WARREN BUFFETT- DON'T MAKE THIS TERRIBLE MISTAKE

Buffett: Buying and selling stocks on current news is a mistake.

Ben Graham Centre - Value Investing Conference 2012

How to Invest like Warren Buffett

1. High ROCE + Low Debt
2. Predictable Earnings
3. Profits generate a lot of Cash Flows
4. Uncomplicated Business (you can understand)
5. Strong Brand + Pricing Power
6. Managers are also Owners of Business

Last speech of Tunku Abdul Rahman

http://www.youtube.com/watch?v=sx8mJnWFAtM&feature=youtu.be&t=1m56s

http://www.youtube.com/watch?v=YkqLwtbGaQ0 http://www.youtube.com/watch?v=XyHDBDLTt0A

http://www.youtube.com/watch?v=XfrD4wVRTc8 

The Best of Value Investing (Video)

Tunku Abdul Rahman Putra Al-Haj

Warren Buffett's Interview from India

Good advice: @ 28 mins

Apa ini? Listen .. listen carefully ........ Shameful!

The student who spoke her mind has my respect.

KLSE Market PE is 16.6 (11.1.2013)

KLCI	11.1.2013
Index Stock	Price		Mkt. Cap		Earnings		Dividends		Equity
Stock Name	RM		RM (m)		RM (m)		RM (m)		RM (m)
AMMB	6.64		20014.2		1527.8		600.4		11152.5
CIMB	7.66		56935		4037.9		1651.1		25940.4
RHB	7.9		19704.2		1713.4		630.5		12944.9
HLFG	14.42		15180.9		1167.8		258.1		8495.8
MBB	9		75960.7		5798.5		3038.4		36967.5
PBB	16.2		57217.2		3510.3		1716.5		14975.4
IOI	5.05		32475.5		1794.2		1006.7		12668.7
MMC	2.63		8008.5		333.7		120.1		6211.9
KLK	22.48		23997.5		1212.0		695.9		7130.9
GENTING	9.51		35372.3		2875.8		283.0		17741.9
PPB	13		15411.5		981.6		277.4		14060.0
BAT	60.9		17388.8		718.5		782.5		431.2
SIME	9.59		57630.8		4146.1		2074.7		26021.0
UMW	12.4		14486.8		503.0		362.2		4264.3
YTL	1.81		19395		1259.4		213.3		13394.3
GENM	3.61		21434.3		1498.9		514.4		12528.1
TM	5.82		20820.5		1189.7		707.9		6975.9
AIRASIA	2.89		8033.9		565.8		136.6		4058.6
UEMLAND	2.15		9307.1		313.4		0.0		4848.3
PETCHEM	13		49840		2637.0		1295.8		9623.0
MHB	4.4		7040		206.5		161.9		2432.0
ARMADA	3.82		11189.4		428.7		78.3		3544.3
TENAGA	6.92		38349.9		4261.1		1112.1		36410.2
PETDAG	22.96		22809.7		655.5		798.3		4778.5
HLBANK	14.98		49128.8		2532.4		2996.9		3542.0
MAXIS	6.55		49128.8		2532.4		2996.9		8100.6
PETGAS	18.98		37556.3		1082.3		788.7		8884.5
YTLPOWER	1.6		11740.7		1249.0		340.5		9539.3
AXIATA	6.69		56920.8		2381.6		1593.8		19399.0
DIGI	5.17		40196.8		1252.2		1366.7		1399.5
			902675.9		54366.7		28599.8		348464.7
Market PE	16.60
DY	3.17%
DPO	0.53
Mkt cap/BV	2.6
ROE	15.6%
EY	6.02%
Risk free int.	3.40%
ERP	2.62%	(Fairly  valued)
KLCI
11.1.2013	1682.7

Related:

KLSE Market PE is 17.7 (19.10.12)

Arithmetic vs logarithmic: Difference between charts plotted using these two scales

Narendra Nathan, ET Bureau Aug 27, 2012,

When data is plotted as a chart, it can be done using two types of scales—arithmetic or semi-logarithmic. The difference in scale can completely alter the shape of the chart even though it is plotted using the same set of data. Consider the three charts given below, which use theSensex data since its inception in 1979 till now. But why does one need to use the semi-logarithmic scale when arithmetic scale is commonly used for plotting charts. This is in order to overcome the inherent weakness of the arithmetic charts.

Arithmetic charts

In arithmetic or linear charts, both X and Y axes scales are plotted at an equal distance. For instance, the Sensex movement from 15,000 to 16,000, that is, an increase of 1,000 points, is treated as equal to the Sensex movement from 16,000 to 17,000, which is another 1,000 points.

This works fine when the data range is small, but will distort the picture when the range is big. Consider the Sensex movement from 20,000 to 21,000, which was a mere 5% increase, but the movement of the first 1,000 points in the Sensex, that is, from 100 to 1,100, was a whopping 1,000% increase. By treating them as equal, the arithmetic chart distorts the picture. This explains why it seems as if the Sensex was almost flat for the first 10 years of its existence in the arithmetic chart.

Logarithmic charts

Logarithmic charts are commonly used in science and engineering when you need the data to be displayed accurately. This is also a necessity when the data that needs to be plotted varies widely. In such charts, the logarithm of the data value (Sensex in the given example) is used as a base to fix the gaps between each data points on the Y axis. This process makes sure that the percentage increase between two data values is depicted clearly. To understand this in a better manner, consider the logarithmic charts given below. Note that the gap between 100 and 200 (100% increase) is equal to the gap between 200 and 400 (next 100% increase). The same gap is maintained for the Sensex increase from 1,000 to 2,000 or from 10,000 to 20,000. Semi-logarithmic charts

In logarithmic charts, both the X and Y axes are plotted using the logarithmic scale. Since there is no possibility of distortion in the X axis (where the date range is plotted), we can continue to use the arithmetic scale while plotting the share price data. In other words, the logarithmic scale is used only along one axis, that is, the Y axis, and therefore, these charts are called semi-log charts.

Advantages

The semi-logarithmic charts can be of immense help while plotting long-term charts, or when the price points show significant volatility even while plotting short-term charts. This is because the chart patterns will appear as more clear in semi-logarithmic scale charts. For example, the very long-term uptrend line in the Sensex is clearly visible in the semi-logarithmic chart (see Semi-logarithmic scale with trendline), not in the arithmetic chart. Similarly, the Sensex was constrained in a slightly upward moving channel for 13 years in the middle, that is, between 1992 and 2005, and this is clearly visible only in the semi-logarithmic chart (see Semi-logarithmic scale with channel). One can plot the charts in the semi-logarithmic scale to easily identify several other chart patterns, some of which we shall explain in the coming weeks.

 

http://articles.economictimes.indiatimes.com/2012-08-27/news/33425208_1_charts-sensex-arithmetic

Semilogarithmic-scale line graphs

If we use a logarithmic scale on the y-axis and if the x-axis remains the same (arithmetic scale), we create a semi-logarithmic scale line graph. With a logarithmic scale on the y-axis we represent the relative change of y over time rather than its absolute change over time. Semi-logarithmic scale line graphs are used to present and interpret rates of change over time rather than magnitude of change. They also allow showing very different magnitudes and ranges of rates between two lines (e.g. high incidence and low mortality rates for the same disease).

Semi-logarithmic scale paper:

• On the y-axis, intervals are logarithmic and no longer arithmetic.
• There are several cycles of tick marks on the y-axis. Each corresponds to an equal distance on the y-axis.
• The values of one cycle are 10 times greater than the values of the previous cycle.
• Within a cycle the 10 tick marks are not equally distant (distance from 2 to 3 is different than distance from 3 to 4). Their progression is geometric, not arithmetic.
• The y axis can cover a large range of y values.

The following characteristics are noteworthy:

• The slope of the line indicates the rate of change (the relative change) of y over time.
• A horizontal straight line indicates no change.
• An upward or downward straight line slope indicates a constant rate of increase or decrease in the measured indicator (e.g. rate) over time.
• Two parallel lines indicate similar rate of change over time.

Tesco’s UK sales growth highest in three years

Tesco’s UK sales growth highest in three years
Published: 2013/01/11


LONDON: Britain’s Tesco plc said its £1 billion (RM4.86 billion) turnaround plan for its home market was starting to work as it posted its highest sales growth in three years over the Christmas period.

Tesco, the world’s third-largest retailer, beat forecasts for underlying sales growth, regaining an edge after a dismal Christmas in 2011 prompted the group’s first profit warning in 20 years and a strategic rethink.

Sales at British stores open more than a year, excluding fuel and VAT sales tax, grew 1.8 per cent in the six weeks to January 5, part of Tesco’s fiscal fourth quarter, compared with analysts’ forecasts in a range of up 0.5 to 1.5 per cent and with a third-quarter fall of 0.6 per cent. Reuters





http://www.fool.com/investing/international/2013/01/09/whats-in-store-for-tescos-shareholders.aspx

Teoh Beng Hock Documentary

http://www.youtube.com/watch?feature=player_embedded&v=2Yq4rLg9TWo#!

MALAYSIA'S first Islamic bond (sukuk) for retail investors

Minimum profit rate of 3.7pc

By Adeline Paul Raj

Published: 2013/01/09

MALAYSIA'S first Islamic bond (sukuk) for retail investors, launched yesterday and expected to be listed on February 8, will have a minimum profit rate of 3.7 per cent a year.

The RM300 million sukuk with a 10-year tenure was issued by DanaInfra Nasional Bhd, a unit under the Ministry of Finance, to fund the Mass Rapid Transit (MRT) project that will run between Kajang and Sungai Buloh in the Klang Valley. It was launched by Prime Minister Datuk Seri Najib Razak.

The issue is part of a larger RM1.5 billion sukuk that's being sold by DanaInfra, of which RM1.2 billion is for institutional investors.

"It will be better than the fixed deposit (FD) return and better than the MGS (Malaysian Government Securities, or government bonds)," Treasury secretary-general Datuk Seri Mohd Irwan Serigar Abdullah told reporters after the launch yesterday.

The average fixed deposit rate offered by commercial banks as at November last year was 3.15 per cent, according to Bank Negara Malaysia data, while the current yield for three-year government bonds is 3.04 per cent.

Bankers said the actual profit rate for the retail sukuk, which will depend on investor demand and the prevailing market interest rate, will be determined at the close of the book building exercise of the institutional offering.

Datuk Lee Kok Kwan of CIMB Investment Bank, one of four banks that are the joint lead arrangers for the issue, said he was confident that there would be strong demand for the retail sukuk.

He pointed out that unlike fixed deposit, income that investors derive from sukuk is not subject to tax.

"And the main assurance is that, post-listing, the liquidity will be there as the four banks are obligated to market them," he remarked.

Bursa Malaysia chief executive officer Datuk Tajuddin Atan said the retail sukuk, which opens up a new asset class for people to invest in, cements Malaysia's role as a top sukuk marketplace.

Previously, bonds or sukuk were accessible only to high-net worth and institutional investors.

"To make this sustainable, we need a pipeline, and this is being worked on. DanaInfra has a big pipeline of sukuk, but we're also looking at other issuers," he said.

The sukuk is meant for investors who want to diversify their portfolio. The minimum subscription amount for an ETBS is RM1,000, which will get an investor one board lot which comprises 10 units with a principal price of RM100 each.

Read more: Minimum profit rate of 3.7pc http://www.btimes.com.my/Current_News/BTIMES/articles/sukuk/Article/#ixzz2HQbadqdL

Indonesia: An industry-led growth economy

Cyrillus Harinowo Hadiwerdoyo, Jakarta | Opinion | Fri, January 04 2013, 9:10 AM

Arwana may not be a household name yet in Jakarta. Yet, the ceramic tiles manufacturer has been a stellar performer in the stock market. At the closing of stock trading on Dec. 28, 2012 its stock price shot up to Rp 1,640 (17 US cents), more than four times its price at the beginning of the year.

In the ceramic tile industry, Arwana is truly an awakening giant. Founded in 1995, the company now boasts a production capacity of over 40 million square meters annually, ranking second only to Mulia Ceramics.

But, with plans to open new factories in South Sumatra, Arwana will be closing the gap with the market leader very rapidly. Arwana currently stands as the 16th largest ceramic tile company in the world with the production cost that can compete with China.

A similar story is also shared by South Pacific Viscose. This rayon company, part of Lenzing Group of Austria, is finishing its fifth factory in West Java that will increase its capacity to 325,000 tons annually, making it the largest single-site rayon factory in the world. The company, founded in the 1980s, was invited by the owner of Bhirla Group of India, which had initiated a factory nearby in West Java by the name of Indo Bharat.

That story can be read in one of the Harvard Business School case studies on the development of such a company in Indonesia.

I will not be surprised if the company will further expand its facilities in Indonesia, given the strong growth of the country’s and the ASEAN region’s economy.

There is no doubt that the demand for textile fibers will continue to climb rapidly.

These two companies do not generally make headlines. It is, for sure, much easier to focus on the automotive industry, led by Toyota and Daihatsu, which has achieved a landmark domestic sale of 1 million vehicles in November 2012. That month, the total sales topped 1.02 million units.

LG and Samsung, meanwhile, have been competing as the leading electronic manufacturers in Indonesia and are expanding their production capacity quite aggressively here.

The domestic demand of electronic products, especially LCD and LED TVs, refrigerators, air conditioners and other household appliances has been growing by over 30 percent annually. All these stories lead to the conclusion that the Indonesian manufacturing industry has been developing at a rapid rate. Arwana has been surging at 23 percent
this year.

Meanwhile, Indonesian car sales have also grown (in terms of units) by around 24 percent. Unilever’s sales have ballooned at a rate of almost 18 percent, while its competitor, Mayora, has been growing by 30 percent.

It is no wonder that the growth of the non-oil manufacturing sector in creating gross domestic product (GDP) has increased to 7.27 percent in the third quarter of 2012, much higher than the growth rate of the overall economy, which grew at 6.17 percent in the same period. At the same time, the growth rate in the first nine months of 2012 of the non-oil manufacturing sector was 6.50 percent, higher than the 6.29 percent in overall GDP growth.

The manufacturing sector has been the largest contributor to Indonesian economic growth at 1.62 percent, followed by the trade, hotel and restaurant sector with 1.22 percent.

While Central Statistics Agency (BPS) data has been showing robust growth of the manufacturing sector, I feel that the performance of the sector has been grossly understated. There are at least four factors that lead me to this conviction.

First, several sectors have been understated. The cement industry, for instance, has reportedly grown at 8.75 percent. At the same time, data from the Indonesian Cement Producers Association reports a 15 percent increase in volume in the first nine months of 2012. The automotive industry has grown by 8.24 percent, although domestic car sales, in terms of units (which is real growth), has grown at a rate of 24 percent.

Pulp, paper and printed products have been reported to suffer negative growth, dropping 4.5 percent in the first three quarters of 2012. At the same time, Asia Pulp and Paper, which has a market share of over 30 percent, has grown at a rate of around 10 percent.

There have been reports of expansion in the corrugated paper industry, which produces carton containers for other industries such as food and beverage, electronic products and others. With such a high growth in the food and beverage and tobacco industry as well as electronic industry, it is highly unlikely that the performance of the pulp, paper and printed products sector is negative.

Second, electricity consumption increased very significantly in 2012. If in the first nine months of 2011, the electricity sector enjoyed production growth of 5.85 percent, it grew by 10.15 percent in the same period of 2012 according to state power company PT PLN. BPS, however, reported the growth rate at only 5.56 percent.

Third, the statistics of GDP have been based on the survey of 2000, when many new industries did not yet exist.

New industries, such as diapers, have been growing very rapidly and currently stand at Rp 6 trillion in value. In fact, Procter and Gamble is currently investing US$1 billion to build a diaper company in Indonesia.

The rapid growth of automotive components might not have been accurately captured by the 2000 survey. So, what may be reported so far by the statistics is more similar to “same store growth”, while the performance of new stores has been largely ignored.

These factors lead me to believe that the Indonesian manufacturing industry has been blossoming at such a rapid rate that other sectors followed suit.

The writer is an Indonesian consultant for Global Source Partners in New York.

Jakarta Post

Malaysia's main market index ends year at all time high; advances 10.34% in 2012.

Tuesday January 1, 2013

Malaysia's main market index ends year at all time high

By TEE LIN SAY
linsay@thestar.com.my

Local bourse advances 10.34% in 2012

PETALING JAYA: The FBM KLCI finished 2012 with a 10.34% gain to close at an all-time high of 1,688.95 as election concerns, defensive trading and high cash holding continued to dominate the equity scene in Malaysia. For the day, the local bourse was up 7.62 points on volume of RM1.31bil shares.

The KLCI's gains were mostly done in the last 15 minutes of trading on selected key blue chip stocks.

Kuala Lumpur Kepong Bhd was the biggest gainer of the day, closing RM2.06 to RM24, pushing up the KLCI by 3.39 points while Malayan Banking Bhd rose 12 sen to RM9.02 and nudged the index by 2.25 points. AEON Co (M) Bhd was on the gainers list, up RM1.42 to close at RM14.12.

Nonetheless, the KLCI is still one of the underperformers when compared with its regional peers. It is only ahead of the Shanghai Composite Index, Taiwan and South Korea, which recorded year to date gains of 3.17%, 8.87% and 9.38%, respectively.

Not surprisingly, it was the smaller Ace market counters that hogged the gainers list for the year.

These included Microlink Solutions Bhd with a 308% gain to 51 sen andBorneo Aqua Harvest Bhd with a 118.18% gain to 72 sen.

Among the bigger stocks that did well included KLCC Property Holdings Bhd which gained 99.37% to RM6.28 on plans to form a stapled real estate investment trust (REIT).

KLCC Property's restructuring exercise will involve the company acquiring the remaining 49.5% stake in Midciti Resources Sdn Bhdwhich owns the Petronas Twin Towers from KLCC Holdings Bhd for RM2.86bil. Following that, KLCC Property will inject three properties into KLCC REIT.

The properties are the Twin Towers, Menara ExxonMobile and Menara 3 Petronas. Thus once the restructuring is completed, KLCC Property shareholders will own shares and units in both KLCC Property and KLCC REIT.

The best performing stock on the Main Market for the year was Bright Packaging Industry Bhd, which was up 230.58% on a year to date basis.

It closed at RM2, which is also its 10-year high, on news that the company may see a change in its board and management.

Bright manufactures aluminium foil packaging materials which are mainly supplied to the tobacco industry. Last week, the company told Bursa Malaysia that four substantial shareholders with a collective stake of 31.2% had requested an EGM to remove existing directors and appoint new ones.

Over in the Ace market, the best performing stock and overall best performing stock for whole of Bursa Malaysia for 2012 was Green Ocean Corp Bhd.

Use Stock Volume to Your Benefit

So how can you use volume to your advantage?

1.  Remind yourself that traders only determine the short term price not the value.

2.  Use the volume to help predict the right time to buy more assets or change into a better position.

Large volume (relatively speaking) means the price is at a peak or valley.  You are either at the top or the bottom of the chart, you need to determine this.



What is Stock Volume?

Summary
In this lesson, we learned the importance of stock volume. Although volume won’t help intelligent investors learn the intrinsic value of a company, it can be used as a tool to help predict market behaviour.

Many times investors can be fooled into believing that the market price of a stock is determined by all the shareholders. This idea is false.

When we look at the volume of a company on an given day, we can quickly get a sense of how many traders are actually determining the price of a stock when we compare this number to the shares outstanding. This ratio, volume/shares outstanding, provides a good idea how many traders are moving away from the company and how many are coming into the company.

• When the company trades at a very low volume, we can generally say that the shareholder agree with the market price. 
• Likewise, if the volume is very high, we can generally say that shareholders disagree with the market price.

We demonstrated this principal with Wells Fargo (WFC). When we looked at the historical market price for WFC, we learned that on the day where the volume was the highest in ten years, the market price was at an all time low. This idea of shareholders disagreeing with the market price when volume is relatively high is an important point that stock traders can use to their advantage. 

Always remember, volume can mean that the stock is over priced or underpriced. The peak or valley is for you to discern.



http://www.buffettsbooks.com/security-analysis/what-is-stock-volume.html

When to Sell Stock like Warren Buffett

1.  When a higher return is expected by trading to another asset (to include the loss incurred by capital gains tax).

2.  When the company changes its fundamentals.



When to Sell Stock like Warren Buffett

Summary

In this lesson, we learned the importance of always understanding the consequences of our actions. Buying and selling stock can have an enormous impact on our success as an investor. The most important thing to learn from this lesson is the emotional decisions when selling stock can often lead to very poor results.

We learned that there are two major rules for knowing when to sell stock:

1. We sell stock when we can trade the capital into an investment that will produce a larger return after accounting for the capital gains tax paid (state and federal). In addition, you’ll want to ensure the risk assumed is comparable for the return received.

2. We sell stock when the business changes its fundamentals. This could mean the way they manage debt. The future outlook for earnings is decreasing…etc


http://www.buffettsbooks.com/security-analysis/when-to-sell-shares.html

How to use a cash flow statement to identify strong versus risky companies

What is a Cash Flow Statement

This important document is used to help determine how money flows through a business. Prior to 1987, investors could only examine the health of a company from the income statement and balance sheet. Due to stricter regulations, publicly traded companies are now required to also disclose the cash flow statement.

The cash flow statement is broken down into three categories. 

1. Operating Activities: This is probably the most important section of the statement because it shows the money that's flowing into the business from the product or service that the company produces. Positive revenues listed on the cash flow statement from other activities are not sustainable in the long term, so that's why this section is so important. 

2. Investing Activities: A negative number listed in this section would mean that the company is investing money. A positive number in this section would mean that the company sold an asset in order to generate money. Obviously its better to see a negative number show-up under this section because it implies that the company is continuing to invest the revenues that it produces. 

3. Financing Activities: In this section, an investor can identify whether the business is try to raise money or pay off debts. A positive number in this section means the company is incurring debt or dilute the value of their shares. A negative number means the company is paying off debt or increasing the value of their shares (through a share buy back). Generally speaking its good to see a negative number under this section because it means the company is removing their leverage and creating a stronger position for their shareholders.

The Cash flow is a great document to help look at trends and how money flows through a business. Although the balance sheet and income statement are very useful documents for determining the intrinsic value of a stable company, the cash flow statement gives potential investors a glimpse into the current conditions of the company and how they manage their resources.

http://www.buffettsbooks.com/intelligent-investor/cash-flow-statement/what-is-cash-flow-statement.html



How to read the cash flow statement
http://www.buffettsbooks.com/intelligent-investor/cash-flow-statement/how-to-read-cash-flow-statement.html

Income Investing: How do you plan to pay for your retirement?

Imagine that you're 65 years old and you're looking to retire.

If you have $500,000 in savings, how long will that money last?

If you spend $50,000 a year and your saving grows at 7% a year, you'll be broke by age 80.

The savings and investments can only support you for 15 years from the age of 65!!!


What is Income Investing?

Income investing is purchasing stable stocks and bonds that pay dividends and coupons.  If enough stocks and bonds are acquired, the dividends and coupons will provide income for the owner during retirement.

If the income is enough to meet spending requirements, then the equity and par value of the investments will remain or grow with time as income payments continue to grow as well.

How can you invest in companies that will provide benefits now and into retirement?  

Invest in stable companies with low debt/equity ratio that pay dividends.

Always purchase assets that will increase your cash flow next month.  Income investing has a compounding effect in increasing your cash flow.  Using this approach will provide increasing liquidity (dividends) each month, so you can invest in the most undervalued security (either stocks, bonds, or preferred shares).

Conclusion

Income investing provides quarterly payments during retirement.

Income investing provides a constant stream of cash so you can continually take advantage of changing market conditions.

As a rule of thumb, I like to find companies that pay 1/3 of their earnings through a dividend and the other 2/3 into the book value growth of the business (this is growth I don't pay taxes on).


Earnings 
----->  Option 1  ----->  Retained or Pay down debts ---->  Increase in Book Value or Equity
----->  Option 2 ------>  Dividends

Most companies retain some earnings (e.g. 2/3)  and also distribute some as dividends  (e.g. 1/3).



How can I employ Income Investing Techniques

Summary of this lesson

By employing the techniques of income investing, one can prepare themselves properly for retirement. Since income investing is the process of picking stable stocks and bonds that pay decent dividends and coupons, the investor can benefit from the cash flow that’s produced by these securities.

The first way income investing provides benefits to the investor is through liquidity. Since the investor will continually receive dividends or coupons, they then have the opportunity to reinvest that cash flow into the most undervalued asset each month. This compounding cash flow is truly the essence of investing like Warren Buffett. With an ever increasing cash flow, investors can take advantage of market conditions during spikes and valleys.

The second way income investing provides benefits to the investor is during retirement. Since most retirees may need to sell their investments in order to pay their monthly lifestyle expenses, income investing offers an alternative approach. Since the retiree will receive quarterly and semi annual payments from these types of investments, they will continue to have a steady cash flow to meet their lifestyle expenses. Although some retirees may need to pull from the principal, income investing will minimize that withdrawal.

In the end, Income Investing creates more cash flow for the individual employing the technique. It’s Warren Buffett’s opinion that purchasing dividend paying stocks is a very wise decision because of the continued and consistent cash flow that provides liquidity to reinvest your earnings.

Warren Buffett Intrinsic Value Calculator - Determine if Stock is Undervalued or Not.

Warren Buffett's 4 Rules:
1.  Vigilant Leaders
2.  Long Term Prospects
3.  Stock Stability
4.  Undervalued

Non-Predictable Company (Andrew :-) )

1. Lots of Debt
2. No Long Term Prospects
3. Not Stable
4. Price ? - Can't be determined due to stability

Predictable Company (Linda :-) )

1. Manageable Debt
2. Long-term Prospects
3. Stable 
4. Market Price = $44.33  Intrinsic Value = ?

Lesson Objective 1: How do we calculate the intrinsic value of a stock

Lesson Objective 2: How do we use the BuffettsBooks.com intrinsic value calculator

Summary of this lesson

In this lesson, students learned that the intrinsic value can be defined as the discounted value of the cash that can be taken out of a business during it's remaining life. For us, we've defined the life as the next ten years. This way, we can discount that cash by the 10 year federal note. The Cash that we are taking out of the business is simply the dividends and the book value growth during the next 10 years. Since these numbers need to be estimated, it's very important to ensure that Warren Buffett's third rule (a stock must be stable and understandable) is met.

When a company doesn't have a history of linear growth, estimating the cash that they will produce for the next ten years becomes more speculative. When we look at the root of the intrinsic value calculator, it operates off of the same principals as a bond calculator. Instead of using coupons, we substitute dividends. And instead of using par value (or value at maturity) we estimate the book value of the business in 10 years. The value that we use to discount the summation of the cash is simply the 10 year federal note.

Although the previous paragraph might sound confusing to some, it's application is fairly straight forward. The reason Buffett says, "Two people looking at the same set of facts, will almost inevitably come up with at least slightly different intrinsic value figures," is due to a difference in opinion of the future cash flows. Since some investors are more conservative than others, their estimates of book value growth or dividend payments may be lower. This will immediately change the intrinsic value. Your job as an intelligent investor is to determine your own tolerance for risk and conservative estimates on how much money you will receive while owning the stock for a 10 year period.

Intrinsic Value Calculator

Source of Quotes: http://www.berkshirehathaway.com/owners.html

"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life." - Warren Buffett

Therefore, the sum of cash that can be taken out of the business over the next ten years is going to be the dividends plus the equity growth. The discounted value is the current value of the 10 year federal note. To start, we'll determine how much a company's book value is growing.

"In other words, the percentage change in book value in any given year is likely to be reasonably close to that year's change in intrinsic value."- Warren Buffett

Click here for the Intrinsic Value Calculator:  

http://www.buffettsbooks.com/intelligent-investor/stocks/intrinsic-value-calculator.html

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Would you rather be with Andrew or Linda? Businesses manage their finances just like individual people. :-)