Essential Terms Flashcards
1
Q
Margin of Safety
A
- It’s how we provide room for error when we invest
- The difference between the sticker price and how much we want to buy a business for is the Margin of Safety
- A 50% margin must be considered. For example, if the sticker price is 20$, the price actually worth is 14$, so we want to buy it for 7$; which is 50% of the worth of the business
2
Q
Return on Invested Capital
A
- It’s the percentage return you get back from the cash you’ve plowed into your business
- It’s a measure of how effectively a company uses the money invested in its operations
- One way to calculate: (Net income - Dividends) / Total capital
- Must be considered at least 10% ROIC per year and don’t want to see it on a downward trend
3
Q
Dollar Cost Averaging
A
- It’s the practice of buying a certain number of shares with the same amount of money in a given stock periodically, regardless of the price per share
- Investors do this because it allegedly helps reduce their risk of investing a large amount in a single stock at the wrong time. So when the price is down, you end up buying more shares with your allotted money. And when the price goes up, you end up buying fewer shares.
- But you already know the value of a wonderful business and buy it when it’s undervalued. We buy one dollar for fifty cents and repeat. We never buy when the price is up
4
Q
Payback time
A
- It’s the amount of time it takes before you get the return on your invested capital
- To calculate divide your investment by the amount of money the business makes a year
- Your payback time goal is eight years or less
5
Q
Assets 1
A
- Resources controlled by a company from which future economic benefits are expected to be generated
- An intangible asset has a dollar value but may not be worth anything unless the business is successful. For example, an asset that was acquired through buying another business
- Types:
- Current assets: things that can turn into cash within one year
- Long term assets: things that won’t be turning into cash anytime soon
6
Q
Assets 2
A
- Total assets are the sum of current and long-term assets. They are one half of the balance
- Liability is how much you owe added to Owners’ Equity is the other half of the balance
- So Assets are equal to the sum of Liability and Owners’ Equity
- Must consider that the balance sheet is better over time. It has more assets, fewer liabilities, and good equity growth
7
Q
Four Growth Rates
A
- They are Sales Growth Rate, Earnings Growth Rate, Equity Growth Rate, and Operating Cash Flow Growth Rate
- All of them must maintain consistent to avoid companies that are manipulating their accountability
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8
Q
Sticker Price
A
- It’s the intrinsic value of a business, despite the selling price on the market
- Never pay sticker price, wait for a discount. Usually when it’s at 50%
- It;s determined by performing calculations on the Four Growth Rates
9
Q
Four Growth Rates
A
- They are Sales Growth Rate, Earnings Growth Rate, Equity Growth Rate, and Operating Cash Flow Growth Rate
- All of them must maintain consistent to avoid companies that are manipulating their accountability
10
Q
Stock Market
A
- It’s a collection of stock. Stock is ownership I’m companies that are public
- The key to success in the stock market is buying a good business that will survive for 10-15 years
- It is a myth that the stock market is constantly going up with time. The compounded average return in the stock market over the last 120 years is 5%
11
Q
S&P 500
A
- It’s an index compiled of the 500 best stocks currently in the market
- In general, the S7P 500 is a measure of how the stock market is doing
- Don’t compare yourself to any index
12
Q
Index and mutual funds
A
- An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index
- Mutual funds do the same thing as index funds. But charge higher fees and index funds are very specific to the index they are tracking
- Both diversify your portfolio across hundreds of stocks
12
Q
Index and mutual funds
A
- An index fund (also called ETFs) is a type of mutual fund with a portfolio constructed to match or track the components of a market index
- Mutual funds do the same thing as index funds. But charge higher fees and index funds are very specific to the index they are tracking
- Both diversify your portfolio across hundreds of stocks
13
Q
Earnings Per Share
A
- They’re the net earnings of the company divided by the number of shares
- EPS, also known as profit per share, is used to calculate the value of a business
- Also, make sure the cash flow is good as the EPS
14
Q
401(k) plans
A
- It’s a retirement account created by taking a portion of your salary pre-tax each month. Also known as the defined contribution plan
- Once your retire, you pay taxes to the government
- If the stock market goes down your retirement fund also decreases
- Try to get get a self-directed 401(k) plan from your company so you can invest your money where you want to
