## Jim - Dollar is always a dollar?

You've opened up a can of worms with that

one.

I'm hardly an expert, but if we examine what Warren

Buffett does, we may get an idea.

Basically,

Buffett determines what an instrument is worth compared

to a bond. First (1) he determine's the instrument's

future worth over a period of 'x' years.

After

that (2), he _discounts_ this instrument by comparing

it to the U.S. long bond. Discounting is a method

used to compare to instruments that grow at different

rates.

If you had $100 that did not grow at all and held it

for one year, it would have a future value of $100

after that year. However, if you discounted it over one

year at 10% (akin to comparing it with a 10% bond),

you'll get something like 90 bucks ($90.91). This means

that if you wanted to have a future $100 amount in 1

year, you should only pay around 90 bucks for it

today.

Conversely, if your $100 grew 20% in one year, it would have

a future one year value of $120. Discounted by 10%,

this would yield $109.09. Again, this would mean that

if you wanted to ensure a 1 year future worth of

$120 bucks you should only pay $109.09

today.

Buffett's intrinsic value calculations is based on one

massive assumption. That is, that the U.S. long bond

yield is the best and safest long-term rate possible in

corporate America; he's probably right.

The answer

to your cash question is: it depends. It depends on

what the money will be doing after 3 months and it

also depends for how long will it be doing what it's

doing. I hope that's not too

confusing.

Basically, lets assume that after 3 months the bonds just

sit as dead cash. To determine it's intrinsic value

after 1 year you would find the future value of a bond

that grew at 'x'% for 3 months and then grew at 0% for

the next 9 months. This would yield a future value

for one year. You can then discount (compare it with

the long bond) it back at current interest rates.

However, with such a short-term outlook the difference

between it's intrinsic value and flat $100 value will be

negligible, but over longer terms, the difference would be

tremendous.

So, in the first case where, say $100 is

growing at 10% for 3 months and then sits dead for the

next 9 months, it's future 1 year value would be

around $100 + $100 x (3 months x 10%/12 months) x 3 =

$102.50. Discounting back by the U.S. long bond (lets

assume a nice round 6%), you get an intrinsic value of

$96.70. This is after 1 year. If it sits as dead cash for

longer than 9 months, this value will drop. Alas, the

ravages of time works both ways - do nothing and your

buying power erodes.

It is probably safe to use

the long bond rate at 6% for one year because the

time span is so short. However, Buffett realizes that

_historically_ the long bond is much higher and has even been

twice as high. This would _dramatically_ change your

discounting process because a 5% yeild and 14% yeild results

in _vastly_ different intrinsic values over a long

time span - say 10 years.

Sorry for the lack of

any concrete answer. :P

JimC

The Toronto

Investment Club

http://torontoinvest.ndsn.com