Value Investing Following Warren Buffett Principles Of Investing

Albert Einstein once noted that the most powerful force in the universe was the principle of compounding. In investing, this manifests itself through something called compound interest. Put in its simplest terms, the phrase compound interest means that you begin to earn interest income   on  your interest income, resulting in your money growing at an ever-accelerating rate. Below is an example of the returns from compounding with various hypothetical investment returns. The table below assumes that the returns are re-invested every year. The longer you leave the money untouched, the higher the returns and the returns are exponential. Compound Interest Tables - The Value of $10,000 Invested in a Lump Sum 4% 8% 12% 16% 10 Years $14,802 $21,589 $31,058 $44,114 20 Years $21,911 $46,610 $96,463 $194,608 30 Years $32,434 $100,627 $299,600 $858,500 40 Years $48,010 $217,245 $930,510 $3,787,212 50 Years $71,067 $469,016 $2,890,022 $16,707,038 Mohnish Pabrai is the f...

The one most important term for value investors, in my opinion, is "Intrinsic Business Value". Intrinsic Business Value is defined as the ability of the business to generate owner earnings in a consistent way for a foreseeable future. I detailed out various tools to use for DCF (Discounted Cash Flow) calculation of intrinsic business value in my previous blog post. In this post, I will be explaining further the parameters that go into the DCF calculation of intrinsic business value using the gurufocus calculator. I will pick Apple(AAPL) stock as an example to walk you through the calculator. Below is the snapshot of the gurufocus calculator for AAPL ticker. Earnings per Share:  This is the earnings per share in the last trailing twelve months(TTM). Annual Earnings per share. Growth Rate in the Next: It is always best to use 10 years as the time horizon. The growth rate is 20% and that is automatically calculated by gurufocus based on the previous 10 years data. ...

You come across a stock ticker or hear about a stock and you would like to know if the stock is a good buy. The first thing I would do is go to https://finviz.com website.  Finviz gives a quick 30 seconds view of a given stock. It also has a good screener to filter stocks based on investment criteria that you are comfortable with and that fits your investing style. You don't need to create an account to pull up a given stock. However, you would need to create an account if you want to create a portfolio or create a screener. You can also view the latest headlines about the company, stocktwits to the right and scrolling down further, you can view the recent insider transactions as well. What finviz doesn't give you is the last 10 years performance, financials, key ratios etc. Once you look at a given stock in finviz and are satisfied with key metrics that matter to you, the next step is to go for detailed analysis. The best website that is out there for detailed analysis o...

"Price is what you pay. Value is what you get - Warren Buffett" It is very important to understand the difference between price and value. Often times investors of stocks assume both are same. In fact, this concept is very important and in my opinion, to not just the stock investments but life in general. One example that Mr. Buffett has quoted in the past to illustrate the point is the college education expense. Let's say for example that you have spent $50,000 dollars on your son/daughter college education. That college degree enables your kid to go and find a job that pays nice enough salary for the rest of his/her life. So, the price you pay is 50K but the value you are getting out of it is lifelong earning potential with a significant upside. That is just the tangible side of the equation. There are a lot of other intangible benefits as well like discipline, responsibility, sense of purpose, so on and so forth. The value in this case, is just undefined on t...

Snap Chat is the new social media company on the block that went IPO last month. I still call it as social media company even though the company would like to call itself as a camera company. I am not fully convinced it's a camera company yet. I haven't seen any proof of it except for the snap glasses sold in limited markets. Anyways, as with any hyped up tech IPO, SNAP IPO was in much demand. It debuted at $17 and first trade was around $24. The following week, it went all the way up to $28 before crashing down to $19. The closing price of SNAP as of 03/31/17 was $22.53. It rallied from $19 to this level because of 5 bullish analyst rankings given on 03/27. Interesting thing to note is that all these 5 analyst companies are the underwriters of the stock. Because of some mandatory quite period, they couldn't recommend the stock till 03/27. Even though all these analyst firms claim that there is no collusion between the underwriting and analyst wings of the firm, I leav...

What should I do in today's market that is at such a high valuation ?? Should I sell my positions, reduce my positions or should I invest more as the market seem to go up and up ?? There is no one answer to all those questions. A lot depends upon your appetite for risk and your horizon for investment returns.  I will try to address different scenarios below and give my recommendations for each one. Invested in stock market thru your 401K or IRA in mutual or index funds. Keep investing in the market if there is no need to sell and cash out in the next 2 years. Dollar cost averaging of regular contributions will cover you during downturns and will yield a more compounding return in the long term. Invested in individual stocks be it personal or retirement accounts Look at the stock valuation metrics to see if it's over valued compared to the overall market and also compared to the particular sector it's in. The CAPE P/E ratio of each particular sector is more relev...

The market currently is overvalued by all measures. The P/E ratio of S&P 500 is at an all time high and is at the levels not seen since 2007. Another way to look at if the market is overvalued is using the CAPE ratio of S&P 500. CAPE stands for Cyclically Adjusted Price to Earnings ratio and is devised by Robert Shiller, the famous economist at Yale university. So, CAPE is also popularly known as Shiller P/E ratio. CAPE or Shiller P/E currently stands at 29. This is higher than 2007 levels. You can check the CAPE P/E ratio of any given day by using the link below, http://www.multpl.com/shiller-pe/ What is then driving today's market extreme valuations?? To understand that first, we need to understand why does a stock increase in price, to begin with?? When you buy a stock of a company, you are not buying a paper. The ease of buying and disposing of the stocks or securities through online brokerages makes you to easily believe that. Instead, when you are buying a stoc...