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No. of Recommendations: 6
Rich,

Your questions aren't as simple as they first might appear. As a professional money manager, I do have my opinions to your anwers. But let me boil down your questions to one simple answer:

You have to know yourself as an investor.

This is especially true if you are a DIY (Do it Yourselfer) because you are essentially your own portfolio manager. Therefore, you need to know yourself which entails knowing how much time you want to allocate to your portfolio, what kind of investor you are, what your performance goals are, etc.

I would suggest, if you haven't read it already, to read The Intelligent Investor by Benjamin Graham which has the anwers you need. If you're looking for superior returns you need to be an enterprising investor....and if this is true you need to 1) put significant time into your enterprise and 2) you need to know what you're really doing which entails business analysis, opportunity costs, etc.

Going on the information you've given, it appears to me you may be a defensive investor, whom is happy with satisfactory returns but not seeking superior returns (for ie: killing the indices). In this case, holding large companies even if they're selling at times a bit above IV may work for you. Your returns will suffer but you get tax deferral benefits and you need to spend far less time monitoring the changes in prices to IV. But I'm only going by your very small post and have no idea who you are as an investor.

But here's my direct answers to your questions:

Do you find that the IV's change significantly from quarter to quarter?

I find that it's far more common that market prices change significantly from quarter to quarter than the IV of a company. I've had stocks literally double in 3/6 months --and in 06 I had a company increase by 200+% -- which typically means the company's quoted market price has changed significantly to the company's business value.

This converegence of Intrinsic Value needs to be assesed for someone seeking superior returns because of the potential and real opportunity costs this may present. IV does and can change over short periods of time (due to competitive pressures, etc.) but not near the extent that market prices are changing all over the map in short order. As Buffett/Graham has said the market is there to either take advantage of or ignore (to serve and not instruct). But if you're a passive investor than large/multinational stocks held for the very long term may be right for you.

I can understand a large investment house doing this, but for the lay-investor this seems like a tall order and implies a sense of precision in the IV calculations that simply doesn't exist.

Acutally, it really works better for the small investor. Money is a drag on returns (nearly every major brokerage houses model portfolios have sucked in returns). As a small investor, you have far more flexibility to take advantage of Mr. Market's mood swings and to do so based on value -- you need to constanstly assess the market and businesses that you know well. Again, though, I believe this is true if 1) you know how to value businesses and 2) have the time to do it and 3) would like more than just satisfactory returns.

An annual basis, would seem more than adequate for the small timers.

Do you agree?


I agree if you don't care about achieving truly great returns (while some might argue this point I think history shows the best investors are really on top of their investments). Buffett's greatest returns came when he bought below IV, sold at IV, and repeated the cycle. Every great investor I know of has done it this way (though I know there are some other successful approaches this approach tends to be far more prevelant and has far more of a history of many successes). But I'd be really happy to hear the argument on other really successful approaches.

In a nutshell, I believe if you want great returns you need to spend a great amount of time on your processs. If you don't have the time hire someone that does or be happy with passive/satifactory results.

VP






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