10/19/2009

 Definition: Investing in firm worth more than intrinsic value  Raises the question:  How do we know what a firm is worth?

 WARREN BUFFET  Berkshire Hathaway  Founder of value investing  Difference between you and Buffet:  When you like a company, you buy some shares of the company  When Buffet likes a company, he buys the whole thing  Recent example: GE

 Metric used in industry  Airlines: Revenue / Seat  Restaurants: Year / year earnings  Clothing: Same store sales  Healthcare: Pipeline  Insurance: Premium earned

 What do they do?  Buffet: “Simple, non-techno-mumbo-jumbo businesses.”  Can you evaluate the business?  What sector? What industry?  Even within each industry, businesses function differently

 Who are the competitors?  Yahoo! Google provide good information  Also read annual reports, more detail on competitors and industry  Do they offer a unique product or service nobody else offers?

 Do they operate in a market that is unique?  Ex. Darling Intl – rendering and recycling  Ex. BWINA – insurance/casualty underwritter  Automatically gives the company the upper hand

 Earnings consistency  Can they make sales and revenue every year?  Look at:  Return on Equity  Return on Assets  Operating Margin  Gross Profit Margin

 Price/Earnings  Commonly known as P/E Ratio  2 things can change: Price & Earnings  Calculating historic P/E Ratio  “Trailing” – past 12 months  Price/Book  Also on a per share basis (price/share) / (book/share)  Sometimes disregard intangible assets  Market Cap = shares outstanding * price/share  Powerful measure of the value of firm

 Dividend increase with more earnings  Payout to shareholders for investing  If dividend isn’t paid out, are they buying back shares?  Increase value per share  Ex. “Earnings per share” (for comparative purposes)

 Is the debt sustainable?  Can they pay off the current portion of their debt?  Current Ratio & Working Capital  Capital Structure:  What percentage of the firm is funded by debt and what percentage by equity

 Are management buying back shares?  Who knows more? Investor or top executives?  Look under “insider transactions” under yahoo  Potential increase in stock price  Ride the boat  Selling not necessarily negative  Want cash on hand

 What innovations do they have for the future?  Are they making headway in their economy  R&D costs usually expensed  Become intangible asset (patent)  Ex. Apple – iPhone, constant upgrades

 Avoid analysts at all costs  They are generally wrong  Be aware: their opinions do affect the stock Downgrade/upgrade/neutral reports  Big firms have so much analyst coverage  Ex. Apple: >9 “Star” analysts + more  Rule of thumb: <5 analysts  Why? Greater potential for growth

 Do your own research <- its best for you  Learn the market and the competition  Read financial statements  10K – annual reports  10Q – quarterly reports (unaudited)  8Q - important information that can affect investing decisions  Remember to read the footnotes as well  Participate in conference calls (quite lenghty)  Contact company directly

 Valuation is subjective  Depends on the individual valuing the company  Leave you with a quote:  "All intelligent investing is value investing -- acquiring more that you are paying for. You must value the business in order to value the stock." - Charlie Munger