A term used by the economist, John Maynard Keynes, to describe inexplicable emotions that influence our behavior, specifically in the context of business and stock investing. An illustration is found in the article The Fall of SAUC’s Stock Price, where I describe an investor that would prefer to develop 65 franchise restaurant of Buffalo Wild Wings as opposed to owning the stock of SAUC.
An American multinational conglomerate holding headquartered in Omaha, Nebraska according to Wikipedia. But I view Berkshire as a mental model for an ethical business conduct. Reading Buffett's letters to shareholders highly influenced - and continues to influence - my approach to business analysis and investing in general.
Bruce is a brilliant bottom-up investor. It is said that he analyses companies using a notepad and a pen and paper. I recommend you to read some of his annual reports to shareholders. The reports from the years 2017 to 2000 are found at the Fairholme Funds website.
There is no material difference between a traditional market place and capital markets. In both markets, participants exchange goods and services where the prices are affected by demand and supply. I use "capital markets" and "stock market" interchangeably.
The mix of debt and equity that a company uses to finance its business; a company's specific mixture of long-term financing.
The ability to focus on what you know and to avoid what is uncertain. In 1999 Warren Buffett wrote: "If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality. Fortunately, it’s almost certain there will be opportunities from time to time for Berkshire to do well within the circle we’ve staked out."
A distribution paid to shareholders based on the number of shares owned.
a company's earnings, before interest expenses, taxes, depreciation, and amortization are subtracted. While some investors view EBITDA as a proxy fro a company' current operating profitability, it is a poor indicator. Or in the words of Charlie Munger: "I think that, every time you saw the word EBITDA earnings, you should substitute the word "bullshit" earnings."
Net earnings divided by common shares outstanding. I prefer to use the dilutive number of outstanding common shares.
Total company value (market value of debt, preferred and common equity) minus the value of investments and cash.
an investment fund traded on stock exchanges, much like stocks. It is often attractive for the passive investor for its low management cost.
A Form 10-K is an annual report required by the U.S .Securities and Exchange Commission (SEC), that gives a comprehensive summary of a company's financial performance.
The cash flow from operations less capital expenditures. It is especially useful when divided by to the capital invested in the company. In An Incredible Ratio to Examine Profitability and Performance, I describe the apparent relationship between the value of a stock and how much free cash flow the company generates.
The National Association of Real Estate Investment Trusts (NAREIT) calculates funds from operations as GAAP-based net income, excluding gains (or losses) from property sales, real estate related depreciation and amortization, and impairment charges on depreciable real estate assets.
Represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired. Goodwill and indefinite lived intangible assets are not amortized, but are reviewed for impairment at least annually.
The accounting standards in the United States. In the context of stock investing, a basic familiarity with the accounting standards is important. Similar to the understanding of typography for a graphic designer. Or an understanding of autonomy or nutrition to a physical trainer.
The IFRS is an organisation established to develop a single set of high-quality, understandable, enforceable, and globally accepted accounting standards. Visit their website here.
The purchase of shares which were to receive one or more cash payments in liquidation of the company's assets. In June of 2018, read When accounting conventions hide economic reality.
The Oracle from Omaha defined it best: "Investing is often described as the process of laying out money now in the expectation of receiving more money in the future. At Berkshire Hathaway we take a more demanding approach, defining investing as the transfer to other of purchasing power now with the reasoned expectation of receiving more purchasing power -after taxes have been paid on nominal gains - in the future," notes Warren Buffett. "More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date." Read the full Fortune article here.
an American former sotckbroker and admitted fraudster. A former non-executive chariman of the NASDAW stock market, and considered the operater of the largest Ponzi scheme in world history, and the largest financial fraud in U.S. history. You can read more about Madoff in Wikipedia.
an Indian-American businessman, investor and philanthropist. You can learn about Pabrai in Wikipedia. I go back every year to his book titled The Dhandho Investor: The Low Risk Method to High Returns as a reminder that smart investing should not be complicated. I also stopped shorting stocks thanks to a talk he gave at Google. He called the talk "Intensive Stock Research Can Be injrous to Your Financial Helath" and you can check it out by clicking here.
Wikipedia explains that a mental model is an explanation of someone's thought process about how something works in the real world. In the context of a business, it is a model that describes the rationale of how an organization creates, delivers, and captures value.
Fidelity Investments, a multinational financial service firm, defines a mutual fund as: “investments that pool your money together with other investors to purchase shares of a collection of stocks, bonds, or other securities, referred to as a portfolio, that might be difficult to recreate on your own. Mutual funds are typically overseen by a portfolio manager.” In theory, it is a noble idea. In practice, it is impossible to know in advance which portfolio manager will provide decent results. It is practically certain that management will cut away any of the investing gains. Caveat Emptor!
The face value of something, traditionally, a bond. If a bond is traded for $1,000 and its face value is $1,000, we say that the bond is trading at par. If the bond traded at $1,200, we would say the bond traded at 1.20 of par. I often use this expression when the book value of the stock equals to what the stock is trading for.
Net income divided by revenue. All else equal, we say that if company A has a profit margin of 10% while company B has a profit margin of 25%, then company B is better enterprise. In The Fall of SAUC’s Stock Price, I show how understanding the profit margin of an industry may bring us closer to understand what the company is worth.
A REIT is a company that owns or finances income-producing real estate in a range of property sectors.
A profitability ratio calculated as net income divided by the average shareholders' equity.
According to FINRA, Risk is any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare. In his latest annual report to shareholders, Warren Buffett defined risk as follows: "Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption at a later date.”Risk" is the possibility that this objective won't be attained." In that spirit, I define risk as how likely it is that you will lose money.
An American stock market index based on the market capitalization of 500 large companies having common stock listed on the NYSE or NASDAQ.
Fixed income securities issued with the full faith and credit of the U.S Government. Treasuries have varying maturities from 30-days to 30 years. Because they are considered a risk-free investment, the Treasuries interest rate is often used as a benchmark.
Total assets minus total liabilities.
A stock's current market price divided by the most recent four quarters of EPS. Also called current P/E.
Shares that were issued and subsequently repurchased by the company.
An investor that focuses on loss prevention and on purchasing a dollar for fifty cents. Value investing is said to have started with Benjamin Graham. Its followers include: Warren Buffett, Charlie Munger, Mohnish Pabrai, uy Spier and Seth Klarman.
A watch list is simply a list of several companies that the investor would be interested in purchasing shares in future time, at the right price of course. Often, companies on the watch list performed better than their peers; are managed by honest and capable people with a solid track record in business; with a product or service that has a competitive advantage - but with a current stock price that is just too dear.
The Mosaic Company (MOS) is on my watch list. Based in Plymouth, Minnesota, Mosaic mines and produces phosphate and potash fertilizers. Consider its stock price. Over the past decade, the stock traded as low as $10 and as high as $89 per share. The 10-year average price range was $58 to $33; the company 10-year average earnings were $3, and 2017 was the first year it reported on a loss in the income statement in over a decade. To me, at a current price of $29, the stock is too high. However, if the stock price will drop to the low $20s level, I will be rushing to buy it.