Back in May 2011 I published an article on this blog making the situation that Berkshire Hathaway was looking cheap (Just click here to start to see the article or go to my May 2011 folder). 115 for the B shares. So how did I go? It just goes to show it doesn’t always take rocket technology to identify a good investment opportunity. I also added back May 2011 which I got bought Berkshire shares using Australian dollars.
US1.10 (this part was just good luck). US0.92 (again, good luck). Therefore, in Australian dollars it exercised to a 23% annual compound return over the 2 2.5 years. US could have yielded closer to 15% compound per annum, much less good as my comeback, but a very nice return still.
I will add that I’ve now sold the shares. I don’t think Berkshire appears anywhere near as cheap today and I have a lot of algorithmic trading opportunities (which is really my loaf of bread and butter nowadays). Decades back, you can buy Berkshire at any price and have obtained excellent profits almost.
Those times are over. Today, those types of returns is only going to have the opportunity of being achieved if Berkshire is bought when the price-to-book value is at an extremely low level. This is a very basic, long-term mean reversion strategy – buy when price-to-book is surprisingly low and hope it reverts to the mean. Well, it worked this right time.
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“At one point I regarded that Warren Buffett, though he previously every advantage from learning from Ben Graham, did not duplicate Ben Graham, but set out on his own route rather, and ran money his way, by his own guidelines. I also immediately internalized the basic idea that no school could educate someone how to be always a great investor, if it were true, it’d be typically the most popular college in the world, with an impossibly high tuition. Most people have the opposite reaction, they see what Buffett has done, it forward looks relatively straight, so they try to emulate him, however they can’t. And this is exactly why I wouldn’t be providing a single thing to Buffett clones, but I would have more to state on this in another article.
This is mainly useful only for small companies. The method for PEG is PE Ratio divided by compound annual development rate. By the end of the computation, if PEG is 1x, the stock is meant because of it is trading at fair value. If PEG is 0.5x, it is undervalued and we can say this stock has a margin of security of 50% (less than 1 is undervalued).
If the peg is 2x, it is a cell transmission. Take notice again that PEG is useful only for small growth companies. Next, we may use the discounted earnings model or discounted cash flow model to calculate the intrinsic value. That is suitable for blue potato chips or older companies. There is a free intrinsic value calculator which you can download from a fellow blogger’s site here. There are instructions so that you can there follow. 0.50, this stock is said to be undervalued with a margin of safety of 50%. However, do remember that blue potato chips companies normally trade at a good price rather than a discount price.
4, then your company is regarded as to be trading at a discount of 50%. This seems such as a good buy at first glance. However, it isn’t that easy as companies would include assets always, such as development properties, as part of their assets. We have to exclude the development properties and suppose they aren’t sold. A company’s property will be further divided under the notes to the financial record.
In the total amount sheet, we can easily see current assets and non-current assets. Development properties are outlined under current property which we would exclude. If we want to look deeper into the types of assets, for example under the property equipment and plant, we can go to note 3 as stated in the balance sheet. The breakdown of capital and property flower and equipment can be seen under the notes to the financial record. To analyze companies at a deeper level, it is essential to refer to the notes behind an annual report. When investing for income, we like to see good dividends which translates into high yields on our investment.