A few of you wrote to request an explanation of how the
price-to-fair value ratio (P/FV) was used in the screening
results from the St. Louis convention.

First and foremost, it was something of a tribute to the
participation of Morningstar and Standard & Poor's at the
conference. Sam Stovall is a kahuna at S&P and provided a
couple of solid speeches and spent a fair amount of time
with the attendees. Second, it's an approach based on
discounted cash flow (DCF) analysis ... and NO, I don't
believe it's better or frankly, that it's something that you
need to know. (It should be presented in that context at
club meetings or conferences.)

In a nutshell, DCF goes through most of the same motions and
considerations that we do (with a few more elusive variables
sprinkled in) and builds a "model" of a company in much the
same manner as we do during our stock studies. The
difference is they (Morningstar, S&P, Buffett and most
b-school graduates) do it backwards and upside down when
compared to our simplified calculation of a projected annual
return. We study the company and based on a future price
projection -- make an estimate of returns. They study the
company and convert a series of cash flows to a current
value known as fair value. One way to translate their
results into our vernacular would be to think of the current
price that would deliver approximately a 10% return ... in
essence, a fair historical return.

The P/FV is a comparison between the current price and this
calculated result. If the current stock price is $20 and
the fair value is $25 ... the P/FV would be 20/25 = 0.80 or
80% ... and would suggest that the stock is at a 20%
discount to fair value.

For the screening results shared in Stars under the Arch, we
simply sought a collection of study candidates with
favorable (lower) P/FV ratios.

Feel free to study DCF methods and understand the basics,
but I repeat -- there's no need to switch "churches" and
Nicholson would suggest that the SSG approach is probably
superior and more easily comprehended.

Best wishes and Better Investing,

Mark Robertson