Warren Buffett Value Formula separates weak industries from strong ones.

[Nowisthetime01]

Could you clarify is it the %net profit to Total Revenue Ratio? Thanks.

[MrAlanKendall]

@Nowisthetime01

The %net profit is the percentage of money that is left over at the end of the year after all expenses have been paid. I get it from msnmoney. After I type in the ticker symbol for the company, I click on "Financial Highlights" and it is "Net Profit Margin". The % dividend is the "Dividend Yield" and the price-to-book is the Book Value/Share divided by the share price.

[Nowisthetime01]

1. Alan, what data gives you confidence that it's underlying economics are very good, and it is going to survive and then eventually with time, thrive again?

2. The Price is selling at much lower than book value per share. Is this "Margin of Safety" enough to justify that we can't lose on this one? Warren talks alot about this margin of safety.

3. What if we buy and they go bankrupt is the fact that the book value is worth more, mean won't lose the money?

[Nowisthetime01]

I appreciate your video on the value formula.

1. Where did you research that Warren is using a conservative projected earnings of 5%?

According to Warren, when banks are hit like this, and the stock goes down, it's the best time to buy (if of course the hit, is more based on fear and that the market is sure to bring them up to their true underlying value). Do you think the hit that Bof A is suffering is suffucient to knock it out, or is it on it's way up, in your opinion?

[MrAlanKendall]

@Nowisthetime01

I have been watched the %net profit of BAC. A year ago BAC was losing 17%, 6 months ago it was losing 9%, 3 months ago it was losing 1.7%. Today it is making 1.7% and since countrywide which BAC bought out owned sub-prime loans and they reset in 2007 and 2008, I don't see how BAC's earnings could not go more positive with time. See my YouTube video "How to double your money in Financial Stocks in 2012 and 2013" to see the effect of resets on Banks and BAC.

[Nowisthetime01]

I have been studying Warren's ways of being sure about a company before you buy. But with with Bank of America I wasn't sure if this one will come up.

You write:

Warren knows that the base product of BofA is account fees and transfer fees and that will remain intact once the Countrywide loans are cleaned up. Warren is using a conservative projected earnings of 5% and BofA still comes up as a buy.

Where did Warren Mention this? The source?

Where could I go to feel more confident about BofA?

[MrAlanKendall]

@Nowisthetime01

Warren did not say this recently. I have been following the subprime mess for four years and BAC earnings are getting better. What about C, BCS, ZION and BK? They are selling below book value and also improving. XLF is also good to buy in 2012 and sell in 2014 or later.

[amattson21]

This is an interesting video but I was wondering if you could possibly break down the equation explain why (Net Profit + Dividend) and Price/Book are good representations of value and cost respectfully?

[MrAlanKendall]

@amattson21

Benjamin Graham wanted low "Price/Book (MRQ)". When this key ratio is below one, the company is selling for less than the price of its assets. Graham popularized this after the Stock Market crash of the great depression to show that the lower the price to book, the safer it was to purchase the company. Philip Fisher popularided companies with high net profits (Profit Margin (TTM)) grew. The first mentor made Warren millions but merged with the second mentor made Warren Billions.

[TheQuantumAlpha]

Hey I have a question, Warren Buffet recently invested 5 Billion in Bank Of America, I'm sure you know. I used this formula on it and it resulted to -4 ! Why would he go against his own system.

Thanks in advance!

[MrAlanKendall]

@TheQuantumAlpha

BofA earning were 17% before the crash and went to -14%. A half a year ago the earnings were -9% and now are -1.7%. Warren knows that the base product of BofA is account fees and transfer fees and that will remain intact once the Countrywide loans are cleaned up. Warren is using a conservative projected earnings of 5% and BofA still comes up as a buy.

[thevulgurvlogger]

could you please explain all these numbers to me somebody :S

[bohemianatlarge]

so based on your formula SBLK would be a ridiculous buy 24.38+13.25/0.1965 = 191.50? I am not saying that it is, but using this type of calculation it seems like an extreme number, no? As well as PRGN = 183 RAS 138ish. I would be interested to read your response, and if I have your formula wrong.

[MrAlanKendall]

@bohemianatlarge

The problem with companies with such high scores is that they are risky in that they are targets for takeover or sometimes they get de-listed. Warren Buffet seems to buy companites like WFC and COP when they are below book value because they are so huge that they cannot be targets for takeover.

[andrewpaul555]

@bohemianatlarge hey im only 18 and im jsut getting into working and stuff jsut out of high school and im intested in learning about stocks and such..how do you calculate the dividend and the price to book and the companies net profit..ive looked for stuff online and couldnt really find much just definitions ands tuff which doesnt really help me. if you could help me out in any way please do. Thank You

[MrAlanKendall]

@andrewpaul555

I get the numbers free from clearstation on the internet. I type in the ticker and select "key ratios" and a screen of numbers pops up. The first column is the key ratios of the company, the second column is the industry's key ratios and the third column is the sector's, and the fourth is the key ratios of the S&P 500. I take the ("Profit Margin (TTM)"+"Dividend Yield")/("Price/Book (MRQ)"). These numbers can be calculated for the company, industry, sector or S&P 500.

[classon]

Corning (GLW) has a score of 39.

price: $13.20

price/book: 1.06

net margin: 40 (average of last 3 years)

[andrew24p]

is this a yearly net profit or most recent quarterly?

[andrew1470]

Yeah, you were using percentages for scoring retained earning and dividends. Did you use Gross Sales as 100%?

[janappeldorn1]

what is price to book ?

[CaseRed0605]

When do you sell? Do you sell when the number begins to go down?

[foster2367]

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[lazyraconteur]

hi - I dont get where are you getting these numbers from - can you be more specific? What is "%net profit"? Is it simply "net income"/"revenue"? If so, for exxon for example, where you say this number is "9", it is actually (assuming you are using Dec 2008 since your video is dated Jul 2009) 45/425 = 10.6%.

[MrAlanKendall]

@lazyraconteur

I get the numbers from clearstation on the internet. I type in the ticker and select "key ratios" and a screen of numbers pops up. The first column is the key ratios of the company, the second column is the industry's key ratios and the third column is the sector's key ratios, and the fourth is the key ratios of the S&P 500. I take the ("Profit Margin (TTM)"+"Dividend Yield")/("Price/Book (MRQ)"). These numbers can be calculated for the company, industry, sector or S&P 500.

[traderman75]

Buffet is the man, Buffeto

[traderman75]

I can see you know your stuff, have you found a good stock screener online, what indexes do you usually focus on, I like the reports you posted as well, were can I find those?

Your help would be appreciated, I am trying to take control of my own portfolio.

Regards,

Lance

[MrAlanKendall]

@traderman75

I get the numbers from clearstation on the internet. I type in the ticker and select "key ratios" and a screen of numbers pops up. The first column is the key ratios of the company, the second column is the industry's key ratios and the third column is the sector's key ratios, and the fourth is the key ratios of the S&P 500. I take the ("Profit Margin (TTM)"+"Dividend Yield")/("Price/Book (MRQ)"). These numbers can be calculated for the company, industry, sector or S&P 500.

[MrAlanKendall]

@traderman75

Benjamin Graham wanted low "Price/Book (MRQ)". When this key ratio is below one, the company is selling for less than the price of its assets. Graham popularized this after the Stock Market crash of the great depression to show that the lower the price to book, the safer it was to purchase the company. Philip Fisher popularided companies with high net profits (Profit Margin (TTM)) grew. The first idea made Warren millions but merged with the second idea made Warren Billions.

[MrAlanKendall]

@traderman75

Between 2016 and 2027 I expect Real Estate to go up eight times in price nationwide. Look at videos posted by Daniel Amerman on youtube to help you take advantage of inflation.

[gautamjain123]

hi alan...the formula with the illustrations looks good...

Can u explain what is the percentage of net income and percentage of dividend? Are you talking about EPS?

[matteo87matteo]

Now in Brazil we are in a very particular moment,the medium class is growing very fast and so the demand for houses is Growing at the same time.

The brazilian bank system doestn allowed loans for more than 80% of the value, and not more of 30% of your earnings for the montlhy payment.So the prices are going up in a logic way,there s no speculation i think.

But like a phisical law says,everything that goes high and high and high after goes also down.

[matteo87matteo]

there isnt a voice Net profit ,Is it Gross margin the same thing?

[betteryoubetter]

I find 18 to be more "wopping" than 14...WTF??

[holkn]

can't rely on one formula alone to separate the good companies from the weak. You need to look at the cash flow as well...if most of the revenue is generated from accts receivable that means the company might eventually run into cash flow problems

[bembe1001]

is there any way that you could do a video on jamaican companies..i'm a young investor..is there any company that you would recommend i buy stocks in?

[MrAlanKendall]

@bembe1001

I studied the US stock market and every time there was a Real Estate crash, the Govt lowered the interest rates and the Stock market rallied. When the effects of lowering the rates stopped, the Stock market crashed a second time due to the continued effects of housing and unemployment. I believe that 2011 will bring another crash (because 1 million more foreclosures are expected in 2011) and it would be best to wait until November 2011 to buy into stocks.

[theabcd430]

How long does it take from the score 10 or more to less than 10? And how much profit do you really earn?

[henry102181]

Mr.kendel , could you please tell me how can I find the price to book from a particular company?

[MrAlanKendall]

@henry102181

It is not permitted to recommend other sites from youtube, but if you do a search on "Key ratios", you will find sites that provide this information.

[MrAlanKendall]

@henry102181

I use clearstation and select "key ratios" after entering the ticker.

[gather1234]

how do you calculate "net profit" and "dividend" as a percentage. IS it net profit divide by equity or sales. as goes for the dividend. please clerfy

[Faraz70]

but this kind of cals is a point in time thing, its not necessary that this value will remian the same in the long turn (buy and hold). wat would you do if this value changes dramatically, i assume re balance the portfolio? (but then doesnt this affect the long term buy and hold strategy of Warren) eg look at BP, its fundamentals were quite good and then suddenly this oil rig explosion in sea negatively affected it?

[hliang168]

Hello where u get these financial data from? like retained earning n the price of book?

[MrAlanKendall]

@hliang168

Clearstation

[addvanden]

not sure if you're formula is giving you screen for the reasons you intend or what it has to do with Warren Buffet. you seem to be able to screen "good" companies is because of the % net profit...it doesn't make any sense to the dividend unless you intention is to double count the dividend which i suppose 'weights' dividend paying stocks more heavily in your screen...all in all though this has NOTHING to do with Buffet or his general philosophy to investing. nice try though and thanks for post

[sweatykev01]

why do you add dividend to net profit if the dividends are paid out from the net profit? net profit comes after tax etc. The residual profit is now shared between the preferred and the common dividends. The income that is left even then is called the retained earning. So why would you add in dividends to net profit if the net profit already contains dividends in its value?

[MrAlanKendall]

@sweatykev01

Benjamin Graham says that a company that is selling for a low price to sales might be a real bargain if the stock turns around for the good and rises. This is hard to quantify. I quantify it by adding the dividend to the net profit. In the case of Connoco Phillips, the dividend is 4% when the net profit is only 3%. That way companies like Connoco Phillips where the price to sales is only 50% we get the added benefit of the large dividend that increases our portfolio.

[joemols]

thanks for sharing that good sir

[joezhou]

alan, first thanks for sharing the formula for us...

what i want to ask is that for disney, i can't find the year it had a EPS of 10, where did u find that data?

[armeijamies]

Alan, I like your ratio. In addition it could be useful look at comparable companies as I know there is some correlation between industries and price to book. This is true of banks that typically have a low price to book.

[achilles198585]

the scores u can get from the formula only represents the current status, but Warrent always looks into the future, several decades from now

[achilles198585]

the scores u can get from the formula only represents the current status, but Warrent always looks into the future, several decades from now

[ssfbbh2]

alan, not sure if my other comment showed up. but how did you come up with this particular formula? Has this worked for you? bh from orange, california

[Elbottoo]

What do you mean with percentage of net income and percentage of dividend? Are you talking about EPS?

This formula doesnt make any sense. Why divide by bookvalue and why add percentage dividend?

[jhalas20]

Alan, I like your screen here. You're right. It's great for its simplicity. This screen will keep you from ever losing too much.

[MrAlanKendall]

Yes, this formula is not exact, but it does filter out 99% of the companies that are overpriced or do not have a good enough return. It forces me to focus on the 1% of companies that are making a good profit and are low priced. I used to have a different formula but after using it for 2 years, adopted this one for its simplicity.

[MrAlanKendall]

Warren says that once you decide on a company as a candidate to buy, "You should think, then "think some more". I find that this formula that I use eliminates 50% of the companies with scores less than 2 (low returns and high price) and eliminates 49% of the companes that are reasonably priced (average returns and average price) and concentrates on companies with high returns and low prices. Warren will wait years and decades for a good company to come down in price before he buys it.