value investing
Look at Table 5.1 of Modern Security Analysis below. The phenomena by which a faster growing company commands a lower market multiple is?
Industry identification
george Soros starting point in developing the theory are the observations that
financial markets are not capable of correcting there own excess, financial markets do not tend to equilibrium
what does the strength of the relationship between stock price growth and book value per share growth depend on
on how stable or unstable the price to book ratio is over time
what gives value to a security
payments by the company that issued the security, its marketability, whether the security gives you control or gives you elements of control,
An investment operation is one wich
promises safety of principal and adequate return
what is warren buffets yardstick for success
rate of growth in book value per share over the most recent period and over time
of the several factors involved in safe and cheap investing, a strong financial position tends to give
significant reduction in financial risk, management the option to be opportunistic, Low return on equity to common stock investors
In what financial statement are you likely to see how earnings were used for the year?
statement of cash flows
buying common stock at historically low price to book ratio ensures
that the performance of the stock purchase will be linked to the performance of the business, as measured by book value per share changes over time
The central issue in Benjamin brahmas Business valuations vs stock market valuations is
the impact of market fluctuations upon the investors true situation
reflexivity is
the interaction between the passive and cognitive functions of markets
what factor in kellys formula does good business and security analysis affect the most
the probability of finding a portfolio investment
Optimal F, or Kelly F, is a formula that allows you to calculate the available capital to deploy on one investment as a function of
the probability of finding profitable investment opportunities, the win to loss ratio of the financial operation under consideration, i.e. how much you could make relative to how much you could loose.
the true risks from owning a security are
the risk of buying a security at a price that is much higher than its extractible value, the risk of substantial reduction in the corporate extractible value
Per share price of DENSO on Sep 19, 2008 was $24.25 per share. Toyota Industries owned at the time, 268,627,000 shares of DENSO. Total outstanding number of Toyota Industries shares on the same date were 311,589,000. How much value of DENSO can be attributed to each share of Toyota Industries?
20.9064
Under Soros theory of reflexivity, a positive feedback loop is one where
An upward movement in the prices of a security possitive affects the fundamentals of the business that issue the security, which in turn further push the price of such security upwards and so on
Why is book value per share growth one of the three most important considerations for a buyer of the common stock in the company?
Because book value growth per share is a measure of how much the total wealth created by the company is retained by the company and accrues to the shareholder over time.
what are 3 areas of competence necessary to become a successful investor
Business analysis, security analysis and the determination of an optimal commitment size relative to available investable capital
In what cases does the issue of "hidden earnings" arise?
Cases when a company owns less than 20% of another company's common stock.
In any company due diligence, the use of earnings needs to be understood. What are the two broad categories of earnings uses that we should focus on?
Company related and shareholder related.
Looking at the IBM table below, what is the factor affecting earnings positively and where would you be able to look for while reading a 10K report?
Decreasing expenses, Income tax footnote
What is the total book value growth (in %) for Starbuck's business since the beginning of 2009 to the end of 2017? Use the numbers on the spreadsheet to make the calculation.
Ending 2017 minus beginning 2009 divided by 2009, 118.8%
Of the four "earnings" factors that influence common stock market prices, which one is likely to affect Facebook common stock the most?
Expected earnings in the future
Paying dividends is the most tax efficient way of distributing value to shareholders?
False
The above DCF analysis is done on an unadjusted DCF EBITDA basis
False
On a yearly basis, growth in book value per share plus dividends was highly positively correlated to share price plus dividend growth.
False, as the correlation was negative 44.8%
Yardsticks of success often used by CEOs are
Growth in earnings per share, Sales Growth, large mergers, increase in stock price
For which types of companies is the "look through earnings" problem likely to be more important?
Holding Companies
How can companies grow book value?
Increase earnings, issuing shares to raise capital, acquisitions of other companies, letting profits sit in the bank earning interest
Starbucks has been able to generate impressive levels of ROE over the 2009-2017 time period. It seems that post 2013, SBUX ROE has increased materially. See sheet below. What can you attribute the large increase post 2013? Answer all that may apply.
Increase profitability, increased leverage
is book value per share something very variable quarter over quarter, why
It can be because it depends on other investing and financing decisions besides results from operations.
Book value growth per share is usually very highly correlated with ROE
It is False
As of October 11, 2013, the Price to Earnings ratio of WalMart and Target common stocks were 14x and 15x respectively. According to the static equilibrium "analysis" what would likely happen if both companies were truly comparable (i.e. they are similar in all respects) to the price of WalMart Common Stock?
It would increase
Where in the 10K can you find the information to perform the analysis shown in the table below?
Item 7. Management Discussion: Critical Accounting Policies, Note 1 on Significant Accounting Policies
what is the difference between value investing and control investing
Value is passive activity, while in control we do use the rights given to us by the securities we own or hold
the leverage ratio symbol is represented by
M_D
What are the major "detractors" to book value growth? Answer all that apply.
Share repurchase and dividends
If book value growth is one of the three most important factors for the buyer of common stocks, what are the other two?
Price to book ratio at the time of purchase and dividends paid
What is Warren Buffett against that he considers a means to attracting speculative activity to Berkshire Hathaway stock?
Providing quarterly guidance
One potential use of earnings is the purchase of assets. This activity includes:
Purchase of property, plant and equipment, Acquisitions of other companies, Acquisitions of intellectual property
When analyzing the "reported" earnings experience of a company one must pay close attention to:
Recurring as well as non-recurring charges, Operating and non-operating income, Look-through earnings vs. reported only earnings
Dupont Analysis involves the analysis of?
Return on Equity
How can companies reduce book value per share over time?
Share repurchases, Impairment of assets
Which of the above mentioned common stocks (WalMart andTarget) would respond faster to changes in earnings as suggested by the dynamic disequilibrium scenario?
Target
The relative growth figure you would use to plug into a DCF analysis
The book value per share growth + dividends per share growth
If company A owns common stock in company B, and its percent ownership of B is 28%, i.e. A owns 28% of the total outstanding shares of B, A must account for this investment using:
The equity method of accounting
The increase in the Enterprise Value of a company using debt in its capital structure is equal to:
The present value of the tax shield
On the graph that plots Share price growth rate vs. Book value per share growth rate, if the data point is above the 45 degree line
The stock price grew faster than book value per share
In a nine year period, average growth of book value per share plus dividends and average growth of share price plus dividends was highly correlated.
True, the correlation was negative 44.8%
Earnings growth, i.e. maintaining high rates of return on equity is indispensable to also maintain high rates of growth in book value. Earnings growth can only be maintained by:
Using earnings to purchase only assets that will maintain or increase profitability
the type of security used in a financial operation determines whether it is an investment operation or a speculative operation
false
the use of leverage is precluded when using a value investing methodology
false
What can create the result of the previous question ?
You buy the stock at a high multiple and "sell" at a low multiple.
What can create the result of the previous question ?
You buy the stock at a low multiple and "sell" at a high multiple.
why do you think warren buffet focuses what he focuses on rather than earnings per share, sale growth and large mergers
because he only focuses on the ability of a business to generate wealth for its shareholders over time
A strong financial position is measured by
cash flow from operations, the quality of assets, relative absence of liabilities,
what do you get by owning a security
contractual or ownership rights
the basic premise of safe and cheap investing is that minority investors ought to adopt the investing practices of
control investors and insiders
Why is book value per share growth a better yardstick of performance than accounting earnings per share? See Table 10.2.
earnings and earnings per share are easily manipulated numbers, book value growth is not, Understanding book value growth is key to assessing wether a company is worth owning, The above example shows how book value growth is quite small because the majority of earnings have to be used to replace rapidly aging assets to maintain earning power.
Graham writes that a silent partner results in a private business that will be his share of profits and or change in net asset value, this statement is correct all the time
false
since mutual funds are fully diversified they can receive the largest possible returns over time
false
when applying the definition of investment to a specific case, the standards of safety refer too
the safety of the business issuing the securities, the safety given by the terms of security, the safety given by the price at which securities can be bought
On the graph that plots Share price growth rate vs. Book value per share growth rate, if the data point is below the 45 degree line:
the stock price grew slower than the book value per share growth
what do you think it means to reinvest profits successfully
to invest them in projects that will increase book value per share at rates high or higher than ROE
the purely passive function of markets is
to reflect the fundamentals of a business
Safe and Cheap investors use the same methods of analysis that Control Investors use.
true
the belief that value markets are value efficient is an important reason for market and regulatory failures, Example: the belief that mortgage backed securities were correctly priced leading to the financial crisis
true
what follows from the definition of value investing and kelly f formula
value investing has a high probability of making money, those who use this course value investing approach, if they follow kelly framework will have highly concentrated portfolios, the short term performance of a portfolio managed by a value investor following this course framework will have a high market volatility.
