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Durable Competitive Advantage > Intelligent Investor Ch. 15-16 > Flashcards

Intelligent Investor Ch. 15-16 Flashcards

0
Q

Liquidations

A

Purchase of shares which were to receive 1 or more cash

payments in liquidation of company’s assets

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1
Q

Arbitrages

A

Purchase of a security and simultaneous sale of one or more
Other securities into which it was to be exchanged

Under plan of reorganization or merger

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2
Q

When did graham conduct arbitrage and liquidations, 2 conditions

A

1 calculated annual return of 20% or more

2 chance of outcome at least 80%

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3
Q

Related hedges

A

Purchase of convertible bonds or convertible preferred shares
And simultaneous short sale of company’s common stock

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4
Q

Net-Current-Asset (or Bargain) issues

A

Buy over 100 different issues at a cost lost than net current
Asset value alone (don’t include plant assets)

Purchases typically made at two thirds or less of stripped down
Asset value

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5
Q

Standard and Poor’s stock good

A

Good way to find listings and data of publicly traded companies

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6
Q

Enterprising investor: Winnowing a stock guide

A

find stocks with PE ratios under 10

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7
Q

Enterprising investor: financial condition ratios

A

1 current ratio = 1.5

2 debt no more than 110% net current assets (for industrial
Companies)

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8
Q

Enterprising investor: earning stability

A

No deficit in last 5 years in stock guide

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9
Q

Enterprising investor: dividend record

A

Some current dividend

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10
Q

Enterprising investor: price to net tangible assets

A

Price less than 120% net tangible assets

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11
Q

Enterprising investor: small companies

A

May have enough safety if carefully bought on group basis

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12
Q

7 criteria for Graham’s stock selection

A 
1 size
2 financial condition
3 earnings stability
4 dividend record
5 earnings growth
6 price
7 S & P ranking
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13
Q

S&P ranking

A

Average rankings offer promise of satisfactory investment results

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14
Q

Important ratio in evaluating stocks

A

Net asset value per share

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15
Q

Portfolio construction: second quality issues

A

Will underperform in a bear market, so best to buy on a bargain
Basis

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16
Q

Goodwill 2 causes

A

1 results from acquisitions, paying more than company’s worth

2 when stock trades substantially more than its book value

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17
Q

What companies decline the most

A

Companies with high PE ratios and companies that don’t pay

Dividends

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18
Q

Net working capital value vs. working capital value

A

Working capital value =
(current assets - current liabilities)/shares outstanding

Net working capital =
(current assets - total liabilities)/shares outstanding

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19
Q

Trade names, and tangible assets for companies with low PE ratios

A

When Wall Street looks unfavorably at companies: trade

names, buildings, land, buildings and machines have no value

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20
Q

Money managers’ recommendations on finding bargains

A

Look for stocks trading at 52 week lows

21
Q

What to look for with ROIC

A

Look for rising returns in invested capital

22
Q

ROIC defined

A

Measures how efficiently a company generates owner earnings

23
Q

Calculation of ROIC

What are attractive rates on ROIC?

A

ROIC = Owner Earnings/Invested Capital

Over 10% is attractive; 6% can be attractive if company has strong
Brand name and is having temporary difficulty

24
Q

Owner Earnings equation

A

Owner Earnings = operating profit + depreciation + amortization of goodwill - federal income tax (paid at company’s average rate)
- cost of stock options - (maintenance or capital expenditures)

25
Q

Invested Capital Equation

A

Invested Capital =
Total assets - cash - short term investments
- non interest bearing short term liabilities
+ past accounting charges that reduce invested capital

26
Q

Evaluating acquisitions, to valuate companies subsidiaries

A

1 start looking at company’s business segments footnote, which
Lists industrial sector, revenues and earnings of each subsidiary
2 also check management discussion and analysis
3 search database like factiva, pro quest or Lexis Nexis for
examples of other firms in same industries that have been acquired
4 using EDGAR database, locate past annual reports to determine
Ratio of purchase price to earnings of those acquired companies

27
Q

How professionals evaluate good management

A

1 keep issuance of stock options to minimum of 3% sh. Outstanding
2 good managers communicate problems candidly
3 good managers have clear plans for allocating current and
Future cashflows and own sizable stakes of company’s company
Stock (preferably through cash purchase instead of options)
4 when management says it will do something and it happens,
They are honest with shareholders and themselves

28
Q

Bad management

A

1 see if non recurring and extraordinary expenses are repeated
2 management talks more about the stock price than the business

29
Q

What’s important to do in order to evaluate management

A

Listen to the company’s conference calls

30
Q

What to look for in the back of the annual report where operating divisions are listed and a new CEO just took over .

A

1 good when there’s a lot of turnover in the first 2 years

2 turmoil if turnover continues

31
Q

Two characteristics successful investment professionals have in common?

A

1 they’re disciplined and consistent, refusing to change their
Approach when it’s unfashionable

2 they think a great deal about what they do and how they do it,
While paying very little attention to what the market is doing

32
Q

Worthwhile newsletter

A

Outstanding investor digest

33
Q

What does Buffett look for in management

A

1 managers that set realistic goals
2 build their businesses from within rather than through acquisitions
3 allocate capital wisely
4 do not over compensate themselves in stock options

34
Q

What does Buffett look for in companies

A 
1 steady and sustainable earnings growth
2 buy during temporary bad news
3 strong consumer brands
4 easily understandable businesses
5 robust financial health
6 near monopolies in their markets
35
Q

Studying warren Buffett

A

Read his annual reports and essays

36
Q

Stock option warrants

A

Long term rights to buy common shares at stipulated prices

37
Q

Convertible bond securities

A

Usually become most prevalent toward the end of a bull market

38
Q

Why we’re convertible bonds better in 2003 compared to 1970?

A

1 shorter maturities (so less volatile)

2 call protection

3 mostly investment grade

39
Q

Call protection

A

Assurance against early redemption

40
Q

The convertible preferred is safer than…

A

The common stock of the same company

Carries smaller risk from eventual loss of principal

41
Q

When is a bond called

A

When the issuing corporation forcibly pays it off ahead of

Maturity date

42
Q

When do convertible bonds advance significantly in price?

A

When the common advances significantly, the convertible will
have a sharp price gain

43
Q

Graham on converting convertible bonds

A

Never convert them, because you will lose your strategic position

44
Q

What is the most ideal combination of convertible bonds

A

Strongly secured convertible, exchangeable for common stock,
Which itself is attractive

Convertible is at a price only slightly higher than current market

45
Q

Convertible bonds: conversion privilege

A

Older issues are more likely to have attractive conversion rates
Compared to newer issues that are strong

46
Q

It’s important for the investor to calculate the additional common stock issuable for the conversion of what 3 instruments?

A

1 bonds

2 preferred stocks

3 options

47
Q

In a falling bond market, convertibles will…

A

Fair worse than the typical bond as they are riskier

48
Q

Interest rates of convertible bonds

A

Are lower than most bonds, this is because they have upside

From being converted into common stock

49
Q

Convertible bonds in bankruptcy proceedings

A

Remain junior to other long term debt and bank loans

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