Case One: Warren Buffett Essay

1467 Words Aug 14th, 2013 6 Pages
Case One: Warren Buffett

From Warren Buffett’s perspective, what is intrinsic value?
Buffett defines intrinsic value as “the present value of future expected performance” or “”the cash that can be taken out of a business during its remaining life” (Bruner 2010). It is a subjective value based on the analysts’ estimates of future cash flows and interest rates.

Why is it accorded such importance?
It identifies mispriced shares and whether or not “an investor is indeed buying something for what it is worth” (Bruner 2010). Eventually market price will gravitate towards the intrinsic value.

How is it estimated?
By discounting the future cash flows that the business is expected to produce. Buffett uses the thirty year U.S. Treasury
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Net Asset Value gauges performance by dividing total assets minus liabilities by the funds outstanding shares and gives the mutual funds price per share.

What does good performance mean to you?
Outperforming the market within my own risk parameters. I would determine performance by the annual growth rate of NAV, and the dollar value today of my past investment, then compare them to a benchmark market portfolio.

What might explain the funds’ performance?
In order to beat the market a portfolio manager must bet against it. Bill Miller had employed a “contrarian strategy” that the market was inefficient and bargains could be found through active investing. The strategy was based on lower diversification, risk taking, buying in bulk at low and falling prices, and a belief that profits could be made by exploiting a market that is irrational, pessimistic, and emotional.

To what extend do you believe an investment strategy, such as Miller’s, explains performance?
Investment strategies must be flexible. Miller’s strategy allowed him to identify undervalued shares on a consistent basis. However, no-one has a crystal ball and there will always be some inherent good and bad luck. Millers luck turned into a 6 year losing streak due to failing to foresee the housing crisis and an unwillingness to change his investment strategy.

What roles to

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