Warren Buffet's 1981 Formula for quick valuation

http://ozstock.blogspot.com

Here is a short technical note Warren Buffet's 1981 formula. I came across this from the Money Magazine, June 2009 issue. Hence I do not guarantee that Money Magazine's content is correct or even if this is truly a formula used by Warren Buffet. However, after analysing the formula for myself, I see the merit of it. In fact I will be including this so called Buffet's 1981 formula in my future article which explains my 3-fold Valuation method to decide on buying stocks.

The Buffet's 1981 formula is this:

Value = (ROE / Required Return) x Equity Per Share

where
ROE = Rate of Return of the Company of interest (in %). This can be calculated using Net Profit After Tax divided by Total Equity.

Required Return = Pre-tax required rate (in %) that you would like to get for your investment. For example you may wish to use a long term deposit or long term government bond rate for this.

Equity Per Share = the Equity of a company divided by the total number of shares. These figures can be obtained from the company's annual reports.

This is a quick and simple way to value a company, to see if the company is priced more or less than it is of value to you. Your input comes into the Required Return where you can choose how much you expect from this investment.

Then the formula will produce the value of the company per share. Simply compare this with the current price to see if it is over or under priced. Using this model, a company that can generate a higher return on equity is worth more than one that cannot. Also a company that generates a high ROE and is able to retain all of its earnings and continue to make higher returns, is worth more than a business with the same ROE but forced to pay most of its earnings out as dividends.

Buy Sell Indices and Metals on the ASX

Source: http://ozstock.blogspot.com

Over nearly the last 2 years, mum and dad investors as well as professional investors may heve been burned by the GFC - Global Financial Crisis. For most, it is bad enough that the shares in companies crashes, but for others trading derivatives like options, futures and CFDs (Contract For Difference) the exposure to individual companies may have been worse.

For some companies the share prices not only crashed but the companies themselves collapse and investors (non-creditors) usually get nothing. But even in the doom and gloom, some companies or sectors fare better than others.

One way to mitigate company risks is to buy or sell stock indices, like the S&P 500. This is not about trading in leveraged derivatives like options or futures, but rather trading in actual units of the indices. This is called Exchange Traded Funds or ETF in short.

ETFs are not only for stock indices, they also exist for commodity indices. Below is a list of the ETFs available to buy and sell just like a regular unit of share, in the Australian Stock Exchange (ASX), along with their respective ASX code.


Internation Emerging Nations Equity (as classified by iShares)
IZZ iShares FTSE/Xinhua China 25
IBK iShares MSCI BRIC
IEM iShares MSCI Emerging Markets
IKO iShares MSCI South Korea Index Fund
ITW iShares MSCI Taiwan

Internation Developed Nations Equity (as classified by iShares)
IVE iShares MSCI EAFE Index Fund
IHK iShares MSCI Hong Kong Index Fund
IJP iShares MSCI Japan
ISG iShares MSCI Singapore Index Fund
IRU iShares Russell 2000
IVV iShares S&P 500
IAA iShares S&P Asia 50
IEU iShares S&P Europe 350
IOO iShares S&P Global 100
IXI iShares S&P Global Consumer Staples
IXJ iShares S&P Global Healthcare
IXP iShares S&P Global Telecommunications
IJH iShares S&P MidCap 400
IJR iShares S&P SmallCap 600

Domestic Equity
SFY SPDR S&P/ASX 50
STW SPDR S&P/ASX 200
SLF SPDR S&P/ASX Listed Property Funds

Metal Commodities
GOLD Gold Bullion
ETPMAG Silver
ETPMPD Palladium
ETPMPT Platinum

Please let me know if you know of any ETFs trading in the ASx which are not listed here.

Note that a small amount of management fees may be build into the prices of these ETFs. In addition, foreign exchange rates also affect the prices. One example is today's Gold price is USD $942/oz but the ETFs GOLD share is AUD $114.6. However, ETFs seem to be as close as we can get to actually trading indices and commodities without actually trading the physical stuff.

Technical Analysis (Gann Charts) - All Ords headed for June fall?

Source: http://ozstock.blogspot.com

After one of the strongest rally in recent times, are we headed for a June Fall? What do the Gann angles tell us?
Below are the weekly graphs for the Dow Jones Industrial and the All Ordinaries indices, with some Gann angles superimposed.

The story so far is that since the March bottom, stock indices all over the world has been rising until May. The "sell in May and go away" adage did not exactly come through. So what do the Gann charts tell about this?



Looking first at the Dow, the Gann-10 (brown) ascending angle, and the Gann-10 (pink) descending angle is projected to meet sometime in mid August. Since the all time high of 2007, the Gann-10 (pink) has acted as a resistance angle. The last 2 weeks saw the Dow break this resistance angle, but have not reached a significant amount yet. The current week starting 15 June 2009, has begun with a significant drop. One scenario, if you believe it, is that the Dow will retrace downwards along the Gann-10 (pink) and meet the intersection point almost creating a double bottom before starting the next bull run. Two angles from opposite direction intersecting like the Gann-10 pink and brown here, is an important point to watch for.




The All Ords seem to be telling a different story but not that much. One of the important Gann angles Gann-2.3 has acted as a support and the All Ords bounced quite definitively from this. It is now approaching the Gann-1/2 angle which may possibly act as a resistance. Note the Gann-1/2 is drawn from a recent low of 2003 whereas the Gann-2.3 originates from a low point farther back. This prediction may be far off but, if the All Ords finds resistance at the Gann-1/2 as the recent falls in the market continue, it may hit the Gann-2.3 support again. If this is the case, it may set-up for a double bottom to bounce back as the next long term bull rally - which in fact may coincide with the Dow.


Outlook: Brace for a sustained and signicant fall, then recovery from early to mid August.


Aside: Jun 21 is one of the 11 important Gann seasonal dates in the year that trend may change - Lookout!

Lightning Analysis - ADE - Adelaide Energy

Lightning Analysis - Adelaide Energy

This is a very quick look at Adelaide Energy following a positive speculative news article recently.

http://www.news.com.au/adelaidenow/story/0,22606,25200329-913,00.html

http://www.theaustralian.news.com.au/story/0,25197,25444885-23634,00.html

Read those articles for yourselves - my impression from them is that ADE is a good speculative punt. However ......

I started looking at some fundamentals and technicals. Please note that this not meant to be a thorough analysis. But my quick calculations tells me that I would not be touching this stock no matter how good the news is until they get some more cash.

From their recent quarterly statement:
Revenue: $406K - first revenue after their purchase of Katnook Gas Plant from Origin.
Operational Cashflow: -$950K
Investment Cashflow : $1.083m
Cash at end of quarter: $409

Assuming the investment income is once off, and assuming revenue will be steady, if operational cashflow remains similar, say $900K, then ADE won't have enough cash to last the next quarter. At this point, I would stop all further analysis and wait at least to the next quarter results.



In terms of technical analysis, a simple Gann analysis would show that current price has almost reach the level of the last significant high at around 15c. Also that high point is about 11month to 1 year ago - another signficant time period in Gann analysis. This is a point to pause and see if it will break out of the resistance level and go higher.

In summary, although prospects of ADE sounds good, both fundamental and technical indicators suggest waiting before buying into it.

Technical Analysis - Update Dow and All Ords Weekly Gann Charts

It is about 2 months since the last post on the analysis on the Dow Jones index and the Aussie All Ords index. In that time, the market has climbed significantly on renewed confidence. The consecutive weekly gains left such an impression on some that there is talk that we have reached the bottom of the GFC (Global Financial Crisis). Instead of random speculation, let's turn to our weekly charts.

In the previous post,
http://ozstock.blogspot.com/2009/03/technical-analysis-update-dow-and-all.html
the DOW seem to be right in between a set of Gann bear angles and bull angles. The All Ords at that time was testing an important angle for support.







In the current situation, the All Ords seemed to have not only found the support but has bounced up from it. The Dow stopped in the middle of the 2 angle supports and also bounced upwards strongly.

So are there any indications of support or resistance in the near future? Looking at the Dow first, it is almost at the point of touching the (pink) angle from the top of the 2007 boom, which is a potential resistance. For the All Ords, although it has crossed over the support angle emphatically, it is approaching the top of the 20 day maximum envelope, almost like being sandwiched between the support angle and the envelope.

Two other historical pattern to note are: i) the "Sell in May" adage; ii) the Gann seasonal date of May 5, both of which is acting against the current trend.

Money Management as Your Trading Account Grows

This is taken from: http://www.hubb.com.au/tradingtutors/emails/2009/TradingTutorsEmail_020409.asp

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One of the reasons that traders tend to overtrade is that they are trying to make too much money, too quickly, with a trading account that is too small.

During the online training sessions I run for new Safety in the Market students, I ask students to think about the financial goals they are trying to achieve from their trading during the year.

For example, let’s assume you aim to make $100,000 per year from your trading.

You have a $5,000 trading account, you will risk 5% of the account per trade and will aim to achieve a minimum of a 2 to 1 Reward to Risk Ratio. This means that your losses should be no more than $250 per trade (including brokerage) and your profits should be at least $500 per trade (after brokerage).

I encourage students to focus on 10 trades at a time. It doesn’t matter whether you take those 10 trades in one day, one week, one month… Just take 10 consecutive trades, and focus on the results. I suggest that new traders aim to have 4 winning trades, 4 losing trades, and 2 “breakeven trades” out of every 10 trades they take.

What does this mean for our trading account? Well, the 4 winning trades should return at least $2,000 (4 x $500). The 4 losing trades should lose no more than $1,000 (4 x $250). The 2 breakeven trades cost us nothing.

If you can achieve this mediocre success rate of 4 winning trades out of 10 with a conservative 2 to 1 Reward to Risk Ratio, then every 10 trades would be worth $1,000 to you.

This gives you a 20% return on your trading capital. Not bad.

So to make $100,000 profit, you would need to take 1000 trades (100 x 10).

We set our target low because if we know that 4 winning trades out of 10 will help us reach our goals, we don’t mind if the first two trades, for example, are losing trades, because we can see the big picture.

Contrast this with aiming for 7 out of 10 winning trades – if your first two trades lose, you can start to panic, and take trades that you shouldn’t.

You then need to ask yourself whether it is safe and reasonable to make 1000 trades during a year – after all, this equates to around 4 trades per trading day.

The answer for most people is probably not.

So we need to adjust the parameters of our trading system.

Many traders will look to increase their risk size – and maybe start risking 6% or 8% or 10%, in order to get where they want to go faster. This is dangerous and can lead to serious depletion of your trading capital if you have a bad run.

Or, they will aim for a higher success rate. While this is a good idea, the reality is it can take a few years in the market before you have the experience to be making, say, 7 winning trades out of 10 consistently. If you aim too high too early, you can find yourself disappointed, and “chasing” extra trades as you play catch up.

I suggest students work out a compounding plan instead.

For example, maintaining the same parameters as above, we know that every 10 trades are worth $1,000. So after 50 trades, we would expect our trading account to double in value from $5,000 to $10,000.

We can now risk $500 per trade, which is still only 5% of our new trading balance of $10,000.

Now every 10 trades is worth $2,000, so 50 more trades would see us at $20,000.

By risking 5% of $20,000, or $1,000, each 10 trades should now be worth at least $4,000 to us, so 50 more trades would see us at $40,000.

Risking 5% of $40,000, or $2,000, each 10 trades should now be worth at least $8,000 to us, so 50 more trades would see us at $80,000.

30 more trades from here would see us make $24,000, giving a profit of at least $99,000.

So by increasing our position sizes as our account grows, you can see that we can still risk 5% per trade, still only require a mediocre 4 wins out of 10, and still make around $100,000 profit in 230 trades.

230 trades in a year is less than one trade per day – this is far safer and far more achievable than taking 1000 trades in a year.

Remember too that 5% loss is our maximum loss, and 2 to 1 is our minimum reward. And we may well do better than 4 winning trades out of 10. In this case, we would achieve our final target well before 230 trades.

The point is, we have a minimum standard to aim at, and we know that if we reach this standard, it is simply a matter of finding and executing 230 trades in a year.

Having this rock solid plan in place will help to keep you from over trading, and help keep you focused on your goals.

Trading is a business – treat it like one.

Be Prepared!

Mathew Barnes

News - World's 50 Safest Banks - according to Global Finance

Here is the excerpt from Global Finance Magazine - Feb 2009

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New York, February 25, 2009 — Such has been the turmoil in the world’s banking industry that, for the first time, Global Finance magazine is publishing a mid-year update of its much-respected Safest Banks listing. A full report on the list will appear in the April issue of Global Finance.The “World’s 50 Safest Banks” 2009 were selected through a comparison of the long-term credit ratings and total assets of the 500 largest banks around the world. Ratings from Moody’s, Standard& Poor’s and Fitch were used.

Global Finance has published its “World’s SafestBanks” listing for 17 years and this ranking hasbecome a recognized and trusted standard of credit worthiness for the entire financial world. “The rating agencies have determined these banks have demonstrated a more prudent and sustainable approach to risk than their peers,”says Global Finance publisher Joseph D.Giarraputo. “More than ever customers all around the world are viewing long term credit worthiness as the key feature of the banks with which they do business.”

1.KfW(Germany)

2.Caisse des Depots et Consignations (CDC)(France)

3.Bank Nederlands Gemeenten (BNG)(Netherlands)

4.Landwirtschaftliche Rentenbank(Germany)

5.Rabobank(Netherlands)

6.Landeskreditbank Baden-Wuerttemberg-Foerderbank(Germany)

7.NRW. Bank(Germany)

8.BNP Paribas(France)

9.Banco Santander(Spain)

10.Royal Bank of Canada(Canada)

11.National Australia Bank(Australia)

12.Commonwealth Bank of Australia(Australia)

13.Banco Bilbao Vizcaya Argentaria (BBVA)(Spain)

14.Toronto-Dominion Bank(Canada)

15.Australia & New Zealand Banking Group(Australia)

16.Westpac Banking Corporation(Australia)

17.Banco Espanol de Credito S.A. (Banesto)(Spain)

18.ASB Bank Limited(New Zealand)

19.HSBC(United Kingdom)

20.Credit Agricole(France)

21.Wells Fargo(United States)

22.Nordea Bank(Sweden)

23.Scotiabank(Canada)

24.La Caixa(Spain)

25.Svenska Handelsbanken(Sweden)

26.US Bancorp(United States)

27.Banco Popular Espanol(Spain)

28.DBS Bank(Singapore)

29.Pohjola Bank(Finland)

30.Deutsche Bank(Germany)

31.Société Générale(France)

32.Intesa Sanpaolo(Italy)

33.Bank of Montreal(Canada)

34.DnB NOR Bank(Norway)

35.The Bank of New York Mellon(United States)

36.Caixa Geral de Depositos(Portugal)

37.United Overseas Bank(Singapore)

38.OCBC(Singapore)

39.Axa Bank Europe(Belgium)

40.Credit Suisse Group(Switzerland)

41.Landesbank Baden-Wuerttemberg(Germany)

42.Nationwide Building Society(United Kingdom)

43.CIBC(Canada)

44.National Bank Of Kuwait(Kuwait)

45.Barclays(United Kingdom)

46.UBS(Switzerland)

47.JPMorgan Chase(United States)

48.Bank of Tokyo-Mitsubishi UFJ(Japan)

49.Banque Federative du Credit Mutuel (BFCM) (France)
50.Credit Industriel et Commercial (CIC)(France)

--- Global Finance magazine February 25, 2009 ---