Case One: Warren Buffett Essay
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 …show more content…
What are the differences between fundamental and technical securities analysis?
Technical analysts evaluate past market statistics such as prices and trading volumes to spot trends. They do not attempt to find a stocks intrinsic value. It is a backwards looking analysis that believes the past can predict the future. Fundamental analysts attempt to estimate a shares intrinsic value by studying all factors relating to the share such as the economy, industry, competitors, and skill of managements.
How well do mutual fund perform relative to the overall market?
Risk adjusted, gross returns, on mutual funds mirror those of the market. However after expense deductions for transaction fees and annual payments to fund managers average returns were ~ 1% lower in 1968 and the same in 1977 (Bruner 2010).
What is capital market efficiency?
It is the belief that the price of shares reflects all available information and there is no strategy that can consistently out-perform the market.
What are its implications for investment performance in general?
If capital markets are efficient investors are better off buying and holding a market index, rather than devoting resources to trying to out-perform it. An inefficient market implies mispriced shares that if spotted can earn an investor abnormal profits.