Some key words:

  • Working Capital: Working capital, also known as net working capital (NWC), is the difference between a company’s current assets—such as cash, accounts receivable/customers’ unpaid bills, and inventories of raw materials and finished goods—and its current liabilities, such as accounts payable and debts.

  • Book Value: The book value of a company is the net difference between that company’s total assets and total liabilities, where book value reflects the total value of a company’s assets that shareholders of that company would receive if the company were to be liquidated.

It is worth recording some essence from “The Intelligent Investors”. I will focus on “enterprising investors” first, complete the “passive investors” later.

Enterprising investors: “Starts from Chapter 7”

  • no outstanding rewards came from diversified investment in growth companies as compared with that in common stocks generally.

Graham suggests 3 ways to identify investment opportunities:

Strategy why low Why up How statistics exceptions
The relatively unpopular large company: unsatisfactor developments of a temporary nature 1. They have the resources in capital and brain power to carry them through adversity and back to tha satifactory earning base. 2. The market is likely to repond with reasonable speed to any improvement shown. six or ten issues in the DJIA which were selling at the lowest multipliers of their current or previous year’s earnings. 45 years backtracking, 30%-100% more compared to index individual companies that are inherently speculative because of varying earning tend to sell both at a relatively high price and a relatively low multiplier.
Purchase of bargin issues (mid-size company) current dispointing results and protracted neglect or unpopularity return to value soon it is indicated value is at least 50% more than the price, common stock that sells for less than the company’s net working capital alone. each of the groups advanced in the two years to somewhere in the neighborhood of the aggregate net-current asset. The gain of the entire portfolio in that period was 75% against 50% for S&P, What’s more remarkable is that none of the issues showed significant losses, seven held about even, and 78 showed appreciable gains, But please diversify P166 require and indication of at least reasonable stability of earnings over the past decade or more
Purchase of bargin issues (small-cap companies) ~ 1. The divident return is relatively high. The reinvested earnings are substantial in relation to the price paid and will ultimately affect the price. 3. A bull market is ordinarily most generous to low-priced issues; this it tends to raise the typical bargain issue to at least a reasonable level 4. even during relatively featureless market periods a continuous process of price adjustment goes on, under which secondary issues that were undervalued may rise at least to a normal level 5. the specific factor that in many cases made for a disappointing record of earnings may be corrected by the advent of new conditions 6. Being acquired will be paid more than bargain level ~ depression years small cap might not perform well  
Special Situations, or “Workouts” “Never buy into a lawsuit” causes bargain opportunities acquisition usually offer a price considerably above the current level be careful, needs ample experience   In recent years, arbitrages and workous became risker and less profitable

Some interesting facts:

  1. From 1960 to 1999, only 8/top 150 companies on the fortune 500 list mainaged to raise their earning by an annual average of at least 15% for two decades.
  2. Looking at fave decades of data, 10% of the large US companies had increased their earnings by 20% for at least 5 consecutive years; only 3% had grown by 20% for at least 10 year straight; and not a single one had done it for 15 years in a row. -

Charpter 11: Security Analysis for the Lay Investor

What are the primary tests of safety of a corporate bond or preferred stock?

  • Coporate bonds: The number of times that total interest charges have been covered by available earnings for some years in the past.
  • In the case of prefered stock. it is the number of times that bond interest and preferred dividents combined have been covered.

What are the chief factors entering into the valuation of a common stock?

  • General Long term Prospects (might be wrong)
  • Management
  • Financial Strength and Capital Structure
  • Dividend Record
  • Current Dividend Rate

Composite or group estimates are likely to be a good deal more dependable than those for individual companies.

Value = Current Earning * (8.5 plus twice the expected annual growth)

The expected annual growth rate should be that expected over the next seven to 10 years.

What the valuer actually does in these cases is to introduce a margin of safety into his calculations.

Questions to be answered from financial statement:

  1. What makes this company grow?
  2. Where do its profits come from?

Specifically:

Negative:

  • The company is a “serial acquirer”. An average of more than two or three acquisitions a year is a sign of potential trouble. After all, if the company itself would rather buy the stock of other busincessesthan invest in its own, shouldn’t you take the hint and look elsewhere, too?
  • The company is an OPM addict (Other people’s money). Borrowing debt or seeling stock to raise boatloads of other people’s money. Cash flow statement: operating activities is always negative, financing activity is always positive.
  • The Company is Johnny-One-Note, relying on one customer for most of its revenues.

Positive:

  • Wide “moat”. Several foces can widen a company’s moat:
    • A strong brand identiy;
    • A monopoly or near-monopoly on the market;
    • Economies of scale, or the ability to supply huge amounts of goods or services cheaply.
    • A unique intangible asset
    • A resistance to substituion.
  • The company is a marathoner. earning as grown smoonthly and steadily over the previous 10 years.
  • The company sows and reaps: spend some money on R&D.

Charpter 12: Earning per share

The margin of the market’s pricing errors is often not wide enough to justify the expense of trading on them.

  • Corporate accounting is often tricky
  • Security analysis can be complicated
  • Stock valuations are really dependable only in exceptional cases

Use of Average earnings

  • The special charges and credits are included in the average earnings.

We suggest that the growth rate itself be calculated by comparing the average of the last three years with. corresponding figures ten years earlier

Why earning on capital funds is the decisive factor for ALCOA?

  • Intelligent investor must always be on a guard for “nonrecurring” costs just keep going.

https://medium.com/the-intelligent-investor-series/chapter-12-things-to-consider-about-per-share-earnings-8411a6a6b18b

Charpter 13: A comparison of 4 listed companies.

What perspervtive to consider of listed companies?

Charpter 14: Stock Selection for the Defensive Investor:

  1. Adequate Size of the Enterprise: not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility.
  2. A sufficiently strong financial condition: Current assets should be at least twice current liabilities.For public utilities the debt shouldn’t exceed twice the stock equity(at book value)
  3. Earning stability: some earnings for the common stock in each of the past ten years.
  4. Dividend record: uninterrupted payments for at least the past 20 years.
  5. Earnings growth: A minimum increase of at least 1/3 in per-share earnings in the past ten years using three year averages at the beginning and end.
  6. Moderate P/E Ratio: Current price should not be more than 15 times average earnings of the past three years.
  7. Moderate Ratio of Price to Assets: Current price should be no more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify correspondingly higher multiplier of assets (cyclical stock, During downturns, their earnings drop and PE rises, while assets and equity are usually stable. Prices go down so P/B looks very low. This is the best time to buy these stocks. ). As a rule of thumb we suggest that the product of the PE and the PB should not exceed 22.5 (15 * 1.5)

  • Public Utility: For the public-utility stocks at this time should be their availability at a moderate price in relation to book value.

  • Financial Enterprises: the same as the public utility

  • rail road station airline stocks today: The carriers have suffered severely from a combination of severe competition and strict regulation. Automobiles, buese, and airlines have drawn off most of their passengerbusiness and left the rest highly unprofitable (labor cost and etc). There is no compelling reason for the investor to own railroad shares; before he buys any he should make sure that he is getting so much value for his money that it would be unreasonable to look for something else instead.

yahoo.com could tell what percentage of a company’s shares are owned by institutions.

Charpter 15: Stock selection for the Enterprising Investor

Graham-Newman Method

  • Liquidation:
  • Related hedge:
  • Net current asset: (bargin)

A windowing of the stock guide:

  • Financial condition - Current asset at least 1.5 current liability. deby not more than 110% of net current assets
  • Earning stability: No deficit in the last five ys covered in th stock Guide
  • Divident record: Some currrent dividend.
  • Earning growth: Last year’s earnings more than those of 1966
  • Price: Less than 120% net tangible assets.

ROIC: Owner Earnings / Invested Capital.

Owner Earnings = Operating profit + depreciation + amortization of goodwill - Federal income tax - cost of stock options - maintenance capital expenditures - any income generated by unsustainable rates of return on pension funds

Invested Capital = Total assets - cash + past accounting charges that reduced invested capital.

ROIC has the virtue of showing, after all legitimate expenses, what the company earns from its operating businesses - and how efficiently it has used the shareholders’ money to generate that return. An ROIC of at least 10% is attractive; even 6% or 7% can be tempting if the company has good brand names, focused management, or is under a temporary cloud.

diff between ROE and ROIC

Charpter 16: Convertible Issues and Warrants:

To be researched more.

Charpter 17: Four extermely Instructive Case histories:

  • interest rate coverage ( EBIT / interest expense ) at least 5 times,
  • 10 years earning.

Charpter 18: A comparison of eight pairs of companies

  • Net/Sales too low is a bad signal