Case Study 1: Setting Some Themes (Case 1: Warren Buffett, Case 2: Bill Miller and Value Trust

Topics: Investment, Stock market, Mutual fund Pages: 4 (1266 words) Published: August 27, 2013
CASE 1: Warren Buffett
From Warren Buffett’s perspective, “intrinsic value is assessed as the present value of future expected performance” (Bruner, Eades, & Schill, 2010): in order to determine whether the investment is worth and is therefore fairly operating on the principle of achieving value for this investment. The displays volatility in earning corresponding to the fluctuation of prices will give investors the cheapest price when the investment shown by the discounted-flows-of-cash calculation. The theory of intrinsic value is significantly important, as it shows the relative attractiveness of investments and businesses, not just simple stock (Carbonara, 1999). The estimation of intrinsic value based on the two elements, which are the future performance (represented by flows-of-cash) and the discount factor (Buffet uses the rate of return on the long-term U.S Treasury bond due to his investing attitude is an avoidance of risk) (Carbonara, 1999). The conventional model of the estimation was the capital asset pricing model (CAPM). The alternative to intrinsic value (future output) is book value (historical input) or accounting profit. That is meaningless as indicators of intrinsic value because of the fluctuation between book value and intrinsic value. Buffett rejects these alternatives due to “economic reality, not accounting reality” (Bruner et al., 2010). If the business performs well in the future, the intrinsic value will far exceed its book value. In other scenario, the business is downward due to unexpected obstacles; the book value will exceed its intrinsic value.

Throughout Buffett’s investment philosophy: The first 5 elements mainly described the economic reality and how to evaluate the intrinsic value. The 6th element recommended investors on diversification of portfolio, investors should typically purchased far too many stocks rather than waiting for one exceptional company. The 7th element essentially noticed investors to be driven by...
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