Investment and Intrinsic Value
CASE 1: Warren Buffett:
a) From Warren Buffett’s perspective, what is the intrinsic value?
According to Warren Buffett’s perspective, the intrinsic value is defined as “the present value of future expected performance” (Bruner, Eades,&Schill, 6th 2010).
Why is it accorded such importance?
It can be used to estimate the value of the business’ ongoing operations, not company’s stock.
How is it estimated?
The intrinsic value is very subjective, but he stated that “it is better to be approximately right than precisely wrong” (Bruner, Eades, &Schill, 6th 2010), so he estimate it by discounting all future cash flow to today’s value.
NPV= -C + R1/ (1+r1) +R2/ (1+r2)2+…+Rk/ (1+rk) k
What are the alternatives to intrinsic value?
Book value and accounting profit are the alternatives to intrinsic value.
Why does Buffett reject them?
Warren Buffett rejects them as the financial statement may not fully represent the economic reality of the business and the book value only reflects the historical data which already happened in the past
(b) Critically assess Buffett’s investment philosophy. Identify points where you agree and disagree with him.
(c) Should Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp? Why?
CASE 2: Bill Miller and Value Trust:
(a) How well has Value Trust performed in recent years? In making that assessment, what benchmark(s) are you using?
How do you measure investment performance?
What does good performance mean to you?
(b) What might explain the fund’s performance?
To what extent do you believe an investment strategy, such as Miller’s, explains performance?
(c) Consider the mutual fund industry. What roles do portfolio managers play?
What are the differences between fundamental and technical securities analysis?
How well do mutual funds generally perform relative to the overall market?
(d) What is capital-market efficiency?
What are its implications for investment performance in general?
a) From Warren Buffett’s perspective, what is the intrinsic value?
According to Warren Buffett’s perspective, the intrinsic value is defined as “the present value of future expected performance” (Bruner, Eades,&Schill, 6th 2010).
Why is it accorded such importance?
It can be used to estimate the value of the business’ ongoing operations, not company’s stock.
How is it estimated?
The intrinsic value is very subjective, but he stated that “it is better to be approximately right than precisely wrong” (Bruner, Eades, &Schill, 6th 2010), so he estimate it by discounting all future cash flow to today’s value.
NPV= -C + R1/ (1+r1) +R2/ (1+r2)2+…+Rk/ (1+rk) k
What are the alternatives to intrinsic value?
Book value and accounting profit are the alternatives to intrinsic value.
Why does Buffett reject them?
Warren Buffett rejects them as the financial statement may not fully represent the economic reality of the business and the book value only reflects the historical data which already happened in the past
(b) Critically assess Buffett’s investment philosophy. Identify points where you agree and disagree with him.
(c) Should Berkshire Hathaway’s shareholders endorse the acquisition of PacifiCorp? Why?
CASE 2: Bill Miller and Value Trust:
(a) How well has Value Trust performed in recent years? In making that assessment, what benchmark(s) are you using?
How do you measure investment performance?
What does good performance mean to you?
(b) What might explain the fund’s performance?
To what extent do you believe an investment strategy, such as Miller’s, explains performance?
(c) Consider the mutual fund industry. What roles do portfolio managers play?
What are the differences between fundamental and technical securities analysis?
How well do mutual funds generally perform relative to the overall market?
(d) What is capital-market efficiency?
What are its implications for investment performance in general?