three distinct categories: railroads, public utilities and “industrials” (everything else). It is important to note that the “industrial” common stocks were not considered an appropriate investment vehicle for the prudent investor at that time; such investors would limit their holdings to bonds, preferred stock and perhaps an occasional railroad or public utility common stock. This attitude prevailed until around World War I.<br /><br />While eschewing common stock for bonds and preferred stock sounds strange to our ears, it was not without justification. The DJIA started off as an arithmetic average of the stocks’ closing prices. In other words, the average price of stocks in the DJIA initially bounced between about $40 and $80 and did not break $100 until 1906. What few people realize is that prior to 1915, common stock prices were quoted as a percentage of par value (like bonds and preferreds), and par value was typically $100. If these sound like “junk bond” prices to you — you’re right!<br /><br /><b>During this period, value investing — focusing on dividend yields, low P/E and discount to book value — prevailed. </b>These concepts carried over readily from the realm of bond and preferred stock analysis.<br /><br /><b>The man generally credited with introducing the concept of growth stock investing is Edgar Lawrence Smith. Smith’s book, Common Stocks as Long Term Investments</b>, stated that common stocks had a history of outperforming bonds under all economic conditions, going back at least to the end of the Civil War. Now, in early 1925, both the book’s title and theme were outrageous statements that flew in the face of all prevailing logic — something present-day investors do not fully appreciate. <b>Unfortunately, Smith’s book and ideas would see a meteoric rise and fall.</b> …<b>In the first edition of Security Analysis (c. 1934), Benjamin Graham wrote a harsh criticism of Smith and his “growth stock” ¬disciples, and he urged investors to go back to the old rules of valuation that were discarded as obsolete during the bubble (leading to the 1929 crash).…</b><br /><br />Against this backdrop, it is easier to understand <b>George Nicholson’s courage in proposing the idea of investment clubs in 1940. </b>Individual investors analyzing stocks? Buying growth stocks? George, where have you been for the last decade — living under a rock?<br /><br />The BetterInvesting principles of <b><u>demanding consistent growth in sales and earnings over a period of five-10 years, stable or increasing profit margins and closely watching valuations did not come out of thin air. </u></b>They all came out of the hard lessons learned in the late 1920s when they were disregarded (as they were during the tech and dot-com bubble of the late 1990s). Nicholson recognized that <b>focusing on these aspects — together with a graphical representation known as the SSG — allowed new investors to gain experience without wading into the trickier aspects </b>of differentiating between a<b><span style="color: red;"> “value play” </span></b>and a<b><span style="color: red;"> “value trap.” </span></b>Nicholson’s “bold experiment” required a leader possessing both courage and clear thinking to make it reality in that historical context. I think all of these things combine to make Nicholson’s legacy what it is.<br /><br /><a href="http://blog.betterinvesting.org/investing/the-rebirth-of-growth-stocks/">http://blog.betterinvesting.org/investing/the-rebirth-of-growth-stocks/</a> </div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-90803119917217169962012-04-16T16:37:00.000-07:002012-04-16T22:09:05.064-07:00Neil Woodford: Why I Sold TescoNeil Woodford: Why I Sold Tesco<br /><br />BY<br />Barney Hatt<br /><br />Published in Investing on 16 April 2012<br /><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div class="Promo" style="background-color: white; color: #222222; font-family: Arial; font-size: 22px; font-weight: bold; letter-spacing: -1px; line-height: 28px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The City super-investor explains why he no longer holds the supermarket.</div><span style="background-color: white; font-family: Arial; font-size: 12px;"></span><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><a href="http://www.fool.co.uk/news/investing/investing-strategy/2009/07/27/investment-greats-neil-woodford.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;" target="_blank">Neil Woodford</a> has revealed why he sold all of his shares in<strong style="font-family: inherit;">Tesco</strong> (LSE: TSCO), despite admitting some reservations with the price trading at a "distressed" valuation.</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Mr Woodford, who is possibly the City's most successful fund manager, owned about 167 million Tesco shares before the sale, which at the time represented about 3.4% of his <a href="http://www.fool.co.uk/news/investing/2011/11/07/todays-strong-buy-signal-for-blue-chip-dividends.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;" target="_blank">market-thumping</a> Invesco Perpetual Income and High Income funds.</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Writing in the <em style="font-family: inherit;">Telegraph</em>, Mr Woodford said he placed too much confidence in the business's ability to cope with the economic headwinds:</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">"Until recently, I believed that food retailers such as Tesco would prove more resilient to the travails of the UK consumer than those that were more reliant on discretionary spending, but Tesco's Christmas trading update earlier this year changed my mind".</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">"However Tesco's problems are not just down to the difficult consumer environment and with the benefit of hindsight it is evident some of the company's investment decisions in recent years have not created the value that they should have -- or not yet at least."</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">In January's trading update, Tesco revealed a poor Christmas period and acknowledged rising costs, a move that sparked a 16% share-price fall.</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The profit warning, reportedly Tesco's first for at least two decades, spooked the market and investors who backed the stock in the belief food retailers would be a defensive play in the volatile markets.</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Mr Woodford explained: "Moves into non-food merchandise and building much bigger stores to cope with an expanding product range seem to have contributed to Tesco's current issues, lessening its defensive qualities."</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">"Investments overseas in areas such as the US, India and China, have not yet fulfilled their potential or enhanced shareholder returns."</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">He added another worrying aspect about holding the shares was rivals seizing upon the opportunity to regain market share as Tesco went through a period of transition:</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">"I have held Tesco shares in my funds for most of the past 20 years, during which time it has proved to be a very successful long-term investment."</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">"But I now find myself worrying more than ever about the risks -- both macro-economic and business specific risks -- that this investment now entails."</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Mr Woodford believes his other holdings are better blue-chip bets, including the UK's fourth-largest supermarket, <strong style="font-family: inherit;">Wm Morrison</strong> (LSE: MRW), which has better growth opportunities in the UK and less exposure to non-food items.</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The rest of the proceeds have been recycled into less cyclical businesses, which Mr Woodford believes will reduce the overall economic sensitivity of his Invesco portfolios. </div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Indeed, he may <a href="http://www.fool.co.uk/news/investing/2012/03/19/neil-woodfords-latest-buys.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;">have added to smaller holdings</a> such as <strong style="font-family: inherit;">Smith & Nephew</strong> (<a href="http://www.fool.co.uk/caps/quote/sn-.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;">LSE: SN</a>) and<strong style="font-family: inherit;">Serco</strong> (<a href="http://www.fool.co.uk/caps/quote/srp.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;">LSE: SRP</a>), or topped up on old favourites such as <strong style="font-family: inherit;">GlaxoSmithKline</strong> (<a href="http://www.fool.co.uk/caps/quote/gsk.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;">LSE: GSK</a>) and<strong style="font-family: inherit;">Vodafone</strong> (<a href="http://www.fool.co.uk/caps/quote/vod.aspx" style="color: #777777; font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;">LSE: VOD</a>)</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">However, at least one master investor is sticking by Tesco.</div><div style="background-color: white; font-family: Arial; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><span style="color: #222222; font-size: 14px;">While Mr Woodford was selling the retailer,</span><b style="font-size: 14px;"><span style="color: lime;"> <a href="http://www.fool.co.uk/news/investing/2012/02/17/tesco-woodford-vs-buffett.aspx" style="font-family: inherit; outline-color: initial; outline-style: none; outline-width: initial;">Warren Buffett was buying</a> and has now accumulated 508 million Tesco shares, which represent about 5% of the supermarket and roughly 1.5% of the common-stock portfolio within Mr Buffett's <span style="font-family: inherit;">Berkshire Hathaway</span> (NYSE: BRK-B.US) conglomerate. </span></b><span style="color: #222222; font-size: 14px;">You may wish to read this </span><a href="http://www.fool.co.uk/shop/ecap/index.aspx?sf=0711_1424_OUKS_NT&aid=4381source=uddsitedi0000001" style="color: #777777; font-family: inherit; font-size: 14px; outline-color: initial; outline-style: none; outline-width: initial;">special free report</a><span style="color: #222222;"><span style="font-size: 14px;"> produced by the Fool, which explains why </span><b><span style="font-size: large;">Warren Buffett still rates Tesco as his top UK blue chip!</span></b></span></div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">On Wednesday, Tesco is expected to own up to further trading pressure when it reports its full-year results. Brokers reckon a 2% decline in first-quarter domestic sales may be revealed.</div><div style="background-color: white; color: #222222; font-family: Arial; font-size: 14px; line-height: 20px; list-style-type: none; padding-bottom: 13px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><i><br /></i></div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-62976252458262890002012-04-16T16:34:00.000-07:002012-04-16T22:09:05.082-07:00Equity Valuation Methods<div dir="ltr" style="text-align: left;" trbidi="on">Insightful discussion on valuation methods from a blog.<br /><br /><a href="http://www.theequitydesk.com/forum/forum_posts.asp?TID=2029&PN=7">http://www.theequitydesk.com/forum/forum_posts.asp?TID=2029&PN=7</a> <br /><br />Posted: 22/Feb/2009 at 9:31pm<br />Originally posted by kanaka_basi<br /><br />Originally posted by kannanravi1<br /><br /><br />Hi Srini,<br />Discount rate is typically what you think you should earn for taking the risk of owning stocks. Typically many fund managers add a risk premium over the treasury bond rates (treasury rates are thought to be zero risk). Eg: If treasury rates are 5%, some may think that 10% should be the risk adjusted rate. Buffett always goes by the treasury rates because he believes that his picks have zero risk! So, I guess one has to find his own comfortable rate.<br /><br />Kannan<br /><br />PS: Any suggestions about how wrong/ right this method is??<br /><br />Hi Kannan,<br /><br />I saw this link <a href="http://www.moneychimp.com/articles/valuation/buffett_calc.htm">http://www.moneychimp.com/articles/valuation/buffett_calc.htm</a> which uses the discount rate as an opportunity cost of not investing in the least riskiest of asset classes (treasuries).<br /><br />I thought that the expected confidence percentage (or probability that the earnings growth would be met) and the fact that my opportunity cost would be the treasury rate gave me the worst case scenario in trying to find the intrinsic value of the stock... and also the assumption that the compnay would grow only 5 years into the future...<br /><br />Your opinions??<br /><br /><br />Hi,<br />I too use the very same link for my DCF calcs!! Good to see I am not alone! I typically use a confidence margin ranging from 50% to 75% (for companies with extremely strong moat I use 75%). I use the opportunity cost as the treasury rate (I don't track the rates religiously but use 6 to 8%). I also predict growth only for 5 years and love to get stocks with no growth priced in. Even if I assume growth I try to keep at or below the GDP growth rates. Don't know if this gives me worst case scenarios but hopefully I am being conservative enough so that I have cushions for any mistakes in my valuation. Also personally I think that the best way to be conservative and risk-free is through buying companies with significant moats. This is a qualitative factor though unfortunately. Buffett once stated that he uses risk-free treasury rates because he believes that the companies he buys in are as stable and risk free as a treasury bill!!<br /><br /><br /></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-10468275057706068992012-04-16T16:11:00.000-07:002012-04-16T22:09:05.102-07:00Dividend Discount Model<div dir="ltr" style="text-align: left;" trbidi="on"><br /><h3 style="background-color: white; color: #ffcc66; font-family: arial; text-align: -webkit-auto;"><span style="font-size: small;">Dividend Discount Model</span></h3><div style="background-color: white; font-family: arial; text-align: -webkit-auto;">The dividend discount model is a<b> more conservative variation of discounted cash flows</b>, that says <u><b>a share of stock is worth the present value of its future <i>dividends</i>, rather than its earnings. </b></u>This model was popularized by John Burr Williams in <i><a href="http://www.moneychimp.com/articles/valuation/dividend_discount.htm">The Theory of Investment Value</a></i>. Williams wrote his book in the 1930s, when people were trying to establish a science of investing after getting burned by the irrational exuberance and accounting tricks of the previous decade. (Plus ca change, Jack.) Williams decided that reported earnings were way too nebulous to be trusted, like buying "bees for their buzz" instead of their honey, and<b> that the only return you could really believe in was an actual check in the mail:</b></div><div style="background-color: white; font-family: arial; text-align: -webkit-auto;"></div><blockquote style="background-color: white; font-family: arial; text-align: -webkit-auto;"><span style="color: magenta;">... a stock is worth the<u><b> present value of all the dividends </b></u>ever to be paid upon it, no more, no less...<b> Present earnings, outlook, financial condition, and capitalization </b>should bear upon the price of a stock only as they <b>assist buyers and sellers in estimating future dividends.</b></span></blockquote><div style="background-color: white; font-family: arial; text-align: -webkit-auto;"><span style="font-size: large;">Short version: you buy "a stock, by heck, for her dividends."</span></div><div style="background-color: white; font-family: arial; text-align: -webkit-auto;">If you'd like to try this method out, you can<b> <span style="color: lime;">use the regular <a href="http://www.moneychimp.com/articles/valuation/dcf.htm">calculator</a>, substituting dividends for earnings.</span> </b>(You presumably<b><span style="color: lime;"> use a lower discount rate to reflect lower </span></b><span style="background-color: white;"><b><span style="color: lime;">risk, </span></b>since a dividend is more of a sure thing than reported earnings; the only guidance Williams gives here is that you<b><u> use your desired rate of return as the discount rate.)</u></b> You can also see the dividend discount </span><a href="http://www.moneychimp.com/articles/finworks/fmvaluation.htm" style="background-color: white;">formula</a><span style="background-color: white;"> - again, think "dividends" when the page says "earnings".</span><br /><span style="background-color: white;"><br /></span><br /><br /><span style="font-size: large;">The dividend discount model can be applied effectively only when a company is already distributing a significant amount of earnings as dividends. </span>But in theory it applies to all cases, since even retained earnings <i>should</i> eventually turn into dividends. That's because <b><u>once a company reaches its "mature" stage it won't need to reinvest in its growth, so management can begin distributing cash to the shareholders. </u></b>(Plan "B" would be for the CEO to pursue some insane acquisition, just to gratify his bloated ego.) As Williams puts it,<br /><br /><blockquote><span style="color: red;">If earnings not paid out in dividends are all successfully reinvested... then these earnings should produce dividends later; if not, then they are money lost.... In short, a stock is worth only <i>what you can get out of it</i>.</span></blockquote><br /><br /><h4 style="color: #ffcc66;">Dividend Taxes</h4>Williams mentions that the "rich men" of his day were starting to prefer dividends over capital gains, due to some recent changes in the tax code. Fast-forward a few <span style="background-color: white;">generations... and in May 2003 the tax rate on dividends was lowered to match that on long term capital gains. Whether or not any rich men were involved, the change is logical in the sense that companies that ought to be paying dividends will no longer have a disincentive for doing so out of concerns for the tax consequences to their shareholders. But one thing that probably won't ever happen is setting the dividend tax even lower than the long term capital gains tax, because doing so would disadvantage the stock of growing companies that really can't pay dividends yet - what would it mean for our economic growth if we made it harder for "growth" companies to raise capital?</span><span style="background-color: white;"> </span><br /><span style="background-color: white;"><br /></span><br /><div style="font-size: 13px;"><a href="http://www.moneychimp.com/articles/valuation/dividend_discount.htm">http://www.moneychimp.com/articles/valuation/dividend_discount.htm</a> </div><div style="font-size: 13px;"><br /></div><div style="font-size: 13px;">Substitute Dividends for Earnings in these calculators</div><div style="font-size: 13px;"></div><h3 style="color: #ffcc66; font-size: 12pt;"><a href="http://www.moneychimp.com/articles/valuation/dcf.htm">Discounted Cash Flows Calculator</a></h3><div><h3 style="color: #009966; font-size: 12pt;"><a href="http://www.moneychimp.com/articles/finworks/fmvaluation.htm">Stock Valuation based on Earnings</a></h3></div><br /><div style="font-size: 13px;"><br /></div><br /></div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-54473655354781285612012-04-16T15:41:00.000-07:002012-04-16T22:09:05.120-07:00Is Investing Gambling?<div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; text-align: -webkit-auto;">I recently returned from a vacation in Las Vegas, Nevada and while I was out there, I received an interesting e-mail from a lawyer in Texas who was hesitant to let his teenage son begin <a href="http://www.teenanalyst.com/investing/">investing</a> because he thought it was just a legalized way for his son to gamble away his <a href="http://www.teenanalyst.com/college/quickguide.html">college savings</a>. Now, I've heard many reluctant people refer to investing as "another legalized form of gambling" and I usually shrug it off with a smile but the fact is that investing is NOT gambling. </div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; text-align: -webkit-auto;">Webster's dictionary defines gambling as "to engage in a game of chance for something of value". In that sense, I suppose you could say investing is gambling but there is a more to it than just a dictionary definition.Gambling, for the most part, is simply a game of chance where the odds are in the house's favor. You hear amazing stories of how people have won thousands of dollars on a single slot pull, but the fact remains that you aren't expected to win. You enter a casino and you hope to win big but the odds of it happening are slim to none. That's the reason why a city like Las Vegas can grow so large. After all, the town wasn't built on winners.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><br /></div><div style="background-color: white; font-family: Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><b>Investing, on the other hand, is something in which the investor has the odds in their favor. </b><span style="color: #666666;">One invests with the expectation of increasing the value of their portfolio. <b>The reason is because </b></span><a href="http://www.teenanalyst.com/glossary/s/sp500.html" style="color: #666666;"><b>the stock market</b></a><b style="color: #666666;"> has historically returned an average of 13% each year.</b><span style="color: #666666;"> Granted, there are risks involved and you don't always earn a positive return but, with the proper research, you can tip the odds even more in your favor.There are some professional gamblers who are successful but I doubt that they were successful from the very start. They probably lost money when they first started out and then learned from their mistakes in order to become as successful as they are now. But with investing, you don't have to lose money in order to invest properly. </span><b>You can educate yourself </b><span style="text-decoration: underline;"><b>before</b></span><b> you begin by learning how investing works and then invest for the long-term. </b><span style="color: red; font-size: large;">Investing for the short-term or <a href="http://www.teenanalyst.com/glossary/d/daytrading.html">daytrading</a> can be considered gambling because it's virtually impossible to see the very near-term future of a stock, but if you educate yourself and then take a long-term perspective, there is an excellent chance that you will earn a great return on your investment.</span></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><a href="http://www.teenanalyst.com/investing/gambling.html">http://www.teenanalyst.com/investing/gambling.html</a> </div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-45631567655115847712012-04-16T15:30:00.000-07:002012-04-16T22:09:05.136-07:00Buffett's Opinion on Calculation of Intrinsic Value<div dir="ltr" style="text-align: left;" trbidi="on"><span style="background-color: white;"><span style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;">Try using <b>Free cash flow.</b></span><br style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;" /><span style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;">Set a process for identifying future cash flows and based on that try to calculate intrinsic value of a company.</span><br style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;" /><br style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;" /><span style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;">Read what is written by Warren Buffett in his letters to shareholders. </span></span><br /><span style="background-color: white;"><br style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;" /><span style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;">While writing about<b> Calculation of Intrinsic value in the Owners manual Buffet says...</b></span><br style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;" /><br style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;" /><i style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;">Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: <u>It is the discounted value of the cash that can be taken out of a business during its remaining life.</u></i></span><br /><span style="background-color: white;"><i style="font-family: Verdana, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><br />The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is <u>an estimate rather than a precise figure</u>, and it is additionally <u>an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. </u>Two people looking at the same set of facts, moreover — and this would apply even to Charlie and me — will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are <u>the facts that we ourselves use to calculate this value.</u></i><br style="font-family: Verdana, Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;" /><br style="font-family: Verdana, Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;" /><span style="font-family: Verdana, Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;">Read owners manual on <a href="http://www.berkshirehathaway.com/">http://www.berkshirehathaway.com/</a></span></span> </div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-25297706102133295302012-04-16T15:11:00.000-07:002012-04-16T22:09:05.153-07:00Common Investing Mistakes<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><a href="http://www.teenanalyst.com/investing/">Investing</a> for the long-term can be extremely beneficial to the person who takes advantage of it. But that doesn't mean that there aren't any pitfalls. Here are five common investing mistakes that you should avoid if you hope to fully benefit from a long-term investing approach.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><b>Investments Are Too Conservative/Risky</b>A big mistake people make is that they pick investments which are too conservative or risky for their investment goals. For example, a person who invests too conservatively with quite a bit of time before retirement might find that they will need to save more than they planned to because their investments aren't appreciating enough. An investor who is nearing their <a href="http://podcasts.teenanalyst.com/Financial%20Planning/SettingFinancialGoals.html">financial goals</a> who decides to put their money in more volatile investments will find that they are taking unnecessary risks with their portfolio.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;">If you want to find out how much risk you should be taking with your investments, take time to ask yourself three questions: "What am I investing for?", "How much time do I have before I need the money?", and "How much can I invest?" Then you might want to talk it over with an investment professional. Or look at our model portfolios.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><b>Losing Interest in Investing</b><b></b>I know it's hard to imagine but there are actually some people who just aren't interested in investing. While you don't have to have a passion for investing to accumulate wealth in the long-term, it definitely helps. What I've found is that a lot of people lose interest in their investments after a couple years. When they first begin investing, they might tell themselves "I am going to invest $100 each month until I retire" but as time passes, they decide that they would rather spend that extra money each month. This is a big pitfall that you should avoid because that extra spending money could literally cost you hundreds of thousands of dollars in the long run.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><b>Losing Sight of Your Financial Goals</b><b></b>The 1990's had an incredible <a href="http://www.teenanalyst.com/glossary/b/bearmarketrally.html">bull market</a> that spawned a new type of investing...<a href="http://www.teenanalyst.com/glossary/d/daytrading.html">daytrading</a>. This bull market led to great gains and has made quite a few people extremely wealthy, and the media has hyped high-flying stocks to get people's attention. The problem with this is that it has caused many people to forget their financial goals. With all this hype, people are investing in these hot stocks, even with <a href="http://www.teenanalyst.com/college/">college</a> or retirement just around the corner.If you're nearing retirement or whatever it is you're saving for, don't give in to the hype. Instead, keep your mind on your goals, instead of ways to get rich quick.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><b>Investing in What You Don't Know</b><b></b>You may have heard of the popular investing concept "invest in what you know." Another way of saying this is "don't invest in what you don't know". A lot of people invest in companies that they know little or nothing about. This can hurt them because a situation might arise that they didn't know about.You can't expect to know everything about a certain <a href="http://www.teenanalyst.com/glossary/s/storystock.html">stock</a> but it does help to invest in what you know the most. Rather than investing in what you don't know, get out a piece of paper and write down the names of some companies that you do know about and then look up their stocks.</div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; font-family: Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><b style="color: #666666; font-size: 12px;">Not Educating Yourself</b><span style="color: #666666; font-size: 12px;"><b></b>The previous four mistakes that investors make are important ones but </span><span style="color: red; font-size: 12px;">this is probably the biggest mistake of all.</span> <span style="color: red;"><span style="font-size: large;">Far too many people want to invest but they don't know enough about it. Rather than taking the time to learn what they can, they decide to try investing on their own first.It is extremely important to have a good understanding of how investing works before you actually start, especially if you plan on </span><a href="http://podcasts.teenanalyst.com/Credit/InvestingInStocks.html"><span style="font-size: large;">investing in stocks</span></a><span style="font-size: large;"> or any riskier investments. </span></span><span style="color: #666666; font-size: 12px;">Getting experience in investing is important but it's wise to have at least a basic understanding before you decide to do so.From time to time, investors do make mistakes but these are five of the biggest mistakes that you should try to avoid. If you can do that then you will be tipping the odds in your favor when you are investing.</span><br /><div style="color: #666666; font-size: 12px;"><br /></div></div></div>http://www.teenanalyst.com/investing/fivemistakes.html<br /><br /><a href="http://www.teenanalyst.com/investing/">http://www.teenanalyst.com/investing/</a> </div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-40998315389653062392012-04-16T15:03:00.000-07:002012-04-16T22:09:05.169-07:00The Five Forces of Competition<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"></div><strong>" We would rather own a great <a href="http://podcasts.teenanalyst.com/Business/">business</a> at a <a href="http://www.teenanalyst.com/glossary/f/fairprice.html">fair price</a> than bad a business at a great price" - <a href="http://www.teenanalyst.com/glossary/w/warrenbuffett.html">Warren Buffet</a></strong><br />These words have always been an issue for me. After all, it seems that we spend so much time worrying about discount rates, analysts' projections ,and <a href="http://podcasts.teenanalyst.com/Financial%20Planning/MaximizingCashFlow.html">discounted cash flow</a> valuations. Who has time to try and go through the very hard, time-consuming task of not just analyzing the financial statements but the entire <a href="http://www.teenanalyst.com/business/structure.html">business structure</a> as well?<br />Unfortunately we are never really taught how to evaluate a business. After all, long-term competitive advantage doesn't quite have the same appeal as easy-to-package ratios like a P/E ratio or <a href="http://podcasts.teenanalyst.com/Financial%20Planning/ChangeFinancialPosition.html">book value</a>. Yet for those of us who invest in the market, analyzing this is perhaps one of the most important and left-out steps in buying a share in a company. Sure the price you pay is important but in the end the sad truth is that no one knows what any one company is going to earn in the future. So how do we figure out if a company has the prospects we are looking for without an MBA? Michael Porter of Harvard University and author of Competitive Advantage developed the best method I know of. It is called the 5 forces of competition and it tells us in a nutshell the 5 things we must determine when evaluating a business's profitability in the future. These are as follows.<br /><br /><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><strong><br /></strong></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><strong>1. Threat of entry</strong><br />This is how easy it is for a firm to enter the industry that your company is in. This is important because any industry worth looking at should earn above average returns. Those returns ultimately attract competitors who want to earn those high returns as well. However, when too many competitors join the fray it eventually drives prices and returns down and makes the industry unattractive. Usually companies that can protect themselves (also known as having a moat around their business) are either business that require high investment to enter (like Aerospace or Oil), have important brands (like Coke), have high switching to change (like Microsoft) or have a patent barring competitors (like drugs)<strong><br /><br />2. Bargaining power of suppliers</strong><br />Companies who have only a few suppliers can't bargain with them or play one off another for better prices. This<strong></strong>leads to higher priced inputs and dilutes returns (like airlines).<br /><strong><br />3. Bargaining power of buyers</strong><br />This is affected by how big your customers are and how much revenue they constitute as well as other things. For instance Wal-Mart has a lot of power with suppliers because it buys so much of their inventory and is thus a large percent of those companies revenues. It is no surprise then that these companies have lived and died with Wal-Mart's orders and would do anything to protect their business with them.<br /><strong><br />4. Availability of substitutes </strong><br />This is how easily people can find something else if you were to raise prices or if they somehow found your offering unfavorable. For instance, oil has no substitute to date. People either pay the price or don't drive. Compare this with designer clothes, where if the price goes up you can always buy low priced jeans instead. For those of us who are economics students, this is also called elasticity of demand.<br /><strong><br />5. Competitive rivalry</strong><br />This is how competitive an industry is. For instance, if there are lots of companies selling essentially the same products there will always end up being a price war which will severely hurt the company' profits. The wireless companies have had this problem for years and fierce competition has made it tough for them to make a profit.<br /><br />Now let's take a look at an example of how we can use this when analyzing the <a href="http://www.teenanalyst.com/investing/cableindustry.html">cable industry</a>.</div><br /><br /><br /></div>http://www.teenanalyst.com/investing/fiveforces.html</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-49595848034346932072012-04-16T14:55:00.000-07:002012-04-16T22:09:05.189-07:00Intrinsic Stock Value<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;">When it comes to investing, everyone wants to know what stocks are going to go up. Unless you have the ability to see into the future, you'll have to settle for doing things the old fashioned way: by research them. Even though it may not be possible to be right on all of your <a href="http://www.teenanalyst.com/investing/myadvice.html">stock picks</a>, you can tilt the odds in your favor by learning as much as you can about the stocks you're investing in. One useful tool that you can use to make an educated decision on whether or not to buy a stock is the intrinsic value, which gives you an idea of approximately what the stock is worth. </div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;">Valuing a stock is not always very easy to do. Ratios like the P/E ratio give you a quick idea but it doesn't go into depth very well. The intrinsic value makes up for some of what the P/E ratio lacks by <a href="http://www.teenanalyst.com/glossary/a/accounting.html">accounting</a> for its growth rate and the <a href="http://www.teenanalyst.com/glossary/d/discountrate.html">discount rate</a>. The growth rate allows the intrinsic value (IV) to value the stock not only on their current<a href="http://www.teenanalyst.com/glossary/e/eps.html">earnings per share</a> but also on their future earnings per share. The term "discount rate" refers to the rate that you would have to earn to make an investment worth the risk. By accounting for this, it helps weed out some stocks that may be less lucrative investments.<br /><br /><strong>Calculating the Intrinsic Value</strong></div><div style="background-color: white; font-family: Arial, Helvetica, sans-serif; font-size: 12px; text-align: -webkit-auto;"><span style="color: #666666;">There are actually a few different ways to calculate the IV but we'll just go over</span><u><span style="color: magenta;"> the most common method.</span></u> <span style="color: orange;"><b>To get started, you must first gather the company's EPS figures. You then take this number and divide it by the </b><a href="http://www.teenanalyst.com/glossary/e/excessreturn.html"><b>annual return</b></a><b> of the investment you are comparing it with (discount rate).</b> </span><span style="color: #666666;">For example, if XYZ stock has $3.46 in earnings per share and you want to compare it with 6% treasury </span><a href="http://www.teenanalyst.com/bonds/" style="color: #666666;">bonds</a><span style="color: #666666;">, you simply divide 3.46 by .06 to get an intrinsic value of 57.66. This means that XYZ stock has an intrinsic value of 57.66. So this means that, relative to </span><a href="http://www.teenanalyst.com/bonds/savingsbonds.html" style="color: #666666;">government bonds</a><span style="color: #666666;">, the stock is "worth" about $58 per share.</span><br /><div style="color: #666666;"><br /></div><div style="color: #666666;">That example only takes into consideration the stock's current earnings. If you are interested in finding out what the stock will theoretically be worth next year, you just substitute next years expected EPS with the current one. So if XYZ stock is expected to earn $3.90 per share next year, you divide 3.90 by .06 which gives you an intrinsic value of $65, relative to government bonds.</div><div style="color: #666666;"><br /></div><div style="color: #666666;">Calculating the intrinsic value seems pretty complicated and if you don't like doing all of the math, you can cheat by using Quicken.com's evaluator to have it figure the IV for you.</div><div style="color: #666666;"><br /></div><div style="color: #666666;"><strong>Using the Intrinsic Value</strong></div><div style="color: #666666;">I know all of this sounds pretty confusing but, trust me, it really isn't. Calculating the intrinsic value is probably the most confusing part. Using it is actually pretty easy. Now that you know what the stock is "worth", you can compare its <a href="http://www.teenanalyst.com/stocks/currentstockprices.html">current stock price</a> with its intrinsic value to decide if it is worth the risk. For example, if XYZ was trading at $45, you would consider it undervalued because its trading at a price that is less than its IV of $58. However, if it was trading at $75 per share, it would be considered overvalued.</div><div style="color: #666666;"><br /></div><div style="color: #666666;">The only big disadvantage that the intrinsic value has is that it doesn't allow you to calculate it for stocks that don't have positive earnings. So if you were hoping to figure out the value of that hot new internet stock, you might want to use another method. But, in general, the intrinsic value has very nice advantages over other methods and I've even found it more accurate. By using it, you give yourself one more way to check out a stock to decide if it really is worth the risk.</div></div></div><br />http://www.teenanalyst.com/stocks/intrinsic.html</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-10848080354130187572012-04-16T14:46:00.000-07:002012-04-16T22:09:05.204-07:00Calculation of Intrinsic Value<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><h1 class="singlePageTitle" style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; border-bottom-color: rgb(239, 239, 239); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(233, 127, 2); border-left-style: solid; border-left-width: 16px; border-right-width: 0px; border-style: initial; border-top-color: rgb(239, 239, 239); border-top-style: solid; border-top-width: 1px; color: #222222; font-family: 'Trebuchet MS', Helvetica, Jamrul, sans-serif; font-size: 22px; font-weight: normal; letter-spacing: -1px; line-height: 1.1em; margin-bottom: 10px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 4px; padding-left: 6px; padding-right: 0px; padding-top: 2px; text-align: -webkit-auto; vertical-align: baseline;">Calculation of Intrinsic Value</h1><div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: arial, verdana, tahoma, sans-serif; font-size: 14px; line-height: 20px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;"><a href="http://profitimes.com/wp-content/uploads/2011/06/intrinsic-value.png" style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #e97f02; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: none; vertical-align: baseline;"></a>I have created an excel sheet that could be usefull when calculating Intrinsic values of stocks.<br />All you have to do is open the excel sheet, and fill in the red numbers in the excel sheet, which you can find on the links next to each box.<br />Excel will then automatically calculate the intrinsic value of the stock you are analyzing.</div><div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: arial, verdana, tahoma, sans-serif; font-size: 14px; line-height: 20px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">If you want to change the ticker, open a hyperlink in a box next to a red number, and change the ticker in the web address.<br />For example, if you are looking at <a href="http://finance.yahoo.com/q/ks?s=PEP+Key+Statistics" style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #e97f02; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: none; vertical-align: baseline;">http://finance.yahoo.com/q/ks?s=PEP+Key+Statistics</a> and you would like to see the data of Coca Cola co. instead of Pepsico, change the ticker from PEP (which is the ticker of Pepsico) to KO (which is the ticker of Coca Cola).<br />The link to visit then becomes: <a href="http://finance.yahoo.com/q/ks?s=PEP+Key+Statistics" style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #e97f02; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: none; vertical-align: baseline;">http://finance.yahoo.com/q/ks?s=KO+Key+Statistics</a> for example.</div><div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: arial, verdana, tahoma, sans-serif; font-size: 14px; line-height: 20px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Method number one is a very simplistic model, which calculates a price target for the next 5 years based on historical valuations, the last 4 quarters results and future growth.<br />Method number 2 is more advanced, and takes into account Free cash flow, net cash position and future growth.<br />This method discounts the future values at a discount rate of 9% per year, which is the return you can expect over the long run in the stock market (7% price appreciation per year + 2% dividend yield per year).</div><div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: arial, verdana, tahoma, sans-serif; font-size: 14px; line-height: 20px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">To open the excel sheet, please click <a href="http://profitimes.com/wp-content/uploads/2011/06/Calculate_Intrinsic_Value.xlsx" style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #e97f02; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">here</a>: <a href="http://profitimes.com/wp-content/uploads/2011/06/Calculate_Intrinsic_Value.xlsx" style="background-attachment: initial; background-clip: initial; background-color: transparent; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #e97f02; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: none; vertical-align: baseline;" target="_blank">Calculate_Intrinsic_Value</a></div><div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: arial, verdana, tahoma, sans-serif; font-size: 14px; line-height: 20px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Please be aware that calculating an intrinsic value is not an exact science. It is based on subjective estimates.<br />The best thing you can do is to use methods used by the biggest value investors in the world, such as Warren buffet, Joel Greenblatt, Monish Pabrai and the likes…</div></div><br /><br />http://profitimes.com/value-investing/calculation-of-intrinsic-value/</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-65159909187826326002012-04-16T14:40:00.000-07:002012-04-16T22:09:05.219-07:00How to Calculate Intrinsic Value for Stock Investing<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><h2 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: left;"><b style="font-size: 13px; text-align: -webkit-auto;">How to Calculate Intrinsic Value</b></h2><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Discounted Earnings, Instead of Just Cash Flow</span><br /><div style="text-align: -webkit-auto;"><span style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: x-small;"><u><br /></u></span></div><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="color: #000066;">Summarized Overview</span></h3><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">You will find information about why you should calculate intrinsic value in stock market investing, and step by step guide on how to do it.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">You will also find information about which key financial ratios to use and what you have <b>to do after calculating intrinsic value.</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="color: #000066;">Why You should Calculate Intrinsic Value</span></h3><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Simply because, you don't buy any stock at any price, do you? Do you know why? Because you want as much return as possible!</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">The price you are paying is the <b>ultimate determinant for the rate of return</b> that you'll be earning. The higher the price you pay for it, you'll be getting lower rate of return. This is why, you need to know how much a stock worth. Once you know its value, you can identify which stocks are traded at discounted price.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">However, buying a stock simply because it is cheap is not the right approach either. This is another reason to calculate intrinsic value. To buy quality stocks at discounted price, value for money right?</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="color: #000066;">How to Calculate Intrinsic Value</span></h3><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">The way to go is, search for stocks whose prospects you believe in ( <a href="http://www.stock-investment-made-easy.com/good-stock-pick.html">with good stock pick method</a> ) and then use a valuation technique to ensure the purchase price is acceptable. Here, I use net present value (NPV) formula.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">How to do it? Let say you are valuing stock ABC,</div><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="Case Study to calculate Intrinsic Value" border="0" height="115" src="http://www.stock-investment-made-easy.com/images/ExampleCondition13yrsIntrinsicValue.jpg" width="383" /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">From 13 years historical data, you get the information as above. To proceed, you also need to <b>firm up your expectation</b> based on your risk profile. In this example:</div><ul style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><li>I set my investment horizon as long as ten years from 2007. So that in 2018 I can use the fund to finance my children's study</li><li>I am confident stock ABC will continue growing 13 per cent per year for the next ten years (13 years records prove this stock able to grow 13 per cent EPS per year)</li><li>I assume stock ABC will be having the same <a href="http://www.stock-investment-made-easy.com/price-to-earnings-ratio.html">PER</a> and dividend payout by end of 2017 (or early in 2018)</li></ul><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><br /><li style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;">I am expecting 12 per cent return on investment (ROI) so that my initial investment able to cover my children's tuition costs in ten years time.</li><br /><br /><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="" border="0" height="132" src="http://www.stock-investment-made-easy.com/images/ExampleAssumption13yrsIntrinsicValue.jpg" width="408" /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Let's start calculating intrinsic value of stock ABC.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b><u>Step One: Forecast Share Price</u></b><br /><br />First of all, you need to forecast its share price ten years down the road. In this case, I project the price for the next ten years using 13 per cent per year growth.</div><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="" border="0" height="50" src="http://www.stock-investment-made-easy.com/images/ForecastedStockPrice2018.jpg" width="448" /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><u><b>Step Two: Forecast Total Future Value</b></u><br /><br />Secondly, you need to calculate the total future value. This must include the potential dividend as well.</div><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="Dividend Payout" border="0" height="36" src="http://www.stock-investment-made-easy.com/images/DividendPayout.jpg" width="225" /></div><br /><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="TotalEPS2017" border="0" height="245" src="http://www.stock-investment-made-easy.com/images/TotalEPSend2017.jpg" width="226" /></div><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="TotalDividend2017" border="0" height="49" src="http://www.stock-investment-made-easy.com/images/TotalDividends2017.jpg" width="355" /></div><br /><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="Future Value 2018" border="0" height="51" src="http://www.stock-investment-made-easy.com/images/FutureValue2018.jpg" width="437" /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Look, some investors doesn't care much about dividend. To them, dividend is just too small to be considered. But as it has effect to the total future value, it should be taken into consideration.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">By the end of the day, you can compare the stock's profitability to others; which may not pay any dividend at all.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b><u>Step Three: Calculate Intrinsic Value</u></b><br /><br />After having all these data, then only you can calculate the intrinsic value for stock ABC.</div><div align="center" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px;"><img alt="Intrinsic Value stock ABC" border="0" height="87" src="http://www.stock-investment-made-easy.com/images/IntrinsicValue_ABC.jpg" width="400" /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><u><b>Step Four: Compare with Current Stock Price</b></u><br /><br />The intrinsic value above is because my goal is to get 12 per cent per annum from this stock. If so, current stock's price, which is $33.50, is acceptable indeed (stock price is below the intrinsic value).</div><form action="http://www.stock-investment-made-easy.com/cgi-bin/fb/FormProcess.pl" method="post" name="_9351476369265975" style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><table align="Right" bgcolor="#FFFFFF" border="1" bordercolor="#FFFFFF" cellpadding="2" cellspacing="0" style="width: 200px;"><tbody><tr><td style="font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><div id="FormLayer_9351476369265975" style="visibility: visible;"><div align="center" id="MissingFields_9351476369265975" style="visibility: hidden;"></div></div><table align="center" border="0" cellpadding="4" cellspacing="0" class="formbody" style="font-family: Verdana, Arial, Helvetica, sans-serif;"><tbody><tr><td align="center" colspan="2" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><b></b></td></tr><tr><td align="center" colspan="2" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;" valign="top"><b>How Do You<br />Calculate<br />Intrinsic Value?</b><br /><table border="0" cellpadding="4" cellspacing="0" class="formbody" style="font-family: Verdana, Arial, Helvetica, sans-serif;"><tbody><tr align="center"><td colspan="2" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><table border="0" cellpadding="0" cellspacing="0" class="formbody" style="font-family: Verdana, Arial, Helvetica, sans-serif;"><tbody><tr valign="top"><td style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;" width="5"><input name="_4756236062511109" type="radio" value="Discounted Cashflow" /></td><td align="left" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">Discounted Cashflow</td></tr><tr valign="top"><td style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;" width="5"><input name="_4756236062511109" type="radio" value="Discounted Dividend" /></td><td align="left" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">Discounted Dividend</td></tr><tr valign="top"><td style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;" width="5"><input name="_4756236062511109" type="radio" value="Discounted Earnings" /></td><td align="left" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">Discounted Earnings</td></tr><tr valign="top"><td style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;" width="5"><input name="_4756236062511109" type="radio" value="Never Calculate" /></td><td align="left" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">Never Calculate</td></tr><tr valign="top"><td style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;" width="5"><input name="_4756236062511109" type="radio" value="What For?" /></td><td align="left" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;">What For?</td></tr></tbody></table></td></tr></tbody></table></td></tr><tr><td align="center" colspan="2" style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><input name="Button" type="button" value="Vote & See Result" /></td></tr></tbody></table></td></tr></tbody></table></form><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">But if your goal is about getting 25 per cent per annum return on investment, the intrinsic value will be $22. In this case, the current stock price will no longer acceptable for you.</span><br /><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">For this same reason, you can say that current stock price is suit to those who are aiming for 15 per cent return per annum (in economics, this called as Internal Rate of Return or IRR)</div><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="color: #000066;">What's Next?</span></h3><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">As you can see, <b>intrinsic value can be relatively different</b> from one investor to another depending on the expected return. Expecting very high return will limit your investment options. On the other hand, having very low expected return may as well better keep the cash in fixed deposit.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">As an investor, it is crucial to set a realistic target on the expected profits.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><br /></div><br /><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">It is better if before you calculate intrinsic value of your selected stock, assess your own risk profile first. This will help you to determine your realistic preferred return based on your need, ability and investing habits. </span><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Eager to buy stock? Hang on first! You need to have the fair value as another comparison. This is what mention by</span><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"> </span><b style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Warren Buffet's guru, <a href="http://www.stock-investment-made-easy.com/margin-of-safety.html">the margin of safety</a></b><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"> </span><br /><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><br /></span><br /><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><br /></span></div><br /><br />http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-88505688411862122642012-04-16T08:27:00.000-07:002012-04-16T22:09:05.320-07:00The Evolution of Warren Buffett as an Investor<div dir="ltr" style="text-align: left;" trbidi="on"><b>The Evolution of Warren Buffett as an Investor</b><br />June 16th, 2011<br /><br /><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Before Warren Buffett became Chairman and CEO of Berkshire Hathaway, he ran a successful investment partnership. But his style of investing was not always the same, it gradually evolved over time. His high school jobs consisted of varied ventures including selling golf balls and delivering papers. The money he saved from these jobs was invested in the stock market using different investment styles.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Perhaps trying to find the best style for himself, Buffett had read every book related to finance in the Omaha Public Library by the time he graduated college.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">His investment style up to this point was wide ranging. He had studied many different techniques including odd-lot investing and technical analysis.</div><a class="toc-anchor" href="http://www.blogger.com/post-create.g?blogID=2884768844412347068" name="buffetts-investing-framework-takes-shape" style="background-color: white; border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"></a><br /><h4 style="background-color: white; border-top-color: rgb(221, 221, 221); border-top-style: solid; border-top-width: 1px; color: #666666; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 20px; letter-spacing: -1px; line-height: 18px; padding-top: 20px; text-align: -webkit-auto;">Buffett’s Investing Framework Takes Shape</h4><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">In 1950 he came across a copy of <a href="http://www.oldschoolvalue.com/blog/reading-links/listen-to-the-intelligent-investor-right-now/" style="border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; text-decoration: none;" target="_blank"><em>The Intelligent Investor</em></a> by Benjamin Graham, his future mentor at Columbia. This book had a dramatic effect on Buffett’s investment style.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Graham’s investment style could be seen on a deeper level in his other book, <em>Security Analysis</em>, which was co-authored by David Dodd.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Within Graham’s two books, an <a href="http://www.oldschoolvalue.com/blog/featured/investing-without-a-framework-is-financial-suicide/" style="border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; text-decoration: none;" target="_blank" title="investing framework">investing framework</a> was outlined that would shape Buffett’s stock selection for the rest of his career.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Graham favored looking at a stock as a piece of a business. He viewed volatility more as an opportunity and less as a risk.</div><a class="toc-anchor" href="http://www.blogger.com/post-create.g?blogID=2884768844412347068" name="working-for-graham" style="background-color: white; border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"></a><br /><h4 style="background-color: white; border-top-color: rgb(221, 221, 221); border-top-style: solid; border-top-width: 1px; color: #666666; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 20px; letter-spacing: -1px; line-height: 18px; padding-top: 20px; text-align: -webkit-auto;">Working for Graham</h4><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">While also a professor at Columbia, Graham ran the investment partnership Graham-Newman Corporation. Through his investment partnership he invested using the <a href="http://www.oldschoolvalue.com/stock-screener/net-asset-current-value-ncav-stock-screen.php" style="border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; text-decoration: none;" target="_blank" title="net current asset value screen"><strong>Net Current Asset Value</strong></a> formula to identify companies. Using this formula he was able to find companies selling for below an estimation of liquidation value.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">In the early 1950s, Buffet was piggybacking off of Graham’s ideas with his own money.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Through his partnership, Graham would sometimes buy large stakes in companies to influence managements and join the board of directors. Some examples include investments in Northern Pipeline, Philadelphia and Reading Coal & Iron Company, and Marshall-Wells.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">It was at the Marshall-Wells annual stockholder meeting that Buffett first met Walter Schloss, whom he would later be colleagues with. It wasn’t until 1954 that Buffet finally convinced Graham to hire him at Graham-Newman.</div><div style="background-color: white; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><span style="color: #666666;">There, Buffet worked alongside Schloss in a spare room manually computing the liquidation value of companies. A signature trait of this investing was that little time was spent evaluating management. </span><span style="color: magenta;">Buffet and Schloss merely filled out simple forms which would be used by Graham to make his investment decisions.</span></div><div style="background-color: white; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><span style="color: magenta;">By ignoring the qualitative side, Graham’s method was largely quantitative.</span></div><a class="toc-anchor" href="http://www.blogger.com/post-create.g?blogID=2884768844412347068" name="the-early-partnership" style="background-color: white; border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"></a><br /><h4 style="background-color: white; border-top-color: rgb(221, 221, 221); border-top-style: solid; border-top-width: 1px; color: #666666; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 20px; letter-spacing: -1px; line-height: 18px; padding-top: 20px; text-align: -webkit-auto;">The Early Partnership</h4><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">After the Graham-Newman partnership was closed in 1956, Buffet formed his own investment partnership. He employed many of the same methods that he used while working for Graham.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Buffet followed in his mentor’s footsteps by buying companies selling below liquidation value and then proceeding to influence management. He did this with success at Sandborn Map, Dempster Mill Manufacturing, and Berkshire Hathaway.</div><a class="toc-anchor" href="http://www.blogger.com/post-create.g?blogID=2884768844412347068" name="the-birth-of-berkshire-hathaway" style="background-color: white; border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"></a><br /><h4 style="background-color: white; border-top-color: rgb(221, 221, 221); border-top-style: solid; border-top-width: 1px; color: #666666; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 20px; letter-spacing: -1px; line-height: 18px; padding-top: 20px; text-align: -webkit-auto;">The Birth of Berkshire Hathaway</h4><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Berkshire Hathaway did not start out as the conglomerate it is today, but as a textile mill selling below liquidation value. Buffett first began buying it in 1962 and by 1965 he had taken control of the company’s board and made himself Chairman.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">During this time, Buffett’s investing style began to change again.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">While he still favored buying companies that were selling below intrinsic value, how he came to a company‘s intrinsic value began to change.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">While still managing his partnerships, Buffett was introduced to Charlie Munger. Munger felt better about buying a great business with high returns on capital than buying a struggling company selling below liquidation value.</div><a class="toc-anchor" href="http://www.blogger.com/post-create.g?blogID=2884768844412347068" name="buffetts-investing-style-today" style="background-color: white; border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"></a><br /><h4 style="background-color: white; border-top-color: rgb(221, 221, 221); border-top-style: solid; border-top-width: 1px; color: #666666; font-family: 'Segoe UI', 'Lucida Grande', Arial, Helvetica, sans-serif; font-size: 20px; letter-spacing: -1px; line-height: 18px; padding-top: 20px; text-align: -webkit-auto;">Buffett’s Investing Style Today</h4><div style="background-color: white; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><span style="color: magenta;">Over time, Buffett and Munger both began to move further from the strict Graham approach and more towards buying great businesses. </span><span style="color: #666666;">By placing a greater emphasis on the intrinsic value as determined by the operating company’s future cash flows (rather than the company’s assets) a company’s qualitative characteristics became more important.</span></div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">Buffett views Phillip Fisher’s book <a href="http://www.oldschoolvalue.com/blog/investing-strategy/15-points-to-look-for-in-a-common-stock/" style="border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; text-decoration: none;" target="_blank" title="common stocks and uncommon profits"><em>Common Stocks and Uncommon Profits</em></a> as the best guide to successful qualitative investing.</div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;">By 1970, Buffett’s partnerships had been wound down and Buffett concentrated his efforts on running Berkshire Hathaway.</div><div style="background-color: white; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><span style="color: magenta;">Over the past 40 years Buffett has been able to combine the quantitative style of Graham with the qualitative style of Fisher, and in doing so has become arguably the greatest investor of all time.</span></div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><em>About the Author: Daniel Rudewicz is a CFA charter holder and the managing member of the deep value investment company <a href="http://www.furlongfinancial.com/" style="border-bottom-style: none; border-color: initial; border-image: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; color: #507aa5; text-decoration: none;" title="furlong financial">Furlong Financial, LLC</a>. He will begin attending Georgetown Law in the evenings this fall. To contact him please send an email to dan@furlongfinancial.com .</em></div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><em><br /></em></div><div style="background-color: white; color: #666666; font-family: 'Segoe UI', Arial, Helvetica, sans-serif; font-size: 13px; line-height: 18px; text-align: -webkit-auto;"><a href="http://www.oldschoolvalue.com/blog/featured/the-evolution-of-warren-buffett-as-an-investor/">http://www.oldschoolvalue.com/blog/featured/the-evolution-of-warren-buffett-as-an-investor/</a> </div></div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-67677646920449036312012-04-16T08:16:00.000-07:002012-04-16T22:09:05.419-07:00Why your portfolio may not be as healthy as you think<div dir="ltr" style="text-align: left;" trbidi="on"><b>Why your portfolio may not be as healthy as you think</b><br />Quarterly statements rarely tell the whole story<br />By Tom McFeat, CBC News Posted: Feb 27, 2012 5:36 AM ET <br /><br /><b><span style="font-size: large;">You can scan your quarterly statements for mention of your personal rate of return, but you may not find it. Many investment advisers and firms don't routinely provide it. (iStock)</span></b><br /><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">You've just received the quarterly statement from your mutual fund company or financial adviser, and the results seem good. Your portfolio's worth has grown by five per cent from the last quarter and by 15 per cent over the past year —in fact, you see that your portfolio has doubled in the past five years.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Wow, you think, my financial adviser is a genius!</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Not so fast.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Chances are that the figures you've been provided with show the overall value of your investment holdings. The catch is that most statements don't clearly show how that figure has been inflated by your regular contributions and perhaps by regular deposits of interest.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;"><br />Warren MacKenzie, CEO of Toronto-based Weigh House Investor Services, says that when he worked at a big mutual fund company 20 years ago, he suggested they provide clients with calculations of their personal rate of return rather than the overall growth of their portfolio.In other words, that seemingly glowing return on your investments could be due in large part to the additional contributions you've made, not to growth of the investments themselves.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"'Great idea,'" they said. 'We'll get right on it.'"</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Twenty years later, he's still waiting.</div><h3 style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: Arial, sans-serif; font-size: 19px; font-weight: normal; line-height: 18px; margin-bottom: 4px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 10px; text-align: -webkit-auto; vertical-align: baseline;">Common error</h3><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">To figure out the real performance of your portfolio, you have to account for all those deposits (and any withdrawals). Failing to do that will leave you with a wildly inaccurate picture of how your investment portfolio has been doing.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">It sounds simple, but it's surprising how often this factor is overlooked.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Back in the 1990s, a group of women investors from Beardstown, Ill., realized they'd made this mistake – but not before they'd written a best-selling book about how their small investors club had beaten the stock market and produced an annualized return of 23.4 per cent over 10 years. The book crowed about how their approach to investing delivered results that far surpassed what most professional money managers had been able to achieve.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">The only trouble was, they had forgotten to account for those cash inflows into their club. The investment growth of their portfolio over those 10 years was actually just 9.1 per cent annually — six percentage points lower than what the broad market had returned.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Embarrassing doesn't begin to describe the fallout. Their well-meaning but hopelessly inaccurate bestseller — <i style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;">The Beardstown Ladies Common-Sense Investment Guide: How We Beat the Market and How You Can Too</i> — was pulled from store shelves just as the lawsuits began to fly.</div><h3 style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: Arial, sans-serif; font-size: 19px; font-weight: normal; line-height: 18px; margin-bottom: 4px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 10px; text-align: -webkit-auto; vertical-align: baseline;">Rate of return</h3><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">So, how do you avoid the Beardstown fiasco and figure out how you're<i style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;">really</i> doing financially?</div><blockquote class="pullq" style="background-attachment: initial; background-clip: initial; background-color: initial; background-image: url(http://www.cbc.ca/i/news/v10/gfx/quote.gif); background-origin: initial; background-position: 100% 100%; background-repeat: no-repeat no-repeat; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-color: rgb(196, 196, 196); border-top-style: solid; border-top-width: 1px; color: #333333; float: right; font-family: Arial, sans-serif; font-size: 20px; line-height: 18px; margin-bottom: 10px; margin-left: 10px; margin-right: 0px; margin-top: 10px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 15px; padding-left: 0px; padding-right: 0px; padding-top: 0px; quotes: none; text-align: -webkit-auto; vertical-align: baseline; width: 276px;"><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;"><strong style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; display: block; line-height: 1.1em; margin-bottom: 0px; margin-left: 8px; margin-right: 8px; margin-top: 8px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;">What you need to calculate is your own internal rate of return (IRR) — also known as the personal rate of return or the dollar-weighted rate of return.</strong></div></blockquote><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">What you need to calculate is your own internal rate of return (IRR) — also known as the personal rate of return or the dollar-weighted rate of return.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">You can scan your quarterly statements for a mention of this figure, but you may not find it. Many advisers and firms don't routinely provide it.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Why not?</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Well, that would make it easier to compare just how well your portfolio has done relative to an appropriate benchmark, such as the average return of the markets. Some advisers, it seems, don't want their clients to know the ugly truth that they aren't adding much, if any, value for the fees they charge.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">MacKenzie has witnessed first-hand how reluctant some advisers are to reveal how well (or poorly) their clients are actually faring compared to the benchmark.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"One woman who came to see us said her adviser told her that [calculating her benchmark] couldn't be done because she had both stocks and bonds," he said.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">The bottom line quickly became clearer, said MacKenzie, when his own calculations showed the adviser had badly underperformed the benchmark.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"I think he's afraid he'll lose the account if he comes clean," MacKenzie said.</div><h3 style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: Arial, sans-serif; font-size: 19px; font-weight: normal; line-height: 18px; margin-bottom: 4px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 10px; text-align: -webkit-auto; vertical-align: baseline;">Figuring it out</h3><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Figuring out one's personal rate of return in a portfolio is not the easiest calculation to perform, especially for the mathematically challenged. MacKenzie's firm has an <a href="http://www.weighhouse.com/resources/portfolio_return.aspx" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #115278; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: none; vertical-align: baseline;">online calculator</a> that will do the figuring for you.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"It's the best one I've seen on the web that's free," says Justin Bender, a portfolio manager at PWL Capital, a fee-based investment management firm.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Bender cautions that large contributions made just before periods of relatively good or poor performance can skew the results. But for most investors, he says, the Weigh House calculator works well.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"A lot of advisers like to pretend that active management is paying off," says Bender.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">The calculator can reveal the truth — that most advisers don't outperform benchmarks over the long term.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Besides its rate of return calculator, Weigh House also has calculators that can figure out if your portfolio's performance is falling short of the appropriate benchmark. One has users spell out their asset mix and compares that with appropriate benchmarks, so if their portfolio is 50 per cent equities and 50 per cent fixed income, they won't be comparing returns to an all-equity benchmark.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">A third calculator tells you how much underperformance can cost you over time. Seeing how relatively small changes in the rate of return can have a huge impact on how much money you'll have in your golden years is sobering stuff, and it leads you to wonder why there isn't a requirement to routinely disclose this information.</div><h3 style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: Arial, sans-serif; font-size: 19px; font-weight: normal; line-height: 18px; margin-bottom: 4px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 10px; padding-left: 0px; padding-right: 0px; padding-top: 10px; text-align: -webkit-auto; vertical-align: baseline;">Adviser fees don't always translate into profits</h3><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">FAIR Canada — the Canadian Foundation for Advancement of Investor Rights — supports moves to have the industry provide better performance information to investors.</div><blockquote class="pullq" style="background-attachment: initial; background-clip: initial; background-color: initial; background-image: url(http://www.cbc.ca/i/news/v10/gfx/quote.gif); background-origin: initial; background-position: 100% 100%; background-repeat: no-repeat no-repeat; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-color: rgb(196, 196, 196); border-top-style: solid; border-top-width: 1px; color: #333333; float: right; font-family: Arial, sans-serif; font-size: 20px; line-height: 18px; margin-bottom: 10px; margin-left: 10px; margin-right: 0px; margin-top: 10px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 15px; padding-left: 0px; padding-right: 0px; padding-top: 0px; quotes: none; text-align: -webkit-auto; vertical-align: baseline; width: 276px;"><strong style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; display: block; line-height: 1.1em; margin-bottom: 0px; margin-left: 8px; margin-right: 8px; margin-top: 8px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;">'Many investors find after 10 years that they're no further ahead than when they started.'</strong><em style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-color: rgb(196, 196, 196); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #565656; display: block; font-size: 11px; font-style: normal; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 8px; padding-left: 8px; padding-right: 8px; padding-top: 6px; vertical-align: baseline;">— Ermanno Pascutto, Canadian Foundation for Advancement of Investor Rights</em></blockquote><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"Performance reporting has not been particularly uniform," says the group's executive director, Ermanno Pascutto, noting that sometimes such reporting is non-existent.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"Many investors find after 10 years that they're no further ahead than when they started, but the financial adviser has generated large fees."</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">That makes it even more critical, he says, that investors be given easy-to-understand information about how their portfolio has been doing so they can see whether their advisers have been earning those fees.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">Still, some firms are coming through. BMO InvestorLine and RBC Direct Investing are two discount brokerage firms that routinely provide their do-it-yourself clients with personal rate of return calculations. Investment counsellors often do this for their high-net-worth clients. But many other firms that actively manage money don't routinely do this, nor do most financial planners.</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">What should you do if your adviser says he or she can't — or won't — provide this calculation for you?</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;">"Find a new adviser," says MacKenzie. "In most cases, they won't volunteer it. But in most cases, if you ask, you can get it."</div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;"><br /></div><div style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #333333; font-family: Arial, sans-serif; font-size: 14px; line-height: 18px; margin-bottom: 14px; outline-color: initial; outline-style: initial; outline-width: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto; vertical-align: baseline;"><a href="http://www.cbc.ca/news/business/taxseason/story/2012/02/21/f-rrsp-rate-of-return.html">http://www.cbc.ca/news/business/taxseason/story/2012/02/21/f-rrsp-rate-of-return.html</a> <br /><br /><br /><h3 class="post-title entry-title" itemprop="name" style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 18px; font-weight: normal; line-height: normal; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; position: relative;"><br /></h3><h3 class="post-title entry-title" itemprop="name" style="background-color: white; font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 18px; font-weight: normal; line-height: normal; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; position: relative;">Portfolio's Return Calculator</h3><br /><a href="http://myinvestingnotes.blogspot.com/2012/04/portfolios-return-calculator.html">http://myinvestingnotes.blogspot.com/2012/04/portfolios-return-calculator.html</a> </div></div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-77658980341893735282012-04-16T07:17:00.000-07:002012-04-16T22:09:05.525-07:00Portfolio Accounting<div dir="ltr" style="text-align: left;" trbidi="on"><br /><h2 style="background-color: white; color: #8cafc3; font-family: Arial, sans-serif; font-size: 12pt; margin-bottom: 6px; text-align: -webkit-auto;">Portfolio Accounting</h2><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">A basic understanding of 'portfolio accounting' is necessary when wanting to calculate returns. Portfolio accounting is also very important when it comes to dealing with derivatives. Most of what will follow in this subchapter looks trivial, but can give one or two headaches in practical applications.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">'Portfolio accounting' is about recording, classifying, and summarizing financial events that affect an investment portfolio.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Portfolio Definition</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Although it might sound trivial, the definition of individual 'portfolios' isn't always that straight-forward in practice.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">We shall define a 'portfolio' as an abstract accounting entity including at least one security and one cash account. The term 'abstract' merely points to the fact that this definition does not necessarily correspond to 'real-world' accounting entities.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Basic Relationships</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">The relationships below are expressed on a "net" basis (net of transactions costs, fees & withholdings taxes).</div><blockquote dir="ltr" style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; margin-right: 0px; text-align: -webkit-auto;"><div style="font-size: 9pt;"><strong>Ending Market Value = Beginning Market Value<br /> + Net Contributions<br /> + Gains&Losses</strong></div><div style="font-size: 9pt;"><strong>Net Contributions = Contributions - Withdrawals</strong></div><div style="font-size: 9pt;"><strong>G&L = Income<br /> + Net Capital Gains&Losses</strong></div><div style="font-size: 9pt;"><strong>Net Capital Gains&Losses = Sales - Purchases<br /> + Ending Market Value Securities<br /> - Beginning Market Value Securities</strong></div><div style="font-size: 9pt;"></div><div style="font-size: 9pt;"><strong></strong></div><strong>Ending Cash Balance = Net Contributions + Income + Sales -Purchases</strong><div style="font-size: 9pt;"></div></blockquote><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Note that for return calculation purposes, "gains and losses" are defined on a 'beginning-of-calculation-period market value basis', and not on a 'cost basis' as in an accounting context. The differences between the two concepts of "gains and losses" are...</div><ul style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><li style="line-height: 1.5;"><u>Valuation</u>: Accounting G&L are calculated based on <strong>cost prices</strong> at the time each security was purchased. When calculating investment returns, all securities are considered at their<strong>market prices</strong>.</li><li style="line-height: 1.5;"><u>Time Period</u>: In calculating accounting G&L, the <strong>holding period</strong> of securities are relevant (because different holdings periods are mixed, an inventory model such as LIFO has to be specified additionally. The calculation of investment returns refers to a specific <strong>calendar period</strong> (for example, "monthly")and stocks and flows during this period only are relevant.</li></ul><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">The further decomposition of "net gains and losses" in "realized" and "realized" components is not of particular interest for return calculation purposes. The only thing to remeber is not to include 'realized gains & losses' as 'income' when calculating investment returns: As realized gains & losses are reinvested, this would result in double-counting and therefore distortion of investment returns.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Market values must be calculated including accruals.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">The above portfolio accouting realtionships can be illustrated graphically...</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><img height="375" src="http://www.andreassteiner.net/performanceanalysis/images/PortfolioAccounting.gif" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px;" width="400" /></h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Click <a href="http://www.andreassteiner.net/performanceanalysis/images/PortfolioAccounting.JPG" style="color: #8cafc3;" target="_blank">here</a> for a large version of the above chart.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Market Valuation</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Portfolios are valued at market prices ('<strong>Mark-to-Market</strong>').</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><strong>Accruals</strong> should be reflected in market prices whenever possible. Accrual accounting is a must for fixed-income securities, but typically rather unimportant in the context of dividends on equity. Dividends are not payable unless the stock was owned on the record date, so dividends are accrued as income on valuation dates from the ex-dividend date up to the payable date trade.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Valuation issues are a very important, but often neglected issue in return calcuation and therefore in investment performance analysis: 'garbage in, garbage out'.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Mark-to-Market versus<strong> Mark-To-Model</strong>, Mark-to-Market versus <strong>OTC...</strong></div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">For illiquid instruments, there is no market price available and MTM can become a serious problem. The choice of valuation model is very often under the control of asset managers. They can therefore take advantage to manipulate the prices so as to smooth the portfolio returns. If this is the case, the auto-correlation coefficient of the portfolio return series will be significant. As a result, volatility of returns (=risk) will be underestimated as well as the correlation of the fund with peer products or the benchmark. The diversification benefits of the portfolio to the investor will therefore be overestimated.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Cash Flows</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Income (dividends, coupons) is included in return calculations if income is re-invested. Income is an <strong>internal cash flow</strong>. Selling/buying securities also generates internal cash flows (transfer of value from securities to cash account or vice versa)</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Contributions and withdrawals are <strong>external cash flows</strong>. For convenience reasons, we use the summary term 'net contributions', defined as contributions minus withdrawals.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Some authors use the term 'cash flow' instead of net contributions. This can easily lead to confusion when mixing up internal with external 'cash flows'. We strongly recommend avoiding the term 'cash flow' in the context of return calcuations and substitute it with the relevant conpcets directly (income, contributions etc.)</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Besides actual client orders, there exist other external cash flows (especially withholding taxes, fees). When presenting net contributions, customer orders and other external cash flows should be reported as separate line items.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Taxes</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Terminology: 'after-tax' and 'before-tax' returns.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Difficult to generalize since tax rates are customer specific.</div><div class="MsoNormal" style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; margin-bottom: 0pt; margin-left: 0cm; margin-right: 0cm; margin-top: 0cm; text-align: -webkit-auto;">In the context of a specific portfolio, returns are normally stated on a 'before-tax' basis, where values are not subject to any deductions in respect of tax (whether incurred or not). Any payments to the tax office out of the portfolio are then treated as a withdrawal of funds. When calculating returns after taxes, tax payments outside the portfolio have to considered as contributions.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"></div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Reclaimable (withholding) taxes versus non-reclaimable taxes: any reclaimable taxes payed have to be consdiered as withdrawals. Reclaimable taxes received are contributions.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Fees</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Investment fee structures differ significantly across countries and products. In a universal bank setting, for example, investors might use one bank for all investment management services. Such full-service providing banks might work with cross-funded (subsidized) fees, partially bundled or summed up to an all-inclusive fee (also known as wrap account programs). In the case of a wrap account, 'net-of-fee performance' would mean a net-of-management-and-brokerage/custody-fee performance while in a difference setting, 'net-of-fee performance' is understood as net of<i>management</i> fees only.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Such differences complicate net-of-fee performance calculations considerably and also affect comparability of returns within a company (aggregating different types of clients and accounts to composites) and between different asset management firms.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Another issue in reporting net returns is that a presented net-return might not be achieved by all clients due to differences in characteristics (volume) or simply bargaining power.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><strong>Brokerage Commission Costs</strong> are usually added to the purchase cost and subtracted from sales proceeds for both gross- and net-of-fee return calculations</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><strong>Custodial Fees </strong>are typically not deducted from either gross or net performance and are treated as a withdrawal. This is justified when the costs are beyond the control of the investment manager.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><strong>Management Fees</strong> and other charges for advisory services provided by the asset manager are usually charged to the portfolio. These charges are treated as withdrawals in the calculation of 'gross-of-fees returns' (=before deduction of fees charged). The same withdrawals are excluded in the calculation of a net-of-fees return (=after the deduction of fees charged). Management fees can also be charged outside the portfolio. It is important to include fees charged are in the calculation of net- and gross-of-fees returns. When fees have been paid from outside the fund, they are excluded from calculations when a gross of fees return is required. They are treated as a contribution to the portfolio when a net of fees return is required.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">To avoid distortions and "jumps", fees payed out of the portfolio should be "accrued" whenever possible.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">If fees are calculated as a percentage of average capital invested, the calculation methodology for average captial invested should be specified as detailed as possible.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Transaction Costs</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Transaction costs are usually deducted: securities at 'cost prices'.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Often neglected, source of return, quality indicator for operationally efficient investment management.</div><h4 style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Exchange Rates</h4><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Portfolio base currency, security currency, currency overlays, currency fowards.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Consistency is oftenan issue: consistency not only within portfolio, but also when benchmarks and other entities the portfolio is compared with are involved.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;">Data source for exchange rates used should always be disclosed.</div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; font-family: Arial, sans-serif; font-size: 12px; text-align: -webkit-auto;"><a href="http://www.andreassteiner.net/performanceanalysis/?Return_Calculation:Portfolio_Accounting">http://www.andreassteiner.net/performanceanalysis/?Return_Calculation:Portfolio_Accounting</a> </div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-46895985909409455502012-04-16T06:56:00.000-07:002012-04-16T22:09:05.630-07:00Portfolio's Return Calculator<div dir="ltr" style="text-align: left;" trbidi="on">Use these calculators to work out your portfolio's returns.<br /><br /><div dir="ltr" style="text-align: left;" trbidi="on"><span style="background-color: white; color: #333333; font-family: 'Trebuchet MS', 'Lucida Grande', Verdana, Arial, sans-serif; font-size: x-small; line-height: 15px;">Detailed version: </span><span style="background-color: white; color: #333333; font-family: 'Trebuchet MS', 'Lucida Grande', Verdana, Arial, sans-serif; font-size: medium; line-height: 15px;"> <a href="http://www.weighhouse.com/resources/portfolio_return.aspx">CALCULATE YOUR PORTFOLIO'S RETURN</a></span><br /><h1 class="post-title" id="post-1155" style="background-color: white; color: #333333; font-family: 'Trebuchet MS', 'Lucida Grande', Verdana, Arial, sans-serif; line-height: 1.4em; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 10px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; position: relative; text-align: justify;"><div><span class="posteddate" style="line-height: 15px; text-align: left;"><span style="font-size: x-small;">Simplified version: </span><span style="font-size: medium;"> <span style="color: #771100;"><span style="line-height: 1.4em;"><a href="http://www.moneychimp.com/features/portfolio_performance_calculator.htm">Portfolio Rate of Return – Calculator</a></span></span></span></span></div></h1></div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-86232130000092088962012-04-16T06:49:00.000-07:002012-04-16T22:09:05.727-07:00How to figure your portfolio's return<div dir="ltr" style="text-align: left;" trbidi="on"><br /><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif;"><b>Q: How can individual investors calculate the rate of return on their portfolios if they have deposited or withdrawn money from the account?</b><br /><b><br /></b></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">A: I'm always intrigued when people do things with their investments they'd never do with their money in normal life.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Would you order a dish from a restaurant menu without knowing the price ahead of time? Would you buy a non-refundable airline ticket without knowing the fare? While there may be some exceptions, the answer will usually be no.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;"><u>But investors keep buying stocks, bonds and mutual funds and have no idea what they're paying or, more important, getting in return.</u> <u>And they may be paying dearly either with large mutual fund fees or indirectly with lackluster performance.</u><br /><u><br /></u></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;"><u>Worse yet, they might be fixated on their one winning stock while ignoring the five dogs that are killing their portfolio.</u><br /><u><br /></u></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;"><span style="color: magenta; font-size: large;">Are you one of these people? You are if you don't know how to calculate the return of your portfolio. </span>You'd be surprised how many people don't. The briefly famous Beardstown Ladies investment club thought they were brilliant investors until it was discovered they were not measuring their returns properly (they counted deposits to the account as investment returns).<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Many brokers don't help. Few of them bother to provide rates of return for their customers' portfolios. <u>The cynic in me suspects that if many active traders knew what their real returns were, they'd probably quit trading so much. </u>To the credit of major mutual fund companies, most of them do calculate your performance data.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Well, it all gets cleared up right now. I'll show you how to do this yourself, using 2005. To get started, you'll need:<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">1. The balance of your portfolio on Dec. 31, 2004, available on your statements.</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">2. The portfolio balance on Dec. 30, 2005.</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">3. The dates and amounts of any deposits or withdrawals made during the year.</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">4. Unless you're a math genius, you'll need a financial calculator or Microsoft Excel.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Let's say your portfolio was worth $10,000 on Dec. 31, 2004. During the year, you deposited $1,000 on March 30, withdrew $500 June 30, deposited another $1,000 Sept. 30 and the portfolio ended the year worth $12,000.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Someone who didn't account for the deposits and withdrawals would assume they did well last year. After all, the portfolio gained 20% in value, not including the value of the deposits and withdrawals.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">But let's do this correctly. We'll first do the problem assuming you have a Hewlett-Packard 12C financial calculator, a popular calculator handy for all investors. Incidentally, the calculator is celebrating its 25th anniversary. You can <a href="http://h30248.www3.hp.com/offers/12c/index.html" style="color: #00529b; text-decoration: none;" target="_blank">read more about it here.</a><br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Keep in mind that each number described above is actually a cash flow. We can plot it this way:</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Initial cash flow: minus $10,000. We show this as a negative number because it's theoretically money coming out of your pocket to invest.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cash flow 1: minus $1,000 — again, a negative number because the money is coming out of your pocket.</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cash flow 2: plus $500. This is positive number because the cash is coming into your pocket.</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cash flow 3: minus $1,000. Negative, see above.</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cash flow 4: plus $12,000. This is the money theoretically coming into your pocket from the investment.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">The HP 12C makes this easy to calculate. Here are the keystrokes (note the "CHS" key makes the number negative):<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Step 1: 10,000 CHS [g] Cf0</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Step 2: 1,000 CHS [g] Cfj</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Step 3: 500 [g] Cfj</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Step 4: 1000 CHS [g] cfj</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Step 5: 12000<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Now that you've entered everything, all you have to do is hit the [f] IRR key, and the calculator does the rest. The HP12C will show you that the quarterly return on your portfolio is 1.14%. All you have to do is annualize that quarterly return. To do that, divide 1.14 by 100, add 1, take the sum to the fourth power, subtract 1 and then multiply by 100. You then derive an annualized return of 4.639%.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">You might be proud of yourself until you realize that last year, the Standard & Poor's 500 index returned 4.9%, says Ibbotson Associates. In other words, you underperformed a basket of stocks that a monkey could have bought and held in an index fund. And that doesn't even include any taxes you may have paid if you sold any of the shares for a capital gain.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">What if you don't have an HP 12C? You can do the same thing in Microsoft Excel. Below is what you'd type into the appropriate cells<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A1: -10,000</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A2: -1,000</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A3: 500</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A4: -1000</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A5: 12,000</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A6: =IRR(A1:A5)</div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">Cell A7:=((((A6/100)+1)<b>^4))-1*100</b><br /><b><br /></b></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">And you get the same answer in cell A7 that you got when using the HP 12C if you format the cells for "number" to four decimal places. Otherwise, Excel will round things off.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">If all this seems like too much work, don't give up. Not knowing your portfolio return is like driving on the freeway blindfolded. Another option is to buy a software program that does the calculations for you.<br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;">One piece of software I've used that does this quite well is the BetterInvesting Portfolio Manager. This software program allows you to do enter each transaction into a checkbook-like register and it calculates your return with great precision. It's not cheap, but you can learn about the software and <a href="http://www.quantixsoftware.com/index_bipm.php" style="color: #00529b; text-decoration: none;" target="_blank">download a free trial here.</a><br /><br /></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif; line-height: 15px;"><i>Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at <a href="http://www.usatoday.com/money/front.htm?Loc=NPV001" style="color: #00529b; text-decoration: none;" target="">money.usatoday.com</a>. To submit a question, e-mail Matt at<a href="mailto:mkrantz@usatoday.com" style="color: #00529b; text-decoration: none;" target="">mkrantz@usatoday.com</a>.</i><br /><i><br /></i></div><div class="inside-copy" style="background-color: white; font-family: Arial, Helvetical, sans-serif;"><i></i></div><table border="0" cellpadding="0" cellspacing="0" height="25" style="background-color: white; color: black; font-family: Arial, Helvetical, sans-serif;"><tbody><tr><td colspan="2" height="40"><span class="posteddate" style="line-height: 15px; text-align: left;"><span style="color: #666666;">Posted 2/27/2006 12:01 AM ET</span><br /><br /><a href="http://www.usatoday.com/money/perfi/columnist/krantz/2006-02-27-portfolio-return_x.htm" style="color: #666666;">http://www.usatoday.com/money/perfi/columnist/krantz/2006-02-27-portfolio-return_x.htm</a><br /><br /><br /><b><u><span style="color: magenta; font-size: large;">Calculate your portfolio return here:</span></u></b><br /></span><br /><h1 class="post-title" id="post-1155" style="color: #333333; font-family: 'Trebuchet MS', 'Lucida Grande', Verdana, Arial, sans-serif; line-height: 1.4em; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 10px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: justify;"><span class="posteddate" style="line-height: 15px; text-align: left;"><span style="font-size: small;">Detailed version: </span><span style="font-size: large;"> <a href="http://www.weighhouse.com/resources/portfolio_return.aspx" style="font-family: Arial, Helvetica, sans-serif; line-height: 25px; text-align: left; text-transform: uppercase;">CALCULATE YOUR PORTFOLIO'S RETURN</a></span></span></h1><h1 class="post-title" id="post-1155" style="color: #333333; font-family: 'Trebuchet MS', 'Lucida Grande', Verdana, Arial, sans-serif; line-height: 1.4em; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 10px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: justify;"><div><span class="posteddate" style="line-height: 15px; text-align: left;"><span style="font-size: small;">Simplified version: </span><span style="font-size: large;"> <a href="http://www.mymoneyblog.com/estimate-your-portfolios-rate-of-return-calculator.html" style="line-height: 1.4em;">Portfolio Rate of Return</a><a href="http://www.mymoneyblog.com/estimate-your-portfolios-rate-of-return-calculator.html" style="line-height: 1.4em;"> – Calculator</a></span></span></div></h1><div style="color: #666666;"><span class="posteddate" style="line-height: 15px; text-align: left;"><br /></span></div></td></tr></tbody></table></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-87416697133258740372012-04-16T03:22:00.000-07:002012-04-16T22:09:05.831-07:00Calculating Intrinsic Value<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><h1 class="xlHeader" style="background-color: white; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: Arial, Helvetica, sans-serif; letter-spacing: -1px; line-height: 36px; margin-bottom: 5px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><span style="font-size: small;">Security Analysis 401: Calculating Intrinsic Value</span></h1><div class="articleMeta" style="background-color: white; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #666666; font-family: Arial, Helvetica, sans-serif; font-size: 12px; line-height: 1.3em; margin-bottom: 10px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><span class="vcard byline" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">By Sham Gad </span><br /><span class="dateline" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">August 23, 2007</span> |<span class="comments" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"></span></div><div class="entry-content" style="background-color: white; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: Arial, Helvetica, sans-serif; line-height: 22px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">In the previous three articles in this "Security Analysis" series, I discussed the concept of<a href="http://www.fool.com/investing/value/2007/07/23/security-analysis-101-margin-of-safety.aspx" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">margin of safety</a>, explained why you should rely on <a href="http://www.fool.com/investing/value/2007/08/01/security-analysis-201-intrinsic-value.aspx" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">intrinsic value</a> to make investing decisions, and showed why you want to find great businesses with <a href="http://www.fool.com/investing/value/2007/08/21/security-analysis-301-look-for-a-wide-moat.aspx?terms=security+analysis+301&vstest=search_042607_linkdefault" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">wide economic moats</a>. <b><u>Once you've taken those steps and found a business that looks attractive, you next need to determine the<a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Intrinsic_value?utm_source=Fool&utm_medium=links&utm_campaign=intrinsic%20value&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">intrinsic value</a> of that business, to find out whether a <em style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">bargain</em> of an <a href="http://www.fool.com/investing/small-cap/2008/06/28/an-investment-opportunity-of-historic-proportions.aspx" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">investment opportunity</a>exists.</u></b></div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><b><span style="color: lime;">Every business has an intrinsic value. </span></b><span style="color: #222222;">According to John Burr Williams in his 1938 publication</span><em style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The Theory of Investment Value</em><span style="color: #222222;">, that value is determined by the </span><a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/How_to_Calculate_Cash_Inflow_Using_Accounts_Receivable_Inventory_and_Accounts_Payable?utm_source=Fool&utm_medium=links&utm_campaign=cash%20inflows&source=ihlsitlnk0000001" style="border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">cash inflows</a><span style="color: #222222;"> and outflows -- discounted at an appropriate </span><a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/How_to_Calculate_a_Lump_Sum_Plus_Interest_Rate?utm_source=Fool&utm_medium=links&utm_campaign=interest%20rate&source=ihlsitlnk0000001" style="border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">interest rate</a><span style="color: #222222;"> -- that can be expected to occur during the remaining life of the business.</span></div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">This definition is painfully simple, but it works. Let's apply it to a couple of businesses so you can see for yourself.</div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Solid, stable cement</strong><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">CEMEX </strong>(<span class="ticker" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">NYSE: <a class="qsAdd qs-source-isssitthv0000001" href="http://caps.fool.com/Ticker/CX.aspx?source=isssitthv0000001" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">CX</a></span> <a class="addToWatchListIcon qsAdd qs-source-iwlsitbut0000010" href="http://my.fool.com/watchlist/add?ticker=CX&source=iwlsitbut0000010" style="background-image: url(http://g.foolcdn.com/common/img/buttons/BtnAdd.gif); background-position: 0px 0px; background-repeat: no-repeat no-repeat; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; display: inline-block; font-family: inherit; font-style: inherit; height: 16px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: middle; width: 16px;" title="Add CX to My Watchlist"> </a>) is a Mexican producer and distributor of cement. Competing with the likes of<strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> LaFarge </strong>(<span class="ticker" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">NYSE: <a class="qsAdd qs-source-isssitthv0000001" href="http://caps.fool.com/Ticker/LR.aspx?source=isssitthv0000001" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">LR</a></span> <a class="addToWatchListIcon qsAdd qs-source-iwlsitbut0000010" href="http://my.fool.com/watchlist/add?ticker=LR&source=iwlsitbut0000010" style="background-image: url(http://g.foolcdn.com/common/img/buttons/BtnAdd.gif); background-position: 0px 0px; background-repeat: no-repeat no-repeat; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; display: inline-block; font-family: inherit; font-style: inherit; height: 16px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: middle; width: 16px;" title="Add LR to My Watchlist"> </a>) , it is one of the largest cement players in the world. It produced <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Free_cash_flow?utm_source=Fool&utm_medium=links&utm_campaign=free%20cash%20flow&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">free cash flow</a> -- cash from operations less <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Capital_expenditures?utm_source=Fool&utm_medium=links&utm_campaign=capital%20expenditures&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">capital expenditures</a> -- of about $2.6 billion in 2005 and around $2.75 billion in 2006. <u>Meanwhile, between 2004 and 2005, it grew free <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Cash_flow?utm_source=Fool&utm_medium=links&utm_campaign=cash%20flow&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">cash flow</a> by around 50%, but that same figure was virtually flat from 2005 to 2006.</u> That may give you an inkling that it makes no sense to try predicting a different rate of <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Gross_Billings_Vs._Gross_Receipts?utm_source=Fool&utm_medium=links&utm_campaign=cash%20flow&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">cash flow</a>growth each year. Instead, when attempting to <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/How_to_Calculate_a_Company%27s_Intrinsic_Value_%26_EPS?utm_source=Fool&utm_medium=links&utm_campaign=calculate%20intrinsic%20value&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">calculate intrinsic value</a>, you should <b><u>stick to one or two consistent conservative growth rates, </u></b>although smaller companies starting with a lower base figure can be assigned higher rates of growth. When calculating intrinsic value, I use a 10-year forecast, because I think that's an adequate time period to provide sufficient data, and I apply a 10% rate <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Discount_rate?utm_source=Fool&utm_medium=links&utm_campaign=discount%20rate&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">discount rate</a>, which is equivalent to the S&P 500's historical return.</div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><span style="color: #222222;">Cemex, however, is a huge business, and while it may experience some years in which</span><a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/How_Are_Financial_Statements_Different_in_Different_Industries%3F?utm_source=Fool&utm_medium=links&utm_campaign=cash%20flows&source=ihlsitlnk0000001" style="border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">cash flows</a><span style="color: #222222;"> grow abnormally,</span><b><span style="color: lime;"><u> it's more logical when determining its intrinsic value to use a meaningful conservative figure.</u></span></b><span style="color: #222222;"> Always work with a </span><a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Margin_of_safety?utm_source=Fool&utm_medium=links&utm_campaign=margin%20of%20safety&source=ihlsitlnk0000001" style="border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">margin of safety</a><span style="color: #222222;">.</span></div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">In this case, it's reasonable to assume that Cemex can grow<b><u> its <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/How_to_Calculate_the_Present_Value_of_Free_Cash_Flow?utm_source=Fool&utm_medium=links&utm_campaign=free%20cash%20flow&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">free cash flow</a> by 10% for four years. </u></b>While this <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Growth_rate?utm_source=Fool&utm_medium=links&utm_campaign=growth%20rate&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">growth rate</a> can continue for a longer period, I like to be extra cautious and <b><u>predict that free cash flows stabilize at a 3% growth rate thereafter</u></b>. Cemex is a very well-run company, and there will always be a need for cement in the world, so I think 3% free cash flow growth is very achievable.</div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Let's look at the calculations. Dollar figures are in billions.</div><table cellspacing="0" class="ed-table" style="-webkit-border-horizontal-spacing: 0px; -webkit-border-vertical-spacing: 0px; border-bottom-width: 0px; border-collapse: collapse; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; empty-cells: show; font-family: inherit; font-size: inherit; font-style: inherit; margin-bottom: 8px; margin-left: 1px; margin-right: 0px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; width: 583px;"><tbody style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><th style="background-attachment: initial; background-clip: initial; background-color: #eeeeee; background-image: initial; background-origin: initial; border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; font-weight: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> Year</strong></div></th><th style="background-attachment: initial; background-clip: initial; background-color: #eeeeee; background-image: initial; background-origin: initial; border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; font-weight: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> Free Cash Flow </strong></div></th><th style="background-attachment: initial; background-clip: initial; background-color: #eeeeee; background-image: initial; background-origin: initial; border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; font-weight: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> Present Value of FCF</strong></div></th></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2007 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$3.02</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.75 </div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2008 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$3.30</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.75</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2009 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$3.70</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.75</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2010 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$4.02</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.75</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2011</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$4.43</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.75</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2012 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$4.56</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.57</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2013 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$4.70 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.41</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2014 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$4.83 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.25</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2015</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$4.98</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$2.11</div></td></tr><tr style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">2016 </div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$5.13</div></td><td style="border-bottom-color: rgb(187, 187, 187); border-bottom-style: solid; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-color: rgb(187, 187, 187); border-left-style: solid; border-left-width: 1px; border-right-color: rgb(187, 187, 187); border-right-style: solid; border-right-width: 1px; border-style: initial; border-top-color: rgb(187, 187, 187); border-top-style: solid; border-top-width: 1px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 5px; padding-left: 7px; padding-right: 7px; padding-top: 5px; text-align: left; vertical-align: baseline;"><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 12px; font-style: inherit; line-height: 18px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">$1.97</div></td></tr></tbody></table><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The sum of the <a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Present_value?utm_source=Fool&utm_medium=links&utm_campaign=present%20value&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">present value</a> (PV) of the free cash flows comes to about $25 billion.</div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><b><u>Next, you need to determine a terminal value for the business. </u></b>Conservatively, I assume that Cemex would be worth 10 times its 2016 free cash flow, or $51.3 billion, which has a<a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/How_to_Calculate_PV_of_an_Expected_Stock_Price?utm_source=Fool&utm_medium=links&utm_campaign=present%20value&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">present value</a> of $19.7 billion. So by adding all of the PV cash flows together, my estimate of intrinsic value for Cemex comes to about $45 billion. With about 790 million shares currently outstanding, Cemex has a per-share intrinsic value, based on my assumptions, of approximately $57 a share, versus the current <a href="http://caps.fool.com/" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">stock price</a> of $31.</div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-size: 14px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Does this mean you should back up truck and load up on Cemex? No, even though I do think Cemex is a fantastic company selling at an attractive price. For one, the number of<a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Shares_outstanding?utm_source=Fool&utm_medium=links&utm_campaign=shares%20outstanding&source=ihlsitlnk0000001" style="border-bottom-color: rgb(0, 102, 204); border-bottom-style: dashed; border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">shares outstanding</a> 10 years from now will surely be a different number from what it stands at today. Assume, for example, that the share count rises to 1 billion shares and the intrinsic value comes down to $45 a share. Then you're talking about a whole different set of numbers.</div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><b>Most importantly, though, you need to know the business inside and out in order to estimate cash flow growth with a high degree of confidence. </b><span style="font-size: 14px;">The ability to assess the quality and competence of management thus becomes critical. Knowing how management spends company dollars tells you a lot about how much cash the company will produce years down the road. In short, do your </span><a class="wikiTerm qsAdd qs-source-ihlsitlnk0000001" href="http://wiki.fool.com/Due_diligence?utm_source=Fool&utm_medium=links&utm_campaign=due%20diligence&source=ihlsitlnk0000001" style="border-bottom-width: 1px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-size: 14px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; white-space: nowrap;" title="Get the definition on The Motley Fool Investing Wiki">due diligence</a><span style="font-size: 14px;"> ... and when you are done, do it </span><em style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-size: 14px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">again</em><span style="font-size: 14px;">.</span></div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><div style="color: #222222; font-size: 14px;"><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The hard part</strong></div><u style="color: #222222;"><span style="font-size: large;">Calculating intrinsic value is simple and straightforward.</span></u> <u style="color: #222222;"><b><span style="font-size: large;">It's having accurate data that's the difficult part. </span></b></u><span style="font-size: 14px;"><span style="color: #222222;">That's why Benjamin Graham remarked:</span><b><span style="color: lime;"> "You are neither right or wrong because the crowd disagrees with you. You are right because your data and reasoning are right." </span></b><span style="color: #222222;">That's also why Warren Buffett, the </span></span><a href="http://www.fool.com/personal-finance/retirement/2008/01/25/the-best-investor-youve-never-heard-of.aspx" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-size: 14px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">best investor</a><span style="font-size: 14px;"><span style="color: #222222;"> on the planet, spends a lot of time focusing on businesses with </span><b><span style="color: lime;">durable competitive advantages,</span></b><span style="color: #222222;"> such as the brand value that</span></span><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-size: 14px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> Coca-Cola</strong><span style="color: #222222; font-size: 14px;">(</span><span class="ticker" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-size: 14px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">NYSE: <a class="qsAdd qs-source-isssitthv0000001" href="http://caps.fool.com/Ticker/KO.aspx?source=isssitthv0000001" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">KO</a></span><span style="color: #222222; font-size: 14px;"> </span><a class="addToWatchListIcon qsAdd qs-source-iwlsitbut0000010" href="http://my.fool.com/watchlist/add?ticker=KO&source=iwlsitbut0000010" style="background-position: 0px 0px; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; display: inline-block; font-family: inherit; font-size: 14px; font-style: inherit; height: 16px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: middle; width: 16px;" title="Add KO to My Watchlist"> </a><span style="color: #222222; font-size: 14px;">) offers, or the monopoly-like industry that</span><strong style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-size: 14px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"> American Express </strong><span style="color: #222222; font-size: 14px;">(</span><span class="ticker" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-family: inherit; font-size: 14px; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">NYSE: <a class="qsAdd qs-source-isssitthv0000001" href="http://caps.fool.com/Ticker/AXP.aspx?source=isssitthv0000001" style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; font-family: inherit; font-style: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">AXP</a></span><span style="color: #222222; font-size: 14px;"> </span><a class="addToWatchListIcon qsAdd qs-source-iwlsitbut0000010" href="http://my.fool.com/watchlist/add?ticker=AXP&source=iwlsitbut0000010" style="background-position: 0px 0px; border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #339933; display: inline-block; font-family: inherit; font-size: 14px; font-style: inherit; height: 16px; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: middle; width: 16px;" title="Add AXP to My Watchlist"> </a><span style="color: #222222; font-size: 14px;">) operates in.</span></div><div style="border-bottom-width: 0px; border-color: initial; border-image: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #222222; font-style: inherit; margin-bottom: 11px; margin-top: 11px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><b><span style="font-size: large;">It's easy to predict future cash flows with a high degree of certainty for businesses like this -- ones that have wide economic moats insulating them from the threat of competition. </span></b><span style="font-size: 14px;">That gets back to our last discussion. And it shows how all of our discussions tie together to make you a better investor.</span></div></div></div>http://www.fool.com/investing/value/2007/08/23/security-analysis-401-calculating-intrinsic-value.aspx</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-37336217209294809432012-04-16T03:08:00.000-07:002012-04-16T22:09:05.947-07:00Intrinsic Value: There are two fatal weaknesses of any DCF model.<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; text-align: -webkit-center;"><span class="text-heading-large" style="color: #000099; font-family: Arial; font-size: 18px; font-weight: bold;">Why Stock "Value" Systems Have No Value</span></div><div align="center" class="text-heading" style="background-color: white; color: #000099; font-family: Arial; font-size: 15px; font-weight: bold; text-align: -webkit-center;">John Price, PhD</div><table align="center" border="0" cellpadding="0" cellspacing="0" style="background-color: white;"><tbody><tr><td class="text" style="font-family: Arial;">We regularly get asked how Conscious Investor is different from the countless "value" based software products and books available.<br />The vast majority of "value" approaches are based upon a standard discount cash flow (DCF) model. They all purport to find what is called the intrinsic value or true value of a stock. This is the value the proponents claim that all rational investors should pay for the stock.<br />Many of the authors and investment websites claim to base their intrinsic value approach upon the methods of Warren Buffett. In fact, it is actually very unlikely that he really uses any of these methods in anything vaguely resembling a formal approach.<br />For example, Charlie Munger, the old friend of Buffett and the Vice-Chairman of Berkshire Hathaway, says that he has never seen Buffett do any discount value calculations. This is consistent with the answer he gave when asked about intrinsic value at the annual meeting of Berkshire Hathaway in 1996. "There is no formula to figure it out." He replied. "You have to know the business."<br />Until recently, Buffett had never used a computer for anything, let alone for implementing any value models. Now he only uses it to play bridge on-line.<br />When people write about Buffett I usually agree with most of the general observations made about his approach. The one area where Conscious Investor differs from the majority of Buffett followers (but quite likely not with Buffett himself) is in relation to the "valuation" model used.<br />There are large numbers of DCF models. Stable growth models, two-stage models, three stage models and so on. Each of these models calculate the intrinsic value of the stock by discounting back to present time the stream of "cash" that is generated by the business. All I can say is that it is hard to believe that such simplistic and unreliable material is still taught in universities and promoted by stock analysts.<br />The main problem is that people think that just because they can put some numbers into a formula they have found a useful and realistic model. Here we are talking about all the academics and writers who have limited understanding of the interface between mathematics and the real world.<br /><div class="text-blue-bold" style="color: #000099; font-weight: bold;">Two Fatal Weaknesses</div>There are two fatal weaknesses of any DCF model.<br />The first is that DCF models are unstable — small changes in the input values can lead to such large changes in the output that almost any number can be obtained.<br />Here is a simple example showing just how unstable intrinsic value calculations are. The model uses the standard two-stage approach.<br />We assume that the company spends ten years in the initial stage during which the cash per share (generally the free cash flow) that it generates grows by the rate given in the second column. After the initial stage comes the steady state period. During this period the cash is assumed to grow at the rate described in the third column. Finally, everything is discounted back to present time using the rate given in the fourth column.<br />With small changes in the input variables, the output can shift from $23 to $58. I can't help getting the image in my mind of the host of an old television show saying, "Would the real intrinsic value please stand up?"<br /><table align="center" border="1" bordercolordark="#0000FF" bordercolorlight="#000FF" cellpadding="5" style="font-size: 12px;"><tbody><tr align="center" bgcolor="#CCFFFF" bordercolor="#000099" class="text" style="font-size: 12px;"><td><div align="center"><b>Current Cash</b></div></td><td><div align="center"><b>Initial Growth Rate</b></div></td><td><div align="center"><b>Final Growth Rate</b></div></td><td><div align="center"><b>Discount Rate</b></div></td><td><div align="center"><b>Intrinsic Value</b></div></td></tr><tr align="center" bgcolor="#FFFFCC" bordercolor="#000099" class="text" style="font-size: 12px;"><td><div align="center">$1.00</div></td><td><div align="center">10%</div></td><td><div align="center">4%</div></td><td><div align="center">11%</div></td><td><div align="center">$23.09</div></td></tr><tr align="center" bgcolor="#FFFFCC" bordercolor="#000099" class="text" style="font-size: 12px;"><td height="29"><div align="center">$1.00</div></td><td height="29"><div align="center">11%</div></td><td height="29"><div align="center">5%</div></td><td height="29"><div align="center">10%</div></td><td height="29"><div align="center">$33.50</div></td></tr><tr align="center" bgcolor="#FFFFCC" bordercolor="#000099" class="text" style="font-size: 12px;"><td><div align="center">$1.00</div></td><td><div align="center">12%</div></td><td><div align="center">6%</div></td><td><div align="center">9%</div></td><td><div align="center">$58.00</div></td></tr></tbody></table><br />And then you have to do the same estimate for the discount rate.<br />If a model with this level of instability was proposed in a science class, it would be thrown out of the window.<br />The second fatal weakness is that just because some model says it is generating something called intrinsic value does not mean that it is providing anything that really is "intrinsic value". And it certainly does not mean that it is giving something useful for investors.<br />For example, just because a stock is undervalued (by some model or other) does not mean that it won't stay undervalued.<br />This is quite different from saying that if a company has a strong economic performance, then eventually the market will acknowledge this by increased stock prices.<br /><div class="text-blue-bold" style="color: #000099; font-weight: bold;">Another weakness</div>The instability described above is compounded by the fact that it is impossible to confirm the accuracy of two of the input variables. For example, the entry for the final growth rate requires that you estimate the growth rate of the cash not for another ten years, or even twenty years, but out to infinity! This is despite large studies showing that analyst forecasts for earnings over five years are no better than random.<br />In contrast, in Conscious Investor we don't try to calculate the mythical concept of intrinsic value. We don't talk about whether a stock is undervalued or overvalued, whatever that may mean. Rather we define value in terms of the return you will get on an investment.<br />Instead of intrinsic value, we talk about investment value or investment return. This is calculated using the proprietary tools STRET<sup>TM</sup> and STRETD®. STRET is a calculation of the annualized percentage profit or rate of return from owning the stock. STRETD is similar except that it assumes that dividends are reinvested.<br />By calculating the actual return you can anticipate on your purchases, you get practical criteria whether it is worthwhile buying stock in a particular company or not.<br />So in a nutshell, if you were to compare the stocks selected by Conscious Investor with other "value" models freely available on investor websites, you are unlikely to find much overlap between the selections.<br />Despite the best intentions of would-be intrinsic value systems, the way that DCF models work either provide you with more or less random stocks or with stocks that you like and you (unconsciously) manipulate the data to make them appear undervalued.<br /><div class="text-heading" style="color: #000099; font-weight: bold;">The Conscious Investor for more details ...</div>The <a href="http://www.amazon.com/exec/obidos/ASIN/0470604387/sherlockholmesin" style="color: #000099; font-family: arial, helvetica, verdana;">book</a> <em>The Conscious Investor: Profiting from the Timeless Value Approach</em> by Dr John Price covers over 30 valuation methods including their assumptions, and their strengths and weaknesses.</td></tr></tbody></table></div><br />http://www.conscious-investor.com/articles/articles/ar04value.asp</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-74850143147777642032012-04-16T02:38:00.000-07:002012-04-16T22:09:06.049-07:00Interview With Mr Market<div dir="ltr" style="text-align: left;" trbidi="on"><br />by THE GRAHAM INVESTOR on OCTOBER 3, 2011<br /><br /><div dir="ltr" style="text-align: left;" trbidi="on"><br /><div style="background-color: white; color: #111111; font-family: Georgia, 'Times New Roman', Times, serif; font-size: 15px; line-height: 22px; margin-bottom: 1.467em; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto;"><span class="drop_cap" style="color: #888888; float: left; font-size: 3.333em; line-height: 0.76em; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0.12em; padding-top: 0.04em;">E</span>xclusive! The Graham Investor has staged an amazing interview with Mr Market. Never before has anyone managed to interview this elusive fellow. The interview gives us a new insight into what goes on in the mind of one of the most enigmatic figures of history. Still going strong, and still beguiling investors, traders, and journalists, Mr Market pulls no punches in this amazing interview.<br /><em style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><br style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;" /><strong style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">TGI:</strong> Thank you for agreeing to this interview. Benjamin Graham once attempted to explain your behavior in a nutshell, suggesting that you came along each day and set a ridiculously high price or a ridiculously low price for an equity or a group of equities, and that the average investor would be well-placed to ignore you and seek his own counsel regarding valuations. What do you feel about that?</em></div><div style="background-color: white; color: #111111; font-family: Georgia, 'Times New Roman', Times, serif; font-size: 15px; line-height: 22px; margin-bottom: 1.467em; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto;"><strong style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Mr Market:</strong> <mumbling> <laughing> Yes, I heard about that. I can’t speak for Mr Graham – he is dead, after all – but I am still going strong. I’ve been doing this for a few centuries now….I mean, back in 1637 when people were pretty much gambling on tulip bulbs, they were trying to pin it on me even back then. It has been ever thus: every time some bubble/bust or other comes along, they say Mr Market is up to his usual crazy tricks again, setting ridiculous prices. I tell you, one of these days I need to get myself a teflon coat.</laughing></mumbling></div><div style="background-color: white; color: #111111; font-family: Georgia, 'Times New Roman', Times, serif; font-size: 15px; line-height: 22px; margin-bottom: 1.467em; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto;"><em style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><strong style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">TGI:</strong> But you do appear to be the one setting prices. Are you denying this?</em></div><div style="background-color: white; color: #111111; font-family: Georgia, 'Times New Roman', Times, serif; font-size: 15px; line-height: 22px; margin-bottom: 1.467em; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto;"><i>Read more here:</i></div><div style="background-color: white; color: #111111; font-family: Georgia, 'Times New Roman', Times, serif; font-size: 15px; line-height: 22px; margin-bottom: 1.467em; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-align: -webkit-auto;"><a href="http://www.grahaminvestor.com/2011/10/03/interview-with-mr-market/">http://www.grahaminvestor.com/2011/10/03/interview-with-mr-market/</a> </div></div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-24919600325803647302012-04-15T17:50:00.000-07:002012-04-16T22:09:06.148-07:00Calculating a Stock's Intrinsic Value (Actual Value)<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><br /><h1 class="hbg" style="background-color: white; font-family: Arial, Verdana, sans-serif; font-size: 21px; width: auto;"><span style="background-color: transparent; font-size: 14px; text-align: -webkit-auto;">You've found a great company, possibly the best investment opportunity in your lifetime...</span></h1><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Not only that, you understand the Basic Principle of Investor Return which says, "the price you pay determines your rate of return."</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So all you have to do is take advantage of your expert knowledge and buy a <i><b>great company</b></i> at a <i><b>great price</b></i>.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Right?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Well, almost.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">You've still got one problem left...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><i>How do know a company's selling for a great price?</i></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Easy...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">You calculate its intrinsic value.</div><h2 style="font-family: Arial, Verdana, sans-serif; font-size: 16px;">What's Intrinsic Value?</h2><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">In his 1938 publication "The Theory of Investment Value," John Burr Williams first articulated the idea of calculating a stock's intrinsic value.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">His idea essentially adds all of the expected future <span class="IL_AD" id="IL_AD5" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">cash flows</span> produced by a company and assigns them a present value. This present value represents the price you should pay.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So, in financial circles, "intrinsic value" is defined as <i>the present value of all expected future net cash flows to the company</i>.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Find that sentence a little hard to follow?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So do I.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">That's why I prefer a definition that doesn't require a dictionary for interpretation.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Here it is...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><i>Intrinsic value is <b>the actual value of a company</b> as opposed to its current market price.</i></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">That definition makes a lot more sense, doesn't it?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So why is intrinsic value important?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Because if you can calculate <b>the actual value of a company</b>, <i>then</i>...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">You can compare it to the current market price.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">If the current market price is <b>higher</b>, then you know the company is <b>overvalued</b>.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">But if the current market price is <b>lower</b>, then you know the company is <b>undervalued</b>.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Knowing what's overvalued and what's undervalued is what separates successful stock market investors from the rest of the crowd.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Why?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Because if you <i><b>know</b></i> a company is undervalued, then...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><i>You can buy low!</i></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">And buying low is the key to successful investing. Right?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Absolutely.</div><h2 style="font-family: Arial, Verdana, sans-serif; font-size: 16px;">How Do You Calculate Intrinsic Value?</h2><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Sounds great, doesn't it?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">But we still haven't tackled the problem...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">How do you calculate a company's intrinsic value?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Well, first you need current information regarding your company's...</div><blockquote style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><ul style="margin-left: 10px; padding-left: 0px;"><li><span class="IL_AD" id="IL_AD1" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">Stock price</span></li><li>Average return on equity</li><li>Dividend payout ratio</li><li>Equity per share (also known as <span class="IL_AD" id="IL_AD9" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">book value per share</span>)</li><li>Earnings per share</li><li>Average P/E ratio</li></ul></blockquote><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Does all that information look intimidating?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Don't worry. We'll address how to easily find each piece of information soon. Fortunately, it's all on the Internet!</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Once you have all this information at your fingertips, you can easily calculate your company's intrinsic value by estimating its earnings for the next ten years.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">The following chart uses The Coca-Cola Company as an example to illustrate how easy this is...</div><img align="center" hspace="10" src="http://www.your-roth-ira.com/image-files/intrinsic-value-chart.jpg" style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;" vspace="10" /><span style="background-color: white; font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"></span><br /><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">We'll address how to use this chart in moment.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">But first, let's get those figures...</div><h2 style="font-family: Arial, Verdana, sans-serif; font-size: 16px;">How to Find the Numbers You Need</h2><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Before you can calculate a stock's intrinsic value, you need to know several pieces of information about the company and its stock.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Here's how to find each piece of information...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><b>Current Stock Price</b> - This one's easy. Just go to <a href="http://finance.yahoo.com/" style="color: #000099;" target="_blank">Yahoo! Finance</a> or <a href="http://finance.google.com/" style="color: #000099;" target="_blank">Google Finance</a> or dozens of other places on the web where you can get real-time stock quotes. Plug in your company's stock ticker, and you've got it.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><b>Average Return on Equity</b> - While most online services like Yahoo! Finance provide a figure for return-on-equity, it most likely represents the current year only. To get a more accurate number for your intrinsic value calculation, go to Google Finance, type in your company's ticker symbol, and find the <span class="IL_AD" id="IL_AD8" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">text link</span> titled "More ratios from Thomson Reuters."</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Follow that link, and you'll find a category titled "Management Effectiveness." Find the figure for "Return on Equity -5 yr. Avg."</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">It's best to use a company's five- or ten-year average return on equity as opposed to a single year when calculating intrinsic value.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Why?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Because a dramatically higher or lower one-year return on equity can throw off your entire calculation. So if you want the most accurate calculation possible, use a long-term average return on equity.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">In my opinion, The <span class="IL_AD" id="IL_AD7" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">Value Line Investment Survey</span> offers the best return on equity figures. Visit your local library, and you can find a company's return on equity every year for the last ten years as well as Value Line's projections for the company's ROE over the next five years.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">For best results, use Value Line figures for your intrinsic value calculations.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><b>Current Dividend Payout Ratio</b> - Again, go to Google Finance, type in your company's ticker symbol, and find the text link titled "More ratios from Thomson Reuters."</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Follow that link, and you'll find a category titled "Dividends." Find the figure for "Payout Ratio (TTM)." That's <span class="IL_AD" id="IL_AD6" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">the percentage</span> of earnings your company pays out in dividends.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><b>Current Equity Per Share</b> - Go to Yahoo! Finance, type in your company's ticker symbol, and find the text link titled "Key Statistics." Find the category titled "Balance Sheet," and find the figure for "Book Value per Share." This is the current equity per share, also known as book value.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><b>Current Earnings Per Share</b> - Go to Yahoo! Finance, type in your company's ticker symbol, and find the figure for EPS. This is the earnings per share.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">However, keep in mind that Yahoo! Finance and most online services report a company's last four quarterly earnings figures as the EPS, so this figure might be distorted by a one-time expense or charge-off due to otherwise favorable long-term investments by the company.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So make sure you perform due diligence when searching for an accurate earnings per share figure for your intrinsic value calculation. Again, The Value Line Investment Surveyprovides the most accurate figures.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><b>Average P/E Ratio</b> - This isn't a ratio I?ve run across on Yahoo! Finance or Google Finance, so I performed a Google search to find a good site. A site called ADVFN popped up. If you follow this link to their site, and scroll down to the category "Valuation Ratios," you'll find a figure titled "5-Y Average P/E Ratio." This is the company's five-year average P/E ratio.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">But again, you can find a far more accurate ten-year P/E ratio by visiting your local library and consulting The Value Line Investment Survey. The figure they provide is the one I personally use.</div><h2 style="font-family: Arial, Verdana, sans-serif; font-size: 16px;">Using Excel to Calculate Intrinsic Value</h2><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Once you've gathered all the necessary information, you can use Excel to calculate a stock's intrinsic value.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">The previous image, using The Coca-Cola Company (KO), is a good example of this...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Do all those spreadsheet formulas and calculations look confusing?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Fortunately, I've already set them up for you!</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">All you have to do is plug in the customized numbers for your company...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">And you can use the exact same Excel spreadsheet I use for calculating a company's intrinsic value.</div><a href="http://www.your-roth-ira.com/intrinsic-value-spreadsheet.xml" style="color: #000099; font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;" target="_blank">Download Britt's Intrinsic Value Spreadsheet >>></a><span style="background-color: white; font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"></span><br /><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Just replace the numbers in the yellow-highlighted cells with your company's numbers, and the spreadsheet will calculate a value titled "Multiple" on line 29.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Line 29 is the calculation you're looking for.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">If your great company has a number <b>above 5.00</b>, it's currently <b>undervalued</b>.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">If it's <b>below 5.00</b>, then the stock is currently <b>overvalued</b>...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Why 5.00?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Because a multiple of 5.00 means you'll make a 5-fold return on your <span class="IL_AD" id="IL_AD2" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">investment in</span> the next ten years if you buy the company at its current price.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">A 5-fold return in ten years is a 17.46% annual compounding rate of return.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Also, five is a nice round number, and I like nice round numbers.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">No kidding...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Think that's a silly reason for picking 5.00?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">It's really not.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Always keep in mind, calculating intrinsic value is an art, not an exact science.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">The spreadsheet's calculations act as a guide, not a precise road map.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">As Warren Buffett says...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><i>"It's better to be approximately right than precisely wrong."</i></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So a figure above 5.00 means you're approximately right.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">But there's another reason you want a 5-fold <span class="IL_AD" id="IL_AD4" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">investment return</span> and not a 4-fold or a 6-fold return...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Remember, if achieved, a 5-fold return is a 17.46% annual compounding rate of return.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">This beats the S&P 500's fifty year track record of 10.85% by more than six points.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Now, in order to make all your time and effort <span class="IL_AD" id="IL_AD3" style="background-attachment: scroll !important; background-clip: initial !important; background-image: none !important; background-origin: initial !important; background-position: 0% 50%; background-repeat: repeat repeat !important; border-bottom-color: rgb(0, 0, 153) !important; border-bottom-style: solid !important; border-bottom-width: 1px !important; color: #000099; cursor: pointer !important; display: inline !important; float: none !important; padding-bottom: 1px !important; padding-left: 0px !important; padding-right: 0px !important; padding-top: 0px !important; position: static; text-decoration: underline !important;">researching stocks</span> a worthwhile endeavor, you <i><b>need</b></i> to beat the market by at least a couple of points per year.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Over time, those couple of points will add up to a lot.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">And while achieving a 4-fold return over ten years (a 15% annual compounding rate of return) achieves your goal of beating the market by more than a few points...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">You need to remember, calculating a stock's intrinsic value is an estimating tool. It's more art than exact science.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So as a precaution, give yourself a little room for error.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Force your potential investment to live up to a higher standard...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Tack an extra 25% onto that 4-fold return, and give yourself a new goal of a 5-fold return.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">That way, if you fall short of your goal, you still have a good shot at beating the market averages.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Remember...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">"It's better to be approximately right than precisely wrong."</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So give yourself a little bit of leeway in case something goes wrong.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">In investment circles, this idea is known as the margin of safety.</div><h2 style="font-family: Arial, Verdana, sans-serif; font-size: 16px;">Providing a Margin of Safety</h2><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Benjamin Graham first put forth the idea of a margin of safety in his groundbreaking book<i>Security Analysis</i> (1934), which he co-authored with colleague David Dodd.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">According to Graham, margin of safety is the secret to a sound investment philosophy...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><i>"Confronted with a like challenge to distill the secret of sound investment into three words, we venture the following motto, Margin of Safety."</i></div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So what's a margin of safety?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">It's nothing more than giving yourself a little room for error.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Just ask yourself, "If things fail to go perfectly, will my investment still work out?"</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">If not, there's no margin of safety.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">However, if your company's earnings fall well short of your projections <b><i>and</i></b> you can still achieve your desired investment returns...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;"><i>Then</i>, you have a margin of safety.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">By purchasing only those stocks which offer a significant margin of safety, you limit your downside risk and significantly increase your odds of success.</div><h2 style="font-family: Arial, Verdana, sans-serif; font-size: 16px;">Conclusion</h2><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Learn how to calculate a stock's intrinsic value. It's a skill that will prove invaluable over the course of your investing lifetime.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Use the spreadsheet located in the middle of this page. Look for companies with a multiple in excess of 5.00 at the current price.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">However, remain mindful of other variables. Some companies look like they're dirt cheap, and they are. These companies will make you a fortune if you're prudent enough to buy them.</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">But other companies also look like they're dirt cheap, while in reality, they're <b>grossly overvalued</b>...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">So how do you tell the difference?</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">By following all the rules previously outlined for finding a great company...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">Also, I can't emphasize this enough - ask question after question about your company's future business prospects and apply your own common sense and good judgment. This will go a long way toward determining your investment success...</div><div style="font-family: Arial, Verdana, sans-serif; font-size: 14px; text-align: -webkit-auto;">After all, if numbers told the entire story, no one would think about their investment decisions at all. We'd all just let computer programs "run the numbers" on our investments. Right?</div></div><br /><br />http://www.your-roth-ira.com/calculating-a-stocks-intrinsic-value.html</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-64510730685544932262012-04-15T16:55:00.000-07:002012-04-16T22:09:06.268-07:00Value investing – When to Sell or Hold?<div dir="ltr" style="text-align: left;" trbidi="on">A good discussion on when to sell in another blog.<br /><br />------<br /><br />12:30 pm<br />April 10, 2012<br /><br />matthew<br /><br />Member<br />posts 13<br />9<br />Yes, I did this on Aeropostale. Approximately a <u>32% gain</u> I got on that bad boy.<br />Reasons I sold, it had <u>trouble getting past</u> $21-$22, and then Barclay's<u> raised there price target</u> to $25 so more investors bought and price went up a bit. I took this chance and sold it, and it has now went back down after today -5%. Keep in mind that I <u>sold it early </u>basically because <u>my intrinsic value was</u> around $23 and I figured i'd <u>rather sell now than risk more just for a small additional gain.</u><br /><br />If I had not sold it then I would have been <u>stopped out </u>as during the <u>price consilidation period</u> I put in a <u>stop loss @ $21 </u><br />10:55 am<br />April 10, 2012<br /><br />Jae Jun<br /><br />Admin<br />posts 1408<br />8<br />do any of you<u> sell after a big fast run up </u>even though it is<u> below intrinsic value</u>?<br />6:29 am<br />April 1, 2012<br /><br />nell<br /><br />Member<br />posts 88<br />7<br /><b><span style="color: lime;">Some reasons to sell..</span></b><br /><b><span style="color: lime;"><br /></span></b><br /><b><span style="color: lime;">1. intrinsic value < price -> no margin of safety</span></b><br /><b><span style="color: lime;">2. business quality goes south, management issues etc.</span></b><br /><b><span style="color: lime;">3. better opportunity</span></b><br /><b><span style="color: lime;"><br /></span></b><br /><b><span style="color: lime;">One good reason to buy more is when market tanks but intrinsic value of your specific company keeps growing..</span></b><br /><br />Best wishes,<br />Nell<br />10:58 am<br />March 31, 2012<br /><br />BugMan<br /><br />New Member<br />posts 2<br />6<br />I'm fairly new to this, and I, too, see<u> selling as the hardest part.</u><br /><br />One thing i've thought of that makes it easier is compare your current holdings to what else is out there. If are holding onto a <u>good company,</u> and you figure it has the <u>potential to go up 12% per year</u>, but you see <u>other companies out there</u> that have the <u>potential to go up 25% per year</u>, then<u> sell your current stock and buy the other ones.</u> It's not that the old company isn't good — it is — it's just that there are better deals out there.<br />8:03 am<br />February 27, 2012<br /><br />gstyle<br /><br />Member<br />posts 4<br />5<br />I am fairly new to value investing so I find it good to know other have had <u>similar thoughts to my own!</u><br />2:17 am<br />February 25, 2012<br /><br />Jae Jun<br /><br />Admin<br />posts 1408<br />4<br />selling is defnitely harder than buying.<br />One of my weak points as well. If I had a partner,<u> I'd find someone who was better at selling than buying</u>. It would be a great combination.<br /><br />But <u>to sell,</u> you would have to<u> re value a company regularly.</u><br />If there isn't much upside to intrinsic value, then I'm <u>willing to sell at 10% below intrinsic value rather than hanging on.</u><br />Companies like GRVY, I am happy to hold even if I'm up 100%.<br />8:17 pm<br />February 22, 2012<br /><br />jalleninvest<br />Coronado, CA<br /><br />Member<br />posts 22<br />3<br />Post edited 8:20 pm – February 22, 2012 by jalleninvest<br /><u>G.raham</u> came up with the <u>50% or two years</u> towards the end of his life, in that interview that is bandied around the internet some. I am<u> not at all sure that he practiced that in the Graham Newman</u> closed end fund he ran. In one case, he did not, and that was GEICO which they bought half of in 1947 or 1948. They ended up having to distribute the shares to the shareholders of the fund, and it increased 54,000 per cent or something like that. Many became multimillionaires, quite a feat back then.<br /><u>Walter Schloss,</u> who died the past weekend at age 95, talked about selling. According to him that was the hardest part of this business, trying to figure out when to sell. He <u>didn't like paying short term income tax rates</u> and tried to hold stocks for a number of years. He commented ruefully several times about <u>buying at $30, selling at $50</u> and watching the stock <u>go to $200</u>, etc. He recommended a new company to Graham that had wonderful prospects. Graham turned it down, saying it wasn't their kind of deal. It was <u>Xerox,</u> of course, but Schloss said Graham would have sold it at a double anyway and missed out on the big increase.<br /><br /><u><span style="color: magenta;"><b>If it was easy, everybody would do it!</b></span></u><br />9:23 am<br />February 21, 2012<br /><br />Graeme<br />Austin, Texas<br /><br />Member<br />posts 162<br />2<br />Yeah, this is always a fun question. <br /><br />For me what I do is I break up my holdings into <u>different categories</u>. For example, I have holdings that I bought at a good (not great) but good price, but they pay me dividends, and if they keep acting as they have for years, they should be<u> increasing my dividends every year.</u> I get a bit of return on the <u>stock price increase</u>, but a <u>great return </u>over many years with the<u> dividends reinvesting.</u> So my sell thesis on these guys is pretty firm: as in, I wont easily do it. <br /><br />But then I have holdings that I would consider a <u>deep value: selling at a deep discount to book value, or below NCAV or in a really beat up industry.</u> <b>These are the shares that I have a<span style="color: magenta;"><u> target price for</u></span></b>: as in,<b><span style="color: magenta;"><u> I will sell when they hit that specific price.</u></span></b> There is not a whole lot that would change my mind and make me hold on to it longer. And sometimes that target price is 50% above my purchase, 100% or even more. <br /><br />So you need to <u>judge for yourself </u>whether<u> the business you bought </u>shares in<u> is now fairly priced </u>at it's 50% gain or if it<u> still has room to go. </u><br />4:33 am<br />February 21, 2012<br /><br />gstyle<br /><br />Member<br />posts 4<br />1<br />Hi,<br /><br />I was pondering the concepts of selling a value stock or holding it for longer. I understand that<u> Ben Graham </u>had a strict rule of selling after a <u>50% increase or after two years</u>, <u>whichever came first.</u><br /><br /><b><u><span style="color: magenta;">A stock brought at value brings the 50% gain, but if this stock is in a strong company with good prospects for the future, should it still be sold?</span></u></b> At this point, do you make a decision to <u>strictly adhere</u> to Ben Grahams teachings or <u><span style="color: lime;"><b>evolve to be more like Buffett in buying a good company at discount and holding it for a long time?</b></span></u><br /><br />If the company in question was a <u>'cigar butt' then selling after its gain seems more obvious</u> than for a value stock in a good company.<br /><br />Thoughts / comments<br />No Tags<br />Page: 1 <br /><br />-----<br /><br /><a href="http://www.oldschoolvalue.com/blog/forum/value-investing/value-investing-sell-or-hold/#p4033">http://www.oldschoolvalue.com/blog/forum/value-investing/value-investing-sell-or-hold/#p4033</a> </div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-61558598682940968632012-04-15T16:07:00.000-07:002012-04-16T22:09:06.388-07:00To make sure every $1 investment will generate $2000 in just 30 years ...<div dir="ltr" style="text-align: left;" trbidi="on"><div style="text-align: -webkit-auto;"><span style="background-color: white; font-family: verdana, sans-serif; line-height: 17px;">Fundamental analysts can have good dreams because they usually sleep well. If you are one of them, you don’t have to be afraid of daily stock price fluctuations. <b>Why care so much for $1 to $2 per day price movements and uncertainties when you can get $100,000 30 years later almost certainly and do nothing? </b>The <u><b><span style="color: lime;">‘do nothing’</span></b></u> is what makes you an investor. Don’t you think so? Once you bought the shares, <b><span style="color: red;">you will only sell them if there are fundamental changes;</span></b> such as change in management or business model. <b>Otherwise, continue riding on their profits and keep on collecting dividends or bonus issues by ‘doing nothing’.</b></span></div><span style="background-color: white;"><br style="font-family: verdana, sans-serif; line-height: 17px; text-align: -webkit-auto;" /><span style="font-family: verdana, sans-serif; line-height: 17px; text-align: -webkit-auto;">Doesn’t it sound so peaceful?</span></span><br /><br /><span style="background-color: white; font-family: verdana, sans-serif; font-size: large; line-height: 17px; text-align: -webkit-auto;">"To make sure every $1 investment will generate $2000 in just 30 years,<b> make sure you buy the stock at the lowest price possible."</b></span><br /><br class="Apple-interchange-newline" /></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-91819207346858191372012-04-15T15:49:00.000-07:002012-04-16T22:09:06.484-07:00Tax Season – 11 Critical Deductions You Should Know<div dir="ltr" style="text-align: left;" trbidi="on"><br /><a href="http://www.financetwitter.com/2012/04/tax-season-eleven-critical-deductions-you-should-know.html">http://www.financetwitter.com/2012/04/tax-season-eleven-critical-deductions-you-should-know.html</a> </div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-68067013827976086852012-04-15T06:02:00.000-07:002012-04-16T22:09:06.581-07:007 Stock Investing Advices Warren Buffet Want You to Know<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on"><b style="font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Good Stock Investing Advices</b><br /><br /><div style="text-align: left;"><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">That All Beginners Need to Follow Religiously</span></div><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="color: #000066;">Summarized Overview</span></h3><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">In this article, you’ll find information on the stock investing ideas that Warren Buffet wants all stock investors to know, strategy he uses to maximise return, price of stocks that he willing to pay, key financial ratio that is so important to him, type of managers </span><b style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">he loves, and kind of </b><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">management he trusts.</span><br /><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="color: #000066;">7 Stock Investing Advices for Beginners</span></h3><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">This stock market investing advice will help you on how to pick stocks Warren Buffet way.</span><br /><span style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><br /></span><br /><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #1: Simple Business Model</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">It is not just about simplicity, but also <u>something that you can understand. </u>You must clearly <u>define your circle of competence and stay where you are.</u> It can be something that you learn while you are working or something that you spend time on to understand the business operation. To most, oil and gas business can be seen as so simple and yet very profitable, but to those who works in that industry will tell you, it is not as easy as what you think. <span style="background-color: white;">Do you know why this is so important?</span><br /><span style="background-color: white;"><br /></span></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">When come to investing, predicting what will happen tomorrow is something that you can’t live without. <u>Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. </u>So, if you really understand the business inside out, you can project how the company perform 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.<br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #2: Wide Economic Moat</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Simply said, the company should <u>serve valuable niche market with price inelastic products or services.</u> Warren Buffet himself <span style="color: red;"><b><u>avoids regulated industries, commodity businesses as well as capital intensive industries. </u></b></span><br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><u>He prefers stocks which can finance their capital from operating cash flow with less borrowing as well as has strong pricing power.</u> Meaning, <u>the company can price their products</u> as much as they want. That is why, Warren Buffet love <u>‘franchise’,</u> for example, Furniture Mart (the <u>lowest cost</u> in the industry), The Washington Post (<u>market dominance and leader</u>), Coke (<u>strong brand name</u>) and Candies (<u>premium priced and high quality products </u>that serve <u>niche market</u>).<br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #3: Sustainable Growth</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Serving the existing niche market is not enough. Instead, <u><span style="color: lime;"><b>Warren Buffet wants the company to grow continuously and exponentially. </b></span></u>Therefore, he looks for managements that have the ability to<u> widen their economic moat consistently over the past years.</u> Their businesses must be positioned where the<u> demand able to grow continuously;</u> Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!<br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #4: Excellent Capital Management</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Every company that is listed in the stock market were entrusted to manage the business on behalf of their shareholders. Therefore,<u> it is the managements’ duty to utilise the available resources for the highest possible return. </u>To do this, they have to think and act like an owner and avoid the ‘institutional imperative’ style of management (think for themselves and don’t care what will happen 20 years down the road). When they don’t have the capability to <u>create at least $1 value from $1 reinvestment</u>, they should return the capital back to the shareholders by giving <a href="http://www.stock-investment-made-easy.com/dividends.html">dividends</a> or share buybacks.<br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #5: Effective Management Team</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Invest in company that have <u>honest and capable managers. </u>They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, <u>“we want managers who tell the truth and tell themselves the truth, which is more important”. </u>He loves <u>cost conscious and frugal type </u>of managers who are <u>honest and integrity </u>as well.<br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #6: Superior ROE</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">Why ROE, and not the other financial ratios? Well, <a href="http://www.stock-investment-made-easy.com/return-on-equity.html">return on equity</a> indicates <u>how effective the management team convert the reinvested money into cash.</u> The higher the return, the more <u>profitably </u>the company can<u> reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. </u>And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, <u>not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.</u><br /><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b>Stock Investing Advices #7: Buy at Discount Price</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><div style="font-size: 13px;"><u><span style="color: lime;"><b>Once the good stocks have been identified, now is the time to buy them.</b></span></u> <u>To make sure every $1 investment will generate $2000 in just 30 years, Warren Buffet have to make sure he buys the stock at the lowest price possible.</u> <u>In the same time, he has to be real that not to set very low price till he misses the golden opportunity. </u>Thus, he keeps himself buying the stocks when the prices are offered at pre-determined <a href="http://www.stock-investment-made-easy.com/margin-of-safety.html">margin of safety</a>. <u>The margin of safety can be as low as 80 per cent discount from the</u> <a href="http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html">calculated intrinsic value</a>. <b><span style="color: red;"><u>Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else. </u></span></b> </div><div style="font-size: 13px;"><br /></div><span style="font-size: x-small;">If you want to be as successful as Warren Buffet in stock investing, </span><u><span style="font-size: large;">study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; </span></u><span style="font-size: x-small;">simply because, in stock investing, due diligence counts. Intentionally not following the advice proves that you are not ready for investing; </span><b style="font-size: 13px;">perhaps you are just looking for fast cash.</b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b><br /></b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b><br /></b></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><b><br /></b></div></div>http://www.stock-investment-made-easy.com/stock-investing-advices.html</div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.comtag:blogger.com,1999:blog-9193836517081059160.post-33257877785875537492012-04-15T02:18:00.000-07:002012-04-16T22:09:06.677-07:00Best Time to Start Saving and Investing<div dir="ltr" style="text-align: left;" trbidi="on"><br /><h3 style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; text-align: -webkit-auto;"><span style="font-size: 13px; font-weight: normal;">Now is as a good time as any. The earlier you start, the bigger the nest egg you’ll have on retirement. But as we know, it is difficult to start in our twenties, as at that age we save for a </span><span style="font-size: 13px;">car </span><span style="font-size: 13px; font-weight: normal;">and then a </span><span style="font-size: 13px;">house.</span><span style="font-size: 13px; font-weight: normal;"> And soon after, there will be </span><span style="font-size: 13px;">educational expenses for kids.</span></h3><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;">But you cannot afford to keep postponing your financial planning for <b>retirement</b>. In order to have sufficient income to cover all those non-working years, you cannot leave the plan to the very last moment. If you decide to retire at 55, you need a nest egg that can generate an income for another 25 to 35 years.</div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><br /></div><div style="background-color: white; font-family: Verdana, Geneva, Arial, Helvetica, sans-serif; font-size: 13px; text-align: -webkit-auto;"><a href="http://www.stock-investment-made-easy.com/retirement-planning.html">http://www.stock-investment-made-easy.com/retirement-planning.html</a> </div></div>Kaitlynhttp://www.blogger.com/profile/01227823582707912531noreply@blogger.com