Security Analysis Ch 1- Flashcards
Value investors as risk averse investors
One who perceives benefit of any gain to outweigh perceived
Chance of loss
Guard against loss of investments
In the investment world how should you classify art, rare stamps and wine collections and why?
As speculation, the items have no ascertainable fundamental
Value, generate no present or future cashflows
Value depends on whim of buyer
Despite the increase in the value investing community, why does a value investor have good prospects in the future?
There has been an even larger increase of growth, momentum and
Index investors
Who concentrate on growth rate of earnings or inclusion in indexes
Paying little attention to value
What do today’s value investors focus on more so than graham?
Analyze free cashflow as a barometer of company’s health
Difference in balance sheet analysis from Graham’s day
Similarities
Most stocks trade far above book value
Balance sheets are still helpful to detect when companies are deteriorating
Private market value
Value a knowledgeable 3rd party would reasonably pay for the
Business
Free cash flow calculation (Seth Klarman: significant for value investors today)
Free Cash Flow = EBIT x (1 - tax rate) + depreciation + amortization - change in net working capital - capital expenditures
Calculating cash flow yield of a stock, what constitutes an attractive free cash flow yield?
Free cash flow yield = (free cash flow per share)/(market price per sh.)
Attractive when stock has a free cash flow yield 8% to 10% than
Risk free government bonds
6 factors that contribute to a great business
1 strong barriers to entry 2 limited capital requirements 3 reliable customers 4 low risk of technological obsolesce 5 abundant growth possibilities 6 significant and growing free cash flow
What are positive choices managers can make to increase shareholder value? 3
1 share repurchases
2 prudent use of leverage
3 valuation based approach to acquisitions
How is intrinsic value determined?
Justified by facts: assets, earnings, dividends, definite prospects
4 considerations of the common stock buyer
1 general future of corporate profits
2 differential in quality between 1 type of company and another
3 influence of interest rates on dividends or earnings returns
4 extent to which purchases and sales should be factor of timing
As distinct from price
Graham: book value in terms of forecasting prices
Book value is almost worthless in forecasting in practical manner
Why are bargains harder to find today?
Armed of Investors with computer screens and internet constantly
Searching for them
2 vital rules of security analysis
1 companies with stable earnings are easier to forecast and
Hence preferable (volatile earnings are harder), look at 10 yr.
Period for earnings
2 earnings tend to fluctuate in a cyclical pattern
