Warren Buffett and Sherlock Holmes

FAQ: Frequently Asked Questions Stock Market Questions
Getting Started How do I get started in setting up an investment portfolio?
	I have set up a page which outlines the main steps in getting started in a successful investment program. Click here.
Value Investing What is value investing?
	According to Warren Buffett, it is redundant to add the word 'value' when talking about investing. If you are not looking for value when you are investing, then you are just not investing. This is the motivation for everything on this site, from the articles to the Valuesoft Investment System. Our aim is to help you identify great companies at sensible prices rather than mediocre businesses at bargain prices. As Buffett wrote, "We prefer a great company at fair price, rather than a fair company at a great price." Some analysts distinguish between value investing and growth investing. Value investing sometimes refers to the search for companies with low price-earnings ratios whereas growth investing focuses on companies with high price-earnings ratios. We won't use these terms in this way on this site. Value is value, no matter what the price-earnings ratios or the price-to-book ratios are. For an introduction on how to find value in the market place, see a Quick Guide to Successful Value Investing.
Stock Purchases What is the single most important step in buying a stock?
	Know why you are buying it. If you are not clear why you are buying a particular stock, then you will not know what to do as the market changes. And if you don't know this, then you are gambling and not investing. For example, if you bought a stock because it had strong upward momentum, then you would sell if it started to go down. But if you bought it because you found it to be undervalued, and if its fundamentals had not changed, then you would not sell under these circumstances. For other key investment principles, see The Three Golden Rules of Investing.
Discount Rate When the value of future earnings or cash flow is converted to present time, you need a discount rate. What discount rate does Warren Buffett use?
	My belief is that Buffett uses the Treasury rate closest to the time period he thinks he will hold the investment. At the 1998 meeting of Berkshire Hathaway, Buffett said, "We don’t discount the future cash flows at 9% or 10%; we use the U.S. treasury rate. We try to deal with things about which we are quite certain. You can’t compensate for risk by using a high discount rate." The second point is that Buffett always assumes a "margin of safety." So whether you discount by 5% or 6% or 7% or perhaps even higher, the results should not have a decisive effect on your buy/don't buy decision. For the best description of his investing methods, Buffett strongly recommended his book (organized by Larry Cunningham) "The Essays of Warren Buffett."
Screening What is stock screening?
	Stock screening is the process of taking data on a large number of stocks and using a filter to select just those stocks satisfying one or more properties. For example, you might want to screen for stocks with an earnings growth rate of 15% and a price-earnings ratio below 15.
If you have a question on the stock market or about the Valuesoft Investment System, you are welcome to send it to me at johnp@sherlockinvesting.com.

Valuesoft Questions
Large-scale data What are the best sources of large-scale data?
	For large amounts of data the best source is Value Line. They supply data which can be exported into an Excel spreadsheet. Another excellent source is Investors Alliance. This data cannot be exported but it can be screened. Then the data for individual stocks can be typed into a spreadsheet. Australian data that can be exported into a spreadsheet is supplied by Aspect Financial. Once the data is in a spreadsheet, Valuesoft can be used to screen for companies with different properties such as all those companies with an expected after-tax return of 15% over the next 5 years.
Screening first How to screen before using Valuesoft.
	Data sources such Value Line, Investors Alliance and Aspect Financial can be used to screen stocks before analysing them with Valuesoft. Once you have made your selection, enter the data into a Level 1, Level 2 or Level 3 Template -- or a template of your own design. Another excellent screening program is supplied MoneyCentral. A good place to start are the pre-defined screens. You can then modify these screens to suit your own needs of proceed directly to the custom screens.
Individual data What are the best sources for data on individual stocks?
	There are many excellent sources of data for individual companies. Examples are Microsoft MoneyCentral and Yahoo Finance. Also many libraries subscribe to the print version of Value Line. For an example of a simple analysis of stocks, click here. For a detailed analysis you can use the spreadsheets supplied with Valuesoft as templates. This takes about 10 to 15 minutes for each stock. Once it is done, very little updating is necessary. I like typing the data in by hand since it helps me to spot things I might have missed otherwise.
Importing Data How do I import data into Valuesoft?
	Valuesoft is a set of functions that can be used to analyze the data associated with any companies. The data needs to be in an Excel spreadsheet. If you are going to use the Valuesoft functions to screen stocks you need to purchase data in a form that can be exported to a spreadsheet. If you are going to use Valuesoft for detailed analysis of individual companies, then you can type the data into templates supplied with the software.
Favorite Functions What are my favorite functions?
	Surveys of Valuesoft users report a wide range for their preferred functions depending on the users backgrounds and goals. The spreadsheet templates set up a comprehensive analysis of stocks involving over 11 functions from Valuesoft. Provided I am satisfied with everything else, my favorite function is TARG. This is a calculation of the target price for a stock to achieve your specified after-tax return over any holding period. Use of just this function can pay for Valuesoft over and over as well as save you hours of worry.
Macintosh Can Valuesoft be used on a Macintosh computer?
	As yet there is no version of Valuesoft suitable for a Mac. Even though a spreadsheet made in Excel for a PC can be opened on a Mac, Valuesoft cannot be used on a Mac. The reason is that Valuesoft builds itself into an Excel spreadsheet but this is only possible when the spreadsheet is opened on a PC.
Templates What is an Excel template?
	Any Excel spreadsheet can be used as a template. For example, take one of the Level 2 analyses of a Dow Jones Company and save it in the name of a new company. Then you can overwrite the entries with the data for a different company. Finally, save this new spreadsheet under the name of the new company. Valuesoft comes with a many examples of spreadsheets that can be used in this way. All the examples of the use of the Valuesoft functions in the spreadsheet vscalcs.xls (including the return functions STRET and STRETD and the target price functions TARG and TARGD) can be used as templates. Also the examples of Level 2 and Level 3 analyses can be used as templates. Some Valuesoft users prefer to design and use their own templates. Those who are more familiar with Excel can also save the files as a specific template file in the templates folder that is automatically set up by Excel. See Excel help for details.
If you have a question on the stock market or about the Valuesoft Investment System, you are welcome to send it to me at johnp@sherlockinvesting.com.