Warren Buffett & The S&P 500 Intrinsic Value
- Posted by ToddSullivan
- on October 18th, 2013
Warren Buffett was extensively interviewed on CNBC yesterday morning. Here is the link to these interviews: Warren Buffett CNBC Interviews Wed Oct 16, 2013 If you have the time to listen, I strongly recommend that you do so. His historical perspective and investment performance remain outstanding and his advice has always proven prescient.
In one video segment he recommended that investors buy stocks during the current market turmoil: CNBC Interview Warren Buffett-Buy Stocks Today He announced he had just purchased for $1.1bil a UK vending machine company, had spent more than $20bil on acquisitions in 2013 and expected to spend many billions more.
His advice and his own investment decisions are not dependent on when the resolution to the current government shutdown and debt discussions occur. He does not and never has timed short term market events. He does however use the major market corrections as buying opportunities and he remains a buyer today. Buffett and other Value Investors have this same historical pattern which I translated into a market valuation benchmark which I call the SP500 Intrinsic Value Index. The SP500 ($SPY) remains below this index today by ~10%. I show the historical relationship between this benchmark and the SP500 in the chart below.
Remaining bullish on stocks because of attractive valuations is justified in my opinion. We are not alone in this thinking with Warren Buffett and other successful Value Investors thinking the same. No Value Investor uses short term events to time market purchases. It is the larger valuation scheme which is most important and we remain at those levels with LgCap stocks today.
I could have named the SP500 Intrinsic Value Index as the “Buffett Index” as it does track the investment thinking of Warren Buffett and other well known Value Investor’s investment activities.
But I didn’t, because this benchmark is not based on Value Investor behavior, it is abenchmark based on economic valuation to which I was eventually lead by Buffett and others having developed an understanding of their thinking after extensive reading and study of their investment activity. This is the benchmark which my research indicates Buffett and other Value Investors inherently track even though none of them has explicitly said so.
It is by reverse-engineering the investment activity and commentary of a number of very good Value Investors, correlating what they said and what they actually did during particular periods of changing market sentiment that one can develop a market benchmark like the SP500 Intrinsic Value Index.
The SP500 Intrinsic Value Index is strictly a fundamental index based on US Real GDP trends adjusted to Core Inflation used to capitalize the long term SP500 Earnings Trend. It is a fairly simple index which when compared to the investment commentary and activity of noted Value Investors offers the fundamental explanation by which one understands the investment reasoning of Buffett and others for making an investment at particular points in the investment cycle. Good Value Investors have investment time frames of 10yrs+. They can buy when they believe the market is providing opportunity and sell at higher levels with the same perspective.
To see more posts on any of the companies mentioned in this article, enter their stock ticker symbol in the search box.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Todd's investing strategy is essentially long with the rare short. He seeks to buy undervalued issues with an upcoming catalyst that will help them realized.... More »
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