Kindle Notes & Highlights
by
Wayne Duggan
The simplest way to measure value is called the price-to-earnings ratio (“P/E ratio” or “P/E”).
P/E is calculated as follows: first, determine the earnings per share (EPS). EPS is found by taking the profits and dividing by the share count to determine the amount of profit per share. For AAPL, this number is $41.7 billion divided by 945 million, which equals $44.10. For BBRY, it is $2.86.
The last step in calculating P/E is to divide share price by the EPS. For AAPL, this number is $585/$44.10, which equals 13.3. For BBRY it is $10/$2.86, which equals 3.5.
Again, don’t worry too much about calculating this ratio manually, as it can be easily located online. A lower ratio is better than a higher ratio, and a negative ratio is a red flag.
So how much debt is “a lot” of debt? There is a metric for that! It is called the debt-to-equity ratio, and it can be easily found online on websites like finviz.com.
The debt-to-equity ratio is the total liabilities of a company divided by the shareholders’ equity. Shareholders’ equity is the total value of a company’s assets minus the total liabilities.
While large amounts of debt may not always indicate that a company is in trouble, it certainly can be a hidden valuation trap for inexperienced buyers.
Lastly, all of these metrics are based on formulas that include variables such as share price, EPS, growth rate, and debt levels. It is important to remember that all of these variables are dynamic; they constantly change on a daily basis.
So now you know the basic idea behind value investing: buy the best companies at low prices. So why would the stocks of the best companies ever trade at low prices? It happens more often than you think. The stock market as a whole, and especially sectors within the market, go through cycles where the P/E ratio rises and falls. When it occurs in the entire market, it might be called a market boom or a recession. When it happens in an individual sector, it could be called a bubble that bursts.
My point is, in the unlikely event that a stock market crash actually leads to the collapse of the United States economy, it is
likely that the US dollar would become nearly worthless, so having some cash that you saved by selling stocks during the crash would be pointless.
One of the most famous Warren Buffett quotes is, “be greedy when others are fearful and fearful when others are greedy.” The times when there is the most greed in the market occur when the bubbles are nearing their bursting points. It is during these periods that people expect everything they buy to rise in value because that has been what has happened in the recent past. This pervasive greed, according to Warren Buffet, should be an indicator of a time to sell.
When everyone else is selling, as they were in late 2008 and early 2009, value investors love to buy.
It’s easy to get caught up in the day-to-day cable news cycle
stories about one trivial item after another. There will never be more negative news stories than during a recession, and there will never be more positive ones than during a bubble. Always try to keep a perspective on what is happening and remember that the market is always in some part of its cycle. Common sense rule #26: Always keep things in perspective!
Decide what a good price would be based on your valuation of the company, and then wait for it to reach that price. Trust me, when a recession comes, there are plenty of great values to be found!
Common sense rule #27: “The stock market is a device for transferring money from the impatient to the patient.” -Warren Buffett If you are impatient, you may want to reconsider trading stocks.
Controlling the emotion of impatience is no different than controlling the emotion of greed and fear: preparation is the best defense. If you are comfortable with your long-term plan, you should have no problem waiting for the market to turn your way. Like Mr. Buffett said: sit back and wait for the impatient people to sell you their stock when it is cheap, and then wait for them to buy your stock when it is expensive.
Buying stocks when everyone else is selling and selling stocks when everyone else is buying is sometimes referred to as contrarian investing.
A dividend is a cash distribution that a company makes to its shareholders. Many companies pay quarterly dividends, some pay special dividends on an irregular basis, and many companies pay no dividend at all.
company. However, a company such as Coca-Cola exhausted its period of rapid growth many decades ago, even though it is still extremely profitable.
The amount of a company’s dividend is usually measured by dividend yield, sometimes simply referred to as a company’s “yield.”
However, while share price can go up and down, dividends are always positive and can be the tortoise that slowly and steadily wins the race.
balance. There are many similarities between interest payments and dividend payments. The biggest similarity is that, when reinvested, dividend payments compound over time like interest does.
So how do you get dividends to “compound”? Some companies have dividend payment plans that automatically pay you in shares of stock rather than cash, in which case the dividends automatically compound. However, if a company pays dividends in cash, you will need to take that cash and buy more shares with it to produce a compounding effect. This strategy is often called dividend reinvestment.
First, companies reserve the right to change or eliminate dividends at any time. Many times when a company is struggling to make profits, reducing or eliminating the dividend is one of the first cost-cutting strategies companies use. Beware of any companies with extremely high dividends. Most healthy companies yield between 0 and 6%.
Remember that dividend yield is calculated based on current share price. Because share price is such a big part of how yield is calculated, a change in share price can have a huge effect on the yield.
While there are a lot of numbers involved, all of the actual calculations are basic division, and the concepts should be pretty intuitive. If
Flipping a stock is the same idea as flipping a house: you buy it with the intention of selling it quickly for a profit.
trade. Growing confidence can be a double-edged sword: it is important to believe in your ability to succeed, but I guarantee you that the minute you start feeling invincible the market will knock you back down to earth.
In the stock market, a catalyst is something such as a news event, an earnings report, a court ruling, or a test result, which has major implications for a company.
Common sense rule #28: The actual expectations of the market are not necessarily equal to the analysts’ estimates!
A buyout occurs when an entity such as a company, an investment group, or an individual buys an entire company. Usually, when an offer to buy a public company
For example, the accountants that compile the quarterly earnings reports for a company will certainly see the contents of the report before it has been released to the public. This type of information is considered inside information, and there are specific laws prohibiting stock trades based on such knowledge.
In addition to illegal insider trading, there is also legal insider trading.
Common sense rule #29: Do NOT buy worthless companies! Avoid the “Q”!
Three types of people would buy shares of GMGMQ: short sellers, day traders, and idiots.
businesses.” Bush -league businesses are small and/or poorly run companies that don’t make much or any money and never will.
Before you buy shares of a pink sheet company, remember to ask yourself this: if this company is too good for the pink sheets, then what is it doing here?
Some companies, because of the nature of their business, need to sell shares of stock to raise money for their operations. For example, precious metal exploration companies
The problem with selling more shares of stock is that it diminishes the value of all the other shares of stock, a process known as share dilution.
