VALUE INVESTING COURSE - LEVEL ONE
Welcome to level one!
We will start by understanding how the stock market works.
We will then learn about "share price sheets" and its uses.
Finally, we will study the key "value investing ratios".
Level one is the foundation to finding the best stocks to buy.
If you need any help send an email to [email protected]
What Is The "Stock Market"?
The stock market is the meeting point for buyers and sellers of company shares.
It allows companies to raise cash & investors the chance to buy a slice of ownership.
What Drives Stock Prices?
A stock's price is driven by supply and demand.
If investors want to buy but few shareholders want to sell, the price of a stock will go
up. As the price goes up more shareholders will be tempted to sell and fewer
investors will still want to buy. The price will steady once buyers = sellers.
What are "Stocks/Shares" ?
A company will split its capital into shares. It will then sell them to raise money. As
each share represents a unit of ownership, shareholders have he right to a piece the
companies earnings.
What Creates Bargain Stocks?
The two major causes for a stock price to drop or remain cheap are:


Disappointing yearly earnings
Unpopularity or neglect
Value investing teaches you to find the exact moment a good company can be
bought at an attractive price.
READING "SHARE PRICE SHEETS"
Share price sheets look complicated so let's take it one column at a time.
Columns 1 & 2: 52W High & Low
These are the highest and lowest prices at which a stock has traded over the past
year.
Column 3 & 4: Company Name &
Ticker
These columns lists the name of the company and unique code which identifies the
stock.
Column 5: Div
This indicates the amount of dividends paid per share.
Column 6: Yield %
The dividend yield represents the "dividends/ price"per share. We will learn more
about this later.
Column 7: P/E
The price to earnings ratio is the (stock price/ earnings) per share. We will learn
about P/E later on.
Column 8: Vol 00's
This figure shows the total number of shares traded for the day.
Column 9, 10 & 11:High, Low & Close
These are the highest and lowest prices at which a stock has traded during the
day.The close is the last trading price when the market closed.
Column 12: Net Change
This is the change in the stock price from the previous day's closing price.
THE "NUMBERS OF VALUE INVESTING"
The numbers below are key to finding the value of a company.
So make sure you understand them inside out!
Price to earnings ratio (P/E)
Formula: Stock price divided by earnings per share
The price to earnings ratio represents the dollar amount an investor will pay to
receive $1 of that companys earnings. If a company has a price to earnings ratio of
20, the investor will pay $20 for $1 of earnings.
When we develop your investment strategy, I will teach you to use the price to
earnings ratio to find the best stocks to buy.
Market Capitalisation
Formula: Number of company shares x stock price
Market cap is the size of the company. If a company has 200 shares on the market
at $10 per share, the market cap is $2000.
Market cap is great for finding the best stocks to buy based on your risk
profile. You will see how when developing your investment strategy.
Enterprise Value
Formula: (Market Cap + Company Debt +Minority Interest + Preferred Stock) Cash
The enterprise value is the true representation of the size and value of the
company. In level 3 you will see how the enterprise value is used to calculate the
value of a company.
Enterprise Multiple
Formula: Enterprise value divided by EBITDA
Enterprise multiple shows how many years of earnings a company will need to pay
off the enterprise value.
We will learn how to use the enterprise multiple in level 3.
Dividend Yield %
Formula: Dividends divided by stock price per share
Dividends is a sum of money paid to give company profits back to shareholders.
A dividend yield of 10% means it will take 10 years to recover the price of the stock
in dividends.
You will learn to use dividend yield to find good companies in level 3.
Warren Buffett's Owners Earnings
Formula: (income + amortisation+ depreciation) – (capital expenditures – any
unusual non recurring costs)
Warren Buffett's owners earnings show the true amount of earnings made by a
shareholder. If Warren Buffett uses owners earnings to find the best stocks to
buy we would be mad not too!
You will learn how to calculate owners earnings in level two.
EBITDA
Formula: Total earnings - interest - tax - depreciation - amortisation
EBITDA excludes interest,tax, depreciation and amortisation to give you a clear view
of a companys profitability. It has many uses when it comes to analysing company
performance.
We will walk through how to calculate EBITDA in level 2.
EBITDA MARGIN
Formula: EBITDA divided by total revenue
EBITDA Margin shows how much operating cash is generated for each dollar of
revenue earned. This is perfect for finding the best stocks to buy! You will use
this to create your stock portfolio.
READY FOR LEVEL TWO?
In Level two we will learn how to calculate owners earnings, EBITDA, EBITDA
Margin & how to spot accounting time bombs!
Level two is a huge step towards finding the best stocks.
VALUE INVESTING COURSE - LEVEL TWO
Welcome to level two!
You start by understanding how to analyse company performance.
You then learn to identify a profitable company.
Finally, you will master a skill to stop you making mistakes!
If you don't know some of the terms visit the investment dictionary!
ANALYSING COMPANY PERFORMANCE
You need to separate good companies from bad ones.
The three numbers below will do this.
EBITDA
EBITDA Margin
Warren Buffett's Owners Earnings
EBITDA
EBITDA = Net income - Interest - Depreciation - Amortisation - Taxes
Let's work through an example...
EBITDA = 600 - (-50) - (-50) - (-100) = $800k
We have found that the EBITDA is $800k. But what use is this to us?
By itself not a great deal. Let's now calculate the EBITDA margin.
EBITDA Margin
EBITDA Margin = EBITDA / Total Revenue
The higher the EBITDA margin the more profitable the company's operation.
Continuing with our example...
EBITDA = $800k
Total Revenue = $1,000k
EBITDA Margin = 800 / 1000 = 0.8
EBITDA Margin = 80%
For every $100 of revenue, $20 is spent on expenses and $80 is profit.
As EBITDA margin is a percentage we can compare companies.
This is perfect for finding the best stocks to buy!
Warren Buffett's Owners Earnings
(Earnings + amortisation+ depreciation) – (capital expenditures –
uncommon costs)
Warren Buffet's owner earnings finds how much cash falls into the
shareholders pockets.
Warren Buffet looks at the amount an owner can take from the business without
affecting operations.
Dividing Warren Buffett's owners earnings by revenue will find the percentage being
converted into shareholder cash.
IDENTIFYING PROFITABLE COMPANYS
Profitable companies have the following in common:
Strong earnings per share growth
High EBITDA margin
Continuous dividends
You use these to find companies that will be profitable in the future.
Strong Earnings Per Share Growth
Earnings per share (EPS) is the companies earnings divided by it's number of
shares. EPS growth of 40% over 10 years shows a well run company.
High EBITDA margin
The higher the EBITDA margin the more profitable the company. The best stocks to
buy will have high EBITDA margins.
Continuous Dividends
Ten years of continuous dividends would show a company that has had strong past
performance.
These will be rules to find the best stocks to buy for your stock portfolio
AVOIDING ACCOUNTING TRAPS
You should never buy a stock without reading the financials. They show you:
Employee satisfaction levels
long term plans of directors
Future issues for the company
The points below will stop you investing in untrustworthy companys.
Read the statements backwards
Anything the company doesn’t want you to know will be at the back. Look out for
anything that impacts earnings.
Read the footnotes
You will find “summary of accounting policies” as a key note. This outlines how the
company calculates revenue. Look for words like “restructuring” which mean
changes in policy.
READY FOR LEVEL THREE?
In level three you will learn to value a company & find bargain stocks!
VALUE INVESTING COURSE - LEVEL THREE
Welcome to level three!
You start by understanding what makes a good company.
You then learn how to calculate the value a company.
Finally, you will master the art of finding bargain stocks.
Bargain stocks guarantee big profits!
If you don't know some of the terms visit the investment dictionary!
SIGNS OF A GOOD COMPANY
A good company has all the below.
Strong brand identity
Monopoly or near monopoly
A unique intangible asset (coca cola recipe)
Company invests in R&D
Trustworthy management
Strong business model
You will use these as rules to find the best stocks to buy!
CALCULATING THE VALUE OF A COMPANY
Enterprise value is the true value of the company.
Enterprise Value =Market Cap + Company Debt +Minority Interest + Preferred
Stock - Cash
The enterprise value alone is not helpful. You need to find the enterprise multiple.
Enterprise Multiple = Enterprise Value / EBITDA
A low enterprise multiple indicates an undervalued company.
Your stock portfolio must have companies with low enterprise multiples.
FINDING BARGAIN STOCKS
A bargain stock is one where the price per share is lower than the book value per
share.
If book value is less than the price per share, you are getting the fixed assets for
free!
Developing your strategy will teach you to use this to find bargain stocks.
Book value = Current Assets – All Liabilities & Preferred Stock
If price divided by book value per share is less than 1 you have a bargain
stock!
READY TO DEVELOP YOUR STRATEGY?
Once you have completed all three levels you are ready create your value investing
strategy.
Let's find how to best invest your money
CREATE YOUR STOCK PORTFOLIO
Value investing is built on rules.
Once you complete the course you are ready to start finding the best stocks to buy.
Let's begin with some common rules that all investors must apply.
COMMON RULES FOR YOUR STOCK PORTFOLIO
Apply the following rules to your stock portfolio to stop yourself making losses
Your stock portfolio should be diverse with a minimum of ten different stocks
Each company should not have debt of more than 50% of it's enterprise value
(See level three for more)
Your stock portfolio should contain no more than thirty different stocks
Common stock should account for at least 50% of a companies enterprise value
(See level three for more)
WHATS YOUR APPETITE FOR RISK?
Only you decide how much risk you are willing to take.
Consider your current financial situation & long term goals before deciding.
Market Capitalisation
The bigger the company the slower but more stable the price growth.
Dividend Yield
Growth stocks tend not to pay out any dividends as they are reinvesting all profits
into expanding.
Price To Earnings Ratio
Growth stocks have large price to earnings ratio.
Earnings Per Share
EPS trend shows a companies growth rate and maturity.
Defensive investors should invest in
companies with:
A price to earnings ratio of less than 20
A monopoly & strong brand identity
10 years of continuous dividends
No negative earnings in the past ten years
Ten year EPS growth of at least 30%
Aggresive investors should invest in
companies with:
Any price to earnings ratio
A strong business model
Trustworthy management
No negative earnings in the past five years
Five year EPS growth of at least 50%
You can now see how the value investing course is applied to develop your
investment strategy.
WANT TO SEE HOW TO IMPLEMENT THE RULES?
I have put together a tutorial to show you how use the above rules to find the best
stocks to buy.
Depreciation is the reduction in a value of a fixed asset over time.
Amortisation is the same but for intangible assets (goodwill, patents).
EBITDA Margin is the percentage of revenue converted into operating profit.
Reported Earnings: Shown as net income on the income statement.
Depreciation and Amortisation: Found in the cash flow statement.
Capital expenditures: Found in the cash flow statement.
Non-recurring costs: Found on the income statement. Confirm they are "nonrecurring".
Market cap: Number of shares x stock price
Company debt: All borrowings (short & long term) shown under liabilities in the
balance sheet.
Minority interests: Found under long term liabilities on the balance sheet.
Preferred stock: Found under equity on the balance sheet
Cash: Found under current assets in the balance sheet
Enterprise multiple is the number of years of current earnings a company needs to
pay off it's enterprise value.
Book value per share = book value / number of shares