Buffett valuation theory

[benjitara]

Does anyone here use the buffett-Williams valuation technique of forward looking average profits over (divided by ) the long-term government bond rate? As far as I can see using such formula on NZ stocks comes out with a large majority of stocks being undervalued? Although I do conclude profit protection is harder to accomplish with stocks without competitive advantages.

[winner69]

No comment benji - I got sort of banned from talking about Buffett since one of his models (attributed to) came up with $3.33 for Diligent

[000831]

Does anyone here use the buffett-Williams valuation technique of forward looking average profits over (divided by ) the long-term government bond rate? As far as I can see using such formula on NZ stocks comes out with a large majority of stocks being undervalued? Although I do conclude profit protection is harder to accomplish with stocks without competitive advantages.

I think the liquidity problem here may require a discount for the SP. So just undervalue them.

[MAC]

Does anyone here use the buffett-Williams valuation technique of forward looking average profits over (divided by ) the long-term government bond rate? As far as I can see using such formula on NZ stocks comes out with a large majority of stocks being undervalued? Although I do conclude profit protection is harder to accomplish with stocks without competitive advantages.

I've found it useful in the past as a quick screening tool for the more cyclical stocks, but it's never matched, for me at least, the performance of the DCF or other models I run.

I'm toying around with one of Buffets other methods at present, interesting results with the retirement sector despite what Forsyth Barr think;



PRICE TO BOOK EVALUATION


Add the percent net profit to the percent dividend and divide it by the price-to-book. For
example, Coca Cola is (23.82 + 2.81) / 5.19 = 5.1


If the ratio is less than 2, Warren believes the stock will fall and will sell.


If the ratio is in between 2 and 10, Warren will hold the stock if he already owns it.


If the ratio is over 10, the stock will likely double in price.


If the ratio is over 15, the stock will likely triple in price over the next few years.


If the ratio is over 20, the stock will likely quadruple in price over the next few years.


Book value = total assets - intangible assets - liabilities

[000831]

No comment benji - I been banned from talking about Buffett since one of his models (attributed to) came up with $3.33 for Diligent

Who is that mean to ban you. pls give your valuation if possible, I will not ban you, haha

[luigi]

... forward looking average profits over (divided by ) the long-term government bond rate.

This calculation is essentially implying that forward looking corporate profits are as certain as the government not defaulting. To get a reasonable valuation, you need to use a higher discount rate that reflects the higher level of risk (more like 10-15% than the 3-4% for govt. bonds).

[benjitara]

This calculation is essentially implying that forward looking corporate profits are as certain as the government not defaulting. To get a reasonable valuation, you need to use a higher discount rate that reflects the higher level of risk (more like 10-15% than the 3-4% for govt. bonds).

Good point I think Buffets thinking was price volatility is negated by the fact that diligence withstands price fluctuations over extended periods of time so the discount rate doesn't need to work in too much variance.

[benjitara]

I've found it useful in the past as a quick screening tool for the more cyclical stocks, but it's never matched, for me at least, the performance of the DCF or other models I run.

I'm toying around with one of Buffets other methods at present, interesting results with the retirement sector despite what Forsyth Barr think;



PRICE TO BOOK EVALUATION



Add the percent net profit to the percent dividend and divide it by the price-to-book. For
example, Coca Cola is (23.82 + 2.81) / 5.19 = 5.1



If the ratio is less than 2, Warren believes the stock will fall and will sell.



If the ratio is in between 2 and 10, Warren will hold the stock if he already owns it.



If the ratio is over 10, the stock will likely double in price.



If the ratio is over 15, the stock will likely triple in price over the next few years.



If the ratio is over 20, the stock will likely quadruple in price over the next few years.



Book value = total assets - intangible assets - liabilities




Interesting stuff MAC. I always get a little mixed intangibles because without including them in some stocks you end up with negative book values which makes valuation difficult!

[bull....]

all very subjective, actually buffet has never revealed all his strategy only snippets as markets go if he revealed his method fully he would no longer have an edge

[MAC]

Something I learnt early on from reading up on Buffet was to be very clear about what kind of investor you want to be, and to then ring fence and apply rules. His valuation methods have been tuned to clearly work really very well for him within his own fence, but they may not work for others in another paddock.

Stick to what you know as they say rather than be a jack of all 'trades', ....., excuse the pun.

Buffet is quite clear that he doesn't like to invest in tech stocks or airlines for example, he seems to go for the more brick's n mortar, 'I can see them and understand them' sort of stocks.

So, to your point perhaps he doesn't suffer from 'goodwill' analysis paralysis as much as others.

[luigi]

Good point I think Buffets thinking was price volatility is negated by the fact that diligence withstands price fluctuations over extended periods of time so the discount rate doesn't need to work in too much variance.

If your investment strategy is 'buy and hold forever' then you don't need to worry about price volatility. When thinking about risk though you do need to consider the risks associated with the actual company's performance.

e.g. will the forward looking average profits that you expect actually materialise? Are they expected profits under threat from competitors? Is their market contracting? Are the reported possibly numbers fraudulent or misleading?