The Art of Value Investing - Complete course | Candi Carrera | Skillshare

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The Art of Value Investing - Complete course

teacher avatar Candi Carrera, Value investor & board director

Watch this class and thousands more

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Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Watch this class and thousands more

Get unlimited access to every class
Taught by industry leaders & working professionals
Topics include illustration, design, photography, and more

Lessons in This Class

27 Lessons (8h 43m)
    • 1. Introduction & Course Content

    • 2. What are the objectives of this course

    • 3. Value investing origin

    • 4. Money & cash circulatory system

    • 5. Risk vs return

    • 6. Investment styles & vehicles

    • 7. Balance sheet, income statement & cash flow statement

    • 8. Investor relations & annual reports

    • 9. Circle of competence & investment universe

    • 10. The 5 Core habits

    • 11. The 6th habit

    • 12. Blue Chips

    • 13. Earnings consistency

    • 14. Price to Earnings (P/E)

    • 15. Return to shareholders

    • 16. Profitability (ROE, ROIC, RONTA)

    • 17. Solvency & debt to equity

    • 18. Price to book

    • 19. Brand valuation

    • 20. Dividend discount model

    • 21. Discounted Future Earnings & Free Cash Flow

    • 22. Brand valuation

    • 23. External stakeholders

    • 24. Internal stakeholders

    • 25. Conclusion & final assignment

    • 26. Appendix 1 - NTT full valuation process - Webinar #6

    • 27. Appendix 2 - Evergrande : how to analyse its debt position

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About This Class

This course consolidates 20+ years of experience & learnings as a value investor. You will learn the financial fundamentals of the stock market, money & inflation in order to find great companies at cheap prices. As Warren Buffett said, you do not need a PhD to become a good investor. It requires the mindset of a business owner not a speculator.

You will be able to determine the real value of a company vs the current share price but also be able to judge if the company has solid fundamentals.

EXCLUSIVE CONTENT : In the last part of this course and as part of my own on-going research as a value investor for more than 20 years, I will share with you unique attributes on how to evaluate the moat of companies that only a few investors use and also how to capture customer and employee sentiment about a company.

The purpose of this training is to make you a seasoned investor and develop the right investment mindset while giving you the keys to read company financial statements. I will teach you how to perform fundamental financial statements analysis, how to read 10K, 10Q reports. After this course you will be equipped with a set of tools covering solvency, profitability, liquidity & valuation of a company.

WEBINARS : When subscribing to this training, you are also entitled to join a bi-monthly 2-hour live webinar

Learn the art of value investing and get an edge.

Investing in stocks and acting as a business-owner can be a life-changing experience.

Learn from my 20 years experience as an investor running my own investment fund and rapidly move ahead faster with the knowledge I will share with you.


- November 2021 : update of Excel file with 3 precalculated examples AbbVie, Alibaba & Dow Chemical

- September 2021 : addition of a 90 minute lecture with complete selection & valuation process

- September 2021 : update of IV calculation file (v2)

- January 2021 : students receive regular invitations to online Webinars/workshops

What students say about this course :

"Let me begin by saying, It was a life-altering learning experience, Candi's approach to teaching is phenomenal.", Sunil M. from Dubai/UAE

"Candi is an outstanding teacher, ... His professionalism and attention to detail is beyond remarkable.", Arturo & Patricia A. from Las Vegas, Nevada, USA

Many thanks and I appreciate your interest in my course!

-Candi Carrera

Meet Your Teacher

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Candi Carrera

Value investor & board director


Hello. My name is Candi Carrera and I am a value investor for more than 20 years with 90% of my personal savings invested in stocks. My main attitude as value investor is to buy shares as if I would be buying the whole company, acting as a business owner and understanding the business I am investing into.

I keep the remaining 10% as a cash reserve to buy more stocks as market corrections and bear markets happen regularly. During bear markets, investors are depressed and become pessismistic. I take the opportunity during those depressed periods of buying great companies at low prices. As famous investor John Templeton said : "If you want to have a better performance than the crowd, you must do things differently from the crowd".

Through these courses, my personal goal is to... See full profile

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1. Introduction & Course Content: Hello, welcome to my training on value investing. My name is kinda Cara and have been for the last 20 years a value investor. Probably if you have decided to take this training, is because you want to invest in the stock market in different way as 9% of the people do. Value investing is acting as a business owner. It's not about speculation or gambling. As Warren Buffett always said, you don't need a PhD to become a good investor. But what you will need to understand and behave is as business owner, understanding how business runs, being able to read and understand a minimum of financial statements. And this is all about what we're gonna do in this training. So my intention is to be able to give you the tools and techniques to separate good from bad businesses. With that, let's get started. Alright, investors, let's get started. Before we go into the course, I want to walk you very rapidly through the course contents. So in the first section, we are going to discuss where val investment comes from and discuss about management. Graham Warren Buffett, that you probably know Charlie Munger. And the key attributes related to value investing. The second section will be related to key concepts because I believe that before investing into companies, there are some fundamentals that you need to understand, like the evolution of the value of money over time, the risk versus return balance and unrealistic expected returns. Investment styles also the three main financial statements, which are the balance sheet income statement, the cashflow statement. In the third section. Again, before discussing tools and techniques, I want you also as part of this training to develop the right mindset as an investor. As I said in the very introduction, it's not about gambling bought speculation. It's about investing in real money and doing this in a repeatable and rational way. So this is what we're going to discuss in a third section. In the fourth section, I'm gonna give you right at the first set of tools that I call the fundamental screens. So this is a set of tools that will allow you already to start filtering out good from bad companies. We're going to discuss earnings consistency, big brands priced earnings. How you can find a return to shareholders profitability and solvency of a company. The section number five, that will be for some people, it's actually the Holy Grail because it's about determining the real value of a company and being able to compare that real value versus what the current market is giving you as in terms of share price. And for that, we're going to use a couple of tools. We're going to use price-to-book adjusted price-to-book. And then also dividend discount models and dividends, certain discounted future cash flows and future earnings tools. The last section before the conclusion is work in progress that I'm currently developing since a couple of years because I believe, and we're going to discuss about Peter Fisher as well, Phil Fisher. And we're going to discuss that. It's not only about ratios and financial fundamentals, it's also about being able to perceive how customers and even employees, how they feel about the company they are working in or that the company they are buying from employees, customers. And they're going to give you some tools so that you're able to monitor before you invest into a company that you are able to get maybe a feeling how those external and internal stakeholders feel about the company. And with that, we're going to conclude, and I'll provide you a final assignment if you would like to do that. So hope you will enjoy the training and let's get started. 2. What are the objectives of this course: So Chapter Zero, speaking about the origins of value investing, first thing that I really want to clarify is, first of all, what are the objectives of this course? So I already gave a little bit of introduction and contexts with when I was walking you through the table of contents. I think this slide actually kind of summarizes where I'd like you to start as a, maybe already an existing investor or maybe you want to start investing into businesses on, on the stock markets as a value investor. But obviously the basis and the foundation of this whole, let's say value investing pyramid is really being able to read and understand a minimum of financial statements. And you need to look at those reports. And I'm doing this actually every quarter. So the companies I'm investing into, I go in, I listened to the annual shareholder meetings, I go into the analysts conference calls to get a sense of what is happening in that business. The second layer is after being able to read and understand a minimum of accounting data for the businesses that you have invested into is being able to evaluate what is the current price. How can you value the current company that the company that you have invested into? And in the process of becoming a good value investor, I wanted to be able to actually take decisions that make sense where you have a clear understanding why you have taken that decision and even that the process becomes repeatable. So that time over time, I told you that I'm now since 20 years on a value investor. So that's time over time whenever you take a decision to invest or not or to stay out of an investment decision is that you, you know, why you are doing it. That's the rational part of it, but also that it becomes repeatable. It's clear that, I mean, I have been, let's say, adapting and learning. I've been doing mistakes as well over 20 years. But smaller mistakes otherwise I wouldn't be here. But, but it's important that also your investment process as you learn and practice it, that it becomes repeatable so that you know why and that you repeat the way how you invest into companies and at the very ends, is really of developing a mindset of a value investor that you are not say influenced by, by the news. We're going to discuss about this by the priesthood as Warren Buffett calls it. So that you really have a clear sense about why, why you investing into something. And that you develop a mindset of not necessarily following the crowd and getting nervous when the market goes up, goes down and vice versa. So this is really, really important. And as already stated, I mean, the causes non-exhaustive. I've decided and that's reason why I'm doing this and sharing this with you is I want to share with you my learnings over 20 years as a very investor. And you're gonna do mistakes. I did mistakes and learned out of it, but the mistakes did not wipe me out. And I think that's an important thing. So if you invest into some businesses, even if you do mistakes that you learn out of it and that you adapt your investment process. So let's move on to the next slides. And I mean, if there would be one visual as very invested, I want you to, to, really to, you have to keep in mind to memorize is really this one. And this actually shows you in one slide in one visual graph what the meaning is of value investing. So to make it short, is if you look at the orange curve, you're going to have the market price that changes every day. We are going to discuss about Mr. Market, which is an manic depressive persona that Benjamin Graham has been defining and prices on the markets. If I take the example of the New York Stock Exchange or the Frankfurt or the London Stock Exchange. They change every day. People are nervous. They are, they are pandemics. There are, there are wars, they are crisis situations out there, tornadoes and floodings, whatever. And, and you cannot predict the market. And I'm gonna give you tangible elements that you cannot predict the market. And what is important as a value investor is that you are able to determine this blue curve that is called the intrinsic value. So what is really the real value of the fair value of the business that you want to potentially invest into. And obviously, if the market price is above that intrinsic value, you should not be invested into the company. Maybe you should wait until the price is going down. And typically how I do it when the market is giving me a price that is between 2530% below the intrinsic value. And like the company and we're going to discuss about it in the circle of competence, in the six habits that we're going to discuss. But if alike the company understand the company and the company is sounds from a financial perspective. There'll be chances and it's part of my investment areas. There are big changes that are going to invest into that company. So I think this graph really kind of summarizes everything related to value investing and understand the business, but specifically tried to buy it when the market is low or depressed. And I'm gonna give you the tools in this course to value business, to determine the intrinsic value of a business. But you need to stay with me a couple of chapters and I'm gonna give you the tools on that and we're going to do a complete exercise on that as well. 3. Value investing origin: And the second introduction, let's talk a little bit about the origins of value investing and I could challenge you here. Who are those three gentlemen? From left to right? So I, I maybe I give you 23 seconds and think about it. And if you look from the left to right, so you have Warren Buffett's, which is one of the most known value investors still, still alive today. And the Milling had Benjamin Graham, I'm going to speak about Benjamin Graham. He's actually the father of value investing and he has been teaching Warren Buffett's value investing actually is. And on the right-hand side you have trolley Mongo is upon of Warren Buffet in so they have like a holding company which is called Berkshire Hathaway. So those are the three personas which are, I would say in the value investing world. They are not the only vary investors and not the only successful value investors. There are many successful investors, but those three are the ones that are, in most cases known being Valley investors. And actually they did pretty well at the remote exact, it will come up later on. But I think Warren Buffet, which I'm not going to have like, I don't know, 70 billion of wealth in the company. So they really, really did very well in the way they have been investing in companies and businesses. So the man in the middle that I was Benjamin Graham. So Benjamin Graham, he's actually known as the father of value investing. And he wrote to, let's say, text or books that are actually very interesting to read. One is called Security Analysis and the other one is called intangible attributes. Here, my library behind me and I do have, I think two versions, German version and an English version of the Intelligent Investor that was written in 1949. So that's nearly a century ago that this book was actually written. And what is interesting in that book is that Benjamin Graham, and you need to imagine that in the, at that time, 193019 forties, 19 fifties, we did we did not have internet, we didn't have Bloomberg, who didn't have CNBC. So it was much more complex who had access to the information. So I mean, it was not as frictionless as it is today. Nonetheless, the, let's say the guiding principles and investment philosophy that Benjamin Graham developed. And you see it here in the slide. Here was actually labouring, say, okay, actually I want to invest into sound businesses and businesses that have a minimal depth. I'm not saying here that depth is bad, but not too much depth. So striking the right balance between equities or capital and adapt. And he was saying, if I invest into a business, I need to act as a business or I'm not buying it today for selling it tomorrow. Today, you would call this going long on a position. And if I take my example, I'm going typically. I invest into business into positions for three to five years. Sometimes when I buy businesses, they are positions that I do not want to sell, that I will stay with them for the next 102030 years actually, because I do like those businesses. What Benjamin Graham also said is that actually a should do fundamental analysis. So you should look at financial statements trying to understand getting a sense of what the CEO, the board of directors actually commenting about the company and the state of the business diversification, we are going to discuss it. But when he was mentioning concentrated diversification is really if you want to act as a business owner and I'm doing it the same way. I am not investing into 50 companies. I'm investing today into less than ten companies because I don't have the time to follow more than those. Actually, it's seven companies I've invested today. And as I told you, I have the discipline of going into causally analyst cause listening in, going into annual shareholder meetings, and tried to get a sense how the business evolves over time. Also. And coming back to the graph, to the visual that I showed you a couple of minutes ago, Benjamin Graham was actually saying you should buy with a margin of safety. So I think Warren Buffett, Benjamin Graham, I mean, I learned from them. So typically is like at least 25-30 percent. So if the current market price is 25 to 30% below the fair value of the company. You are getting the company at a discount of 25 to 30%, which is not bad. And the chances are very big. And I can explain this later on, but the chances are very big that if the company is sounds and it's just because the market is depressed, that the price will race. And this is an interesting one of contrarian mindsets. When the market is actually depressed. What Benjamin Graham is actually saying, you should not follow the crowd. Obviously, you need to look into businesses that are sound. But if everybody is selling, the prices will go down. So you're going to have opportunities of buying businesses at a depressed price. And again, as long as the business is sound and I'm going to teach you the measures how to evaluate if a business is sound. So this debit, the investment philosophy of Benjamin Graham. So moving on to Berkshire Hathaway. So as mentioning you see the photos here of Warren Buffett and Charlie Munger. And maybe some of you know that this company exists for at least 60 years. They have done a fortune out of it. I think that Warren Buffett is the third largest, most wealthy man in the world. And his Pondicherry magazine very much as well. And if I would kind of summarize without going too much into the details, I mean, you can read up by herself. But if I would summarize one key difference between Benjamin Graham and knowing that actually Warren Buffett, he went to school and he has been taught value investing by Benjamin Graham at Columbia University. So and electrically, if I'm not mistaken, actually has been even working afterwards in investment money for Benjamin Graham. So Benjamin Graham has been kind of a mentor to Warren Buffett. And, but there is 11 thing that actually kind of differentiates Warren Buffett versus Benjamin Graham is that Buffett's likes to buy businesses not only that have solid fundamentals, but that have. We would call modes. So differentiating attributes that will make that customers like the brand. It's a strong brand and they will come back ever an ever again and buy from this brand because they liked the brand and the like the products of this brand. And they're even willing to pay a premium in terms of pricing for that brands. So that's something that we're going to discuss later on. How we do we look at brands, how can we define a mods? Who tangible is that mode, et cetera? And then obviously as well, one of the things that is important is that Warren Buffett was saying that's gonna, gonna give elements on that economical elements, but you cannot expect and unrealistic long-term return. And we're going to discuss that typical value that Buffett says here is like a 30-year period. If you're able to grow every year, your wealth by six to 7%, which is above inflation about the growth of the economy, even the worldwide economy. You actually going to be rich, very rich, but do not expect over a long-term period like 30 years to be able to grow your wealth by 30% every year. There is just not possible. So and here, sharing with you and probably if it is on YouTube or on the internet, you can Google this up. And there was an interesting interview done by Charlie Munger by the BBC. So by the British TV in 2012 were actually he was also kind of sharing what are the main characteristics of main decision criteria that Buffett and Munger actually follow. And the first one that I'm showing here with you is that manga was clearly stating that if you want to act as a business owner, it means that you understand the business you're investing into. And I'm going to give a concrete example. I, for example, I do not invest in biotech and pharma because I do not understand that business and I don't want to understand it under one. I don't wanna make a photo of understanding. It's just outside of my circle of competence. I do have a friend that actually I've been teaching value investing. And this friend actually has a PhD in microbiology. So here's investing and in a pretty successful ways, investing into those pharma. Big corporations, biotechs, et cetera. And so he understand the present. I'm not understanding it and we're going to discuss, are going to discuss about the six habits of a very investor. But here already manga 2012 was actually seeing this interview. So you need to be able to understand where you're putting your money. The second one is, what I was really commenting in this land reform is that you need to invest your own business or part of the business that has some characteristics that make it. So that gives it a durable competitive advantage. What I mentioned earlier as being a mode. And that's something that we're going to try to define how we look at companies, what are the kind of modes they have begun to discuss what brand valuation and those kinda things. So stay with me on that regard and discuss it through the course of these various chapters. The third one is. Actually that they want to invest into businesses where the CEO, the board of directors, they act with integrity and talent. And in one of the last chapters before wrapping up this, this, this course, actually I'm going to try to give us some sense. If you are able to determine if the CEO, he or she, and the board of directors, if they are behaving in a way that that comes with a lot of integrity, compliance, and also with talent. So we're going to discuss about that. And then last but not least, and this is one of the most important ones, is that and if it is buffered a monger. And again, remember my visual where I said you spoke by this 25-30 percent safety margin. So what they are saying is, no matter how wonderful have fantastic, how beautiful, how financially sound the business is, it's not worth an infinite price. And this is where we come back to what is the fair value of the business and set are going to give the tools on that. But then at the same time is what is today the price I can buy that business. And if we have the safety margin of, let's say 25-30 percent, you went to define your value of safety, margin of safety. Something indeed that's also manga and buffered and specifically in this engineer was actually stating. So last part here is really about where I don't want you to be distracted. So you could spend today a lot of time on the internet looking up for a lot of information, looking at Bloomberg over time. And if it is Mongo buffet table clearly stating and they're calling it actually the priesthood. I didn't know that term before listening into that interview. But you really need to strike the right balance between information and what they call information entertainment. So be selective because otherwise, you will spend your time and getting nervous on any kind of information that you would feed me with the missing. So is really trying to differentiate that. And actually the, let's say the habits of behavior that Buffett and Munger are actually are asking here is, if you buy a business, just shut down the TV and Internet for a couple of years, would you still be confident investing into that business, whatever happens in the world? The answer to that is yes, then probably you are developing some kind of Martin as a value investor and not being distracted by this whole information entertainment, which is a business by itself as well. So that's going to wrap up chapter 0 actually, which is the introduction to value investing. I hope that you like it so far. And we're going to move on to the key concepts that are fundamental to understanding companies, how business works, how money works, how the economy works. So that's me and I'm going to open up a new video, chapter one. Thank you so far. 4. Money & cash circulatory system: Welcome back value investors. So we're going to start now in chapter one. And in this chapter more specifically, we're going to look into very important key concepts, fundamentals like money, cash from cash to assets, and how we can look at return on those investments. Also, we are going to discuss different types of investment vehicles, investment styles. And then at the end of the chapter, I'll start walking you through how to read financial statements of arrows. Companies, we're going to discuss balance sheet, income statement, cash flow statement, and also sharing a little bit experience on how I look at investor relations. So let's start with money and cash secretory system conversation. When we discuss about money, the first thing that is very important to understand is indeed understand the primary function of money. So money has been actually created to exchanging as medium for exchanging goods and services. And prior to that, before money appeared, people were bartering, so they were changing goods for other goods. And that's not the point. I think the point that is important, looking more at war, why the purpose of money that was really tutoring or removing bartering is really that the value of money changes over time. And this has a value investor as an investor in January, it is something that's definitely you will need to understand. And you can see in this slide, I've taken the example of coffee. And you can see that if you take the example, now took this image from Investopedia. If you look at the cost for a single cup of coffee in 19 seventies and was around a quarter of a dollar. While today actually for the same cup of coffee, it will cost you around eight times more. So around 1.5 $1, the cup of coffee. So it's important to understand that the value of money actually and consistently declined over time. And this is what we call inflation through reason. And again, the purpose not to go into all economic attributes about the reason why inflation is happening is that when the consumer sentiment, the buying sentiment is positive, people tend to buy more. And with that it actually increases the demand. And the demand that is increasing. It actually tells the sellers, the producers that maybe they can pass a part of the costs, an increasing actually the margin they are doing and passing this to the buyers so that the consumers, this is how actually inflation becomes like a snowball effect. And I said without going into all the details, it's not an economical course, but you need to trust me that you hear economists discuss, is inflation good or bad? How much information do we need? Is deflation better? Let's stick to the position that actually a little bit of inflation, let's say a couple of percentage. That's actually good for the economy and that's the role of the federal reserve. Their role is actually making sure that there is enough supply, money supply on the market, but at the same time, there is not too much. So that the economy is and how to balance and having a little bit of inflation. And I mean the main monetary, let's leverage that they have is really curbing the interest rates up and down. And depending on how, how, how the economy is becoming the May then increase interest rates so that people stop spending money. So the cost of getting money is increasing. And when there are risks of economical, let's say downturn, they typically lower the interest rates that money actually gets is cheap. So that's really the whole purpose and this something that you need to understand why, why is this important? For you as an investor? You can look here in the slide deck. So the example I was one year to you to understand is the following. You have as an investor at a certain time, you will need to take a decision about the instruments investment vehicle that you're gonna put your money in. And here I've taken an example of a 0.5. percent bank savings accounts. And what is interesting with a bank savings account, and some people say, Yeah, but 0 dot five is not a lot. That's true. It's really not a lot. It's nonetheless, the value of the money is increasing over time. So we are in a situation that $1 at the very beginning, I share this with my laser pointer. So $1 in the beginning actually, after ten years with a 0 dot 5% compounding effect becomes 1.05%. So that's great. I mean, you are, you have not done anything and your work is growing. What people very often forget in the equation is the cost of living, the cost of inflation. And I've taken the example of a inflation that would be flat as an assumption over ten years. And you can actually see that the cost of living, the inflation that is here as an example, as an assumption at one not 5% is actually destroying. Well. So the $1 here at year 0 is eaten up, is deflated by, is devalued by the causes of inflation of 105% annually. Actually, the $1 here you will need in ten years time, like the cup of coffee, you will need 1.So $16 to be able to have the same purchasing power as you had ten years earlier with $1. So you clearly see how the cost of living increases and changes the value of money over time. So net-net actually if you take the bank savings account of 5% and you add on top of that v1 naught five to deep inflation, which actually destroys the value of your money over time. Actually, even though you think that you have increased your wealth by 5% after ten years from $1 to 100 5%. Actually you have destroyed 11% because the GDP inflation is eating up faster than what the bank, bank savings account is giving you as a return. And this is a very important thing that you need to understand. That you need to include the cost of living, the cost of inflation into your investments. So 0.5, 0 dot 5% yearly increase. A bank savings accounts, money that you've put there is actually, with this level of inflation is bad. And you can see, I mean, I'll let you read through it. You have it in the attached training document. And you have done the same with 5% compound rate and a 7% compound, right? So the importance of the key takeaway here is really wherever you put your money in real estate, if is your bank savings account, if on the stock exchange, you need to think, what is my return, but that's not enough. You need to think also as well. What's the inflation rate? How is the cost of living actually eating up part of the reason that I have. So and again, I'm just trying to visually show you here. Obviously, when you have a return that is around 7% without any inflation, you need a couple of years just at Apple that you can see that with a 7% return after ten years, you have nearly doubled your wealth. Why would there 0 dot 5%? You have only increased by around 10% after 20 years and around 5%, as we saw in the previous example after ten years. So there is, obviously there is an exponential effect the higher the return is. And obviously, as I already said, if you now bring in inflation into the equation, obviously this goes down. And with their 0 dot 5% growth rate or return rates per year and within a one dot 5% inflation. So net, net, it's minus 1%. You actually destroying value, you are destroying your wealth because a bank savings account, it may be with 0 risk or close to 0 risk, but the return is not high enough to compensate the cost of living. So I think I hope that you get the point about that you need to factor inflation into the whole conversation. So having put the, the, the conversation that money has a cost over time and that inflation or cost of living is eating up part of that value of money over time. We can now go into the conflation about investing because investing is what were typically investing is the mechanism that people, investors, banks, lenders, they do have money, they don't know what to do with it. So they sometimes give it to another person called the chief executive officer. And he or she or the board of directors, they will invest this into real assets and real assets actually. And I really like this secretory system which cache, which is very similar to how blood is the human body. So you go from cache that investors and lenders have, they do not know where to allocate it. I think there is a good opportunity and a specific company, let's call it company a. So they give this money to the shareholders or they become shareholders. They give it to the CEO. And with that actually, they put the cash to work. They invest into real assets with the hope that the cash that they have invested into assets are those assets will generate fresh cache, fresh money from the operations of the company. And then if you look at the circulatory system, they have actually two decisions. So the board CEO is aid or they return this back to the investors or to the lenders. Lenders would be paying back debt while returning it to investors. We're going to discuss it in the upcoming chapters will be giving either a cash dividends to the shareholders or maybe just doing a share buyback. But maybe also it would be better for the company instead of using the process or the flow number here, here, that they actually would reinvest the cash that has been generated by the operation, that they would reinvest this actually into the real asset. So that's definitely something that is also sometimes a better option than option for actually has a sometimes option five is a better option. 5. Risk vs return: Welcome back to lecture number five. This time we're going to discuss further important concepts. That is a value investor you need to understand is the risk versus written balance that we need to find as an investor. And if you look at this, slides, it, I think it's very well summarizes the various categories of investments that do exist on the markets. And today there is lot of hype around startups. So that would be the area of venture capital that you can see on the upper right-hand side of this graph, where, I mean, most of the people who are in the venture capital area, they do know that in average nine out of ten startups will fail over time, so they will not stand the test of time. So the one that is remaining from the ten obviously has to compensate the loss of capital velocity of investments of the other ones. So obviously, the risk is very high, the risk of failure is very high. And as a risk of failure is very high when there is a success, that success needs to compensate the Otzi, the disruption that none of those ten companies have actually failed. So obviously the return has to be exponential. That's why you typically see Venture Capital being on the upper right-hand side of this graph. Because the risk is very high and obviously the return and the expected return is also as well very high. And then if we go down, we're gonna discuss later through the lectures and in this training that typical value investor is in the area of small cap, large cap stocks because it's still equity, it's not corporate obligations or even state owned obligations. So they're actually, you see that obviously with large, sorry, with a large international companies. Take the example of Coca-Cola or Microsoft, et cetera, et cetera. So obviously the risk of them going bankrupt, bankrupt is lower. And then obviously the return given the size of this companies, the expectations on the return will also be lower. And what this graph is actually telling us as investors is the safer the investment vehicle is, the lower actually the retina you can expect from the investment vehicle. And if you look at, at t3, so US Treasury 30-year bonds, which are today kind of between 100 to one to 31 with 4%. A lot of people actually say, don't bet against the economy. Us economy will always be able to provide that return of one or 3% over a 30-year period, which actually theory you gives a lot of uncertainty what will be happening in the next and during those next three years. So that's really something that you need to take into account depending where you put your money, what is the realistic written that you can expect? So having said that, and I said that as a value investor, we're speaking here about value investing. What is actually the right level of annual return that you can expect? This not just as a one-shot during one year or one period, but really of a very long period of time. So you're typically looking at horizons of 102030 years. And I've, I will start with the statement that, that Buffett actually said, which says that a company cannot grow faster than the economy. Otherwise it would grow the economy. So having companies where investors believe that the company will grow for 100% or 80% over a 30-year period that doesn't exist. And history has proved, has proved this. You will not have companies that will keep such a pace forever. So at a certain time, companies become mature and they will go then probably into an organic growth scenario. And so the, the, I believe as well and I do agree with buffet. So what I showed to you in the previous lecture that we have the value of money that changes over time due to inflation. You can see here that the typical GDP growth rate, so that's the left graph. The typical GDP growth rate is somewhere between, let's say 0, 5% over the last, let's say 20-30 years. If you take into account inflation as well because you need to adjust that growth obviously to inflation. And you hope that you're going to get some kind of return that we're going to discuss later on, like for example, dividends. And you see on the right-hand side of the typical, If you take the Standard and Poor's. So that's the 500 largest US companies that the currents dividends yields is around, let say, 2% more or less since again, 2-3 decades, you could take the assumption, that's what Buffett is saying. You could take the assumption that having a six to 7% per year of a very long period of time, let's say 20-30 years. That's definitely something that is possible and realistic. So but I wanted to be a little bit more precise than just making statements or taking a statement from Warren Buffett that I do respect nontheless lots. And I tried to rate, to show you through the historical GDP growth of the US, the inflation and the dividend yield on average on the S&P 500 that he needs six to 7% fields. Indeed quite realistic. And I find interesting study on visual on the internet where the study was actually looking at what is, depending on the kind of investor, what is the reason that they were achieving over a longer period of times? And if you see the red line in the graph, that's the sixty-seven percent expected average that we could have. And you see that people like Warren Buffett that are in the business for nearly 55 years, they have been growing at an average growth rate year over year of around 12 to 13%. And remember what we discussed in the previous lecture, what I've tried to show you when I was showing the compounding effect of money. If you recall, we need around 77% per year, compounded over a ten-year period to double the amount of wealth of money. So if you start with, let's say 100 thousand US dollars or €100 thousand. And if you're able to compound this at a 7% yearly rates and you do this for ten years, you're going to actually end up with $200 thousand with a 7% growth rate over ten years. And you see, so Warren Buffet, 55 crystal 55 years. We're going to discuss about Peter Lynch on the left-hand side. So he was planned investment vehicle accompany. So he was also at rates around 13 to 14%, but for a period of years around 13%. So you see actually that even those people, they are unable to outperform in a crazy way. This six to 7% is going to be always be exceptions. But consider that for you having a sixty-seven percent year-over-year in ten years time, you're going to w Well, so that's something that you need to take as a benchmark. And continuing a little bit here, the, so again, not just throwing at you a quote from Warren Buffett, but trying to be a little bit more scientific. And this is actually updated research that Barclays in the UK is publishing and we will not speak too much. I'm not a big fan of of too much diversification because I believe that when you're diversified to Muji are unable to understand the business of the company that we're going to discuss later on. So here they given an estimation of the performance of a fund of funds index since at least I have the data since 1997. And a fund of funds would actually kind of simulate kind of perfect market diversification. And what is interesting to see, and obviously you see that it fluctuates. It fluctuates as well even in a perfect diversification model. You're gonna have yours like 2008 where you were at minus 20% growth year over year because of the subprime crisis in the US. When the sovereign debt crisis happened in Europe again, he had a negative here and obviously now in 2020 with the 19th situation, we do have as well a negative current year to date growth rate even in a perfect diversification model. What is interesting as if there is one key takeaway on this slide is actually that you can see that over a 20-year period, the average, today's average is just below 5% of growth rate. So you see that even a perfect diversification is not able to go beyond this, lets say kind of average benchmark of being six to 7%. And I think that's really the key takeaway here. So I'm trying to show you that this, your expectations, if your expectation is to be able to have something like 67% over a 30-year period. That's already very, very, very good. But you cannot expect to be having a returns every year of 3040, 50%. You're gonna, you're gonna do big mistakes. You're going to be wiped out. You're gonna probably lose your shirt by wanting to be too aggressive. That's really not something that as an investor, but even as a value investor, you should not do that's more speculators who do gamblers that do those kinds of things. 6. Investment styles & vehicles: So the next lecture, we're going to speak about investment styles and vehicles was still in Chapter one. And so the first thing I want to share with you, and again, we are still in the chapter of giving you the reading Key, some fundamentals and also some vocabulary to understand the minimum, what you need to understand to be able to invest in a right way into, into the market. And typically when we look at an investment techniques, most of the people agree that they are to actually be a little bit more because you have people that are what we call some macro fundamentalists though they look at broader economical cycles. And so, but typically, when, when we look at investment, we do have what we call fundamental analysis and then technical analysis as a value investor. And you're going to be more actually a fundamentalist in the sense that you're going to try to determine the intrinsic value of a company by looking at also the strength of the business, the financial statements. And assuming that even though you know that there isn't an efficient market theory outs and that, that efficient markets theory holds in the long run. But that the market, and we're going to discuss this. Ron, that the market will give you inefficiencies during course of time and that you're going to take profit of those non efficiencies to buy companies at a cheaper price. The second investment technique is what we call technical analysis. So that typically people look at graphs and they tried to figure out, depending on the movements in the graph, what, what will happen in the future. And some people are successful at it. It's absolutely not my style. So I do execute fundamental analysis because I believe that you need to understand the business that you're investing into and also being able to determine how healthy or not the business, the company actor that you are putting your money in. Actually. So technical analyst said, looking at graphs, I do look at graphs nonetheless, from time to time. But it's really to see a broader market movements. But, but really for the rest, it's not something that I am taking decisions based on technical analysis or graph analysis. That's not something I'm, I'm using. So having put the investment techniques on the table, we also have different investment styles. You have people who are active investors. I'm an active investor. I'm not a passive investor. But you see today with those investment funds that I think it's 80% of the market, that market transactions that are executed in a passive way. And through algorithms, through automatic decisions that are taken, then you have as well, growth versus value investing. So growth investing is typically investing into, as an example, IPO companies. So initial public offering companies like Facebook, like you borrow those kind of companies while on Netflix. While value investing is being more investing into traditional companies. That are less, let's say, cool, attractive, but nonetheless, they are very healthy and they generate nice returns. As already said in the previous lecture, you may have people who prefer to mass and small cap companies versus large-cap companies. And then in terms of investment vehicles, you're going to have, the market will give you a lot of investment vehicles being its stocks. So that's real equity buying portions of real business with a company. But you may have trackers that some investment funds make available corporate bonds or state bonds. You can have options, penny stocks, futures. And typically as an investor, not a gambler or speculator. As an investor, you, very often we'll see people investing into stocks or combination of stocks and bonds, corporate bonds or state obligations. And speaking about value investing, if there is one graph, not just in this lecture, but over the whole course, I want you to keep in mind, it's this one. And this one actually really summarizes what value investing is. So value investing is really about determining. It's not just about being able to navigate in accounting data. That's something that I'll try to teach you during this, the various lectures that we have here. But it's on top of being able to navigate an accounting data and financial statement data is really being able to estimate the real fundamental value of a company. And what is interesting, and this is why I'm showing this Grob is being able to determine if the company, if the market today is giving you the company at a cheap price versus the blue curve that you can see on the graph, which is the intrinsic value. And if you have something like a 20, 25-30 percent margin of safety between the two? It's not a margin of safety. It's actually probably telling you that the market is for the time being very emotional and is giving you a good company at a cheaper price at minus 20, minus 30%, so undervalued and that, again, that gives you an opportunity to buy fantastic companies ads at a decent price. So there's really something that you need to understand this graph at which moment in time it is appropriate. What you obviously you will get from the market is the daily, hourly, every minute price of the company. But you really need to calculate the intrinsic value. And this is something that I going to teach you in chapter down the road in this training. And still in the conversation about investing versus gambling versus speculation. The when you speak about value investing, the typical value investor zone is in the small camp to large-cap companies, we are not in venture capital B or not in private equity. And also value investor. When, when, when I invest into companies, I don't buy state bonds, I don't buy corporate bonds are really buy a piece of the company. So I'm going to discuss in the next chapter, not in the next lecture, but in the next chapter, that my investment universe Actually it's very, very big companies. With very strong brands and giving you an example here on the right-hand side, what Ostrom brands are probably you're gonna recognize a lot of those brands as of today. The NS part of, again, we under trap of trying to give you the right vocabulary and concepts. So when we speak about small cap, large cap, medium camp, what does that mean actually a how do you how do you know companies? A small cabal lot? Cab Actually, it's pretty straight forward. If you have a company that has a million shares, you just need to multiply the number of shares by the current market street price that will give you the current market capitalization. And this is how we classify companies to small-cap, mid-cap, large cap and mega cap. And maybe some of you have heard that today in 2020, we have companies like Apple, Microsoft, Amazon, alphabet, so Google that are mega caps, with even some of those companies being beyond 1.5 trillion of market valuation. So again, this is Joseph purpose of vocabulary that you understand. What do we mean by small cap versus a mega cap? And another concept that I want you to understand is really difference between the primary market in the secondary market. So we as value investors, if we buy companies from a public stock exchange being at the New York Stock Exchange, the German DAX in Frankfurt, the London Stock Exchange, Paris, or whatever, Hong Kong, Tokyo, et cetera, from the Nikkei. So we're going to be active on the secondary market normally, except if you're in venture capital and private equity or you're an investment bank, you will not be acting on the primary market, but you're going to be acting on the secondary market. So the primary market is typically used when, for example, Facebook before they went public, so before they did the initial public offering, what we call an IPO. So they had actually a couple of banks who on a road that title. So they were buying the shares, the whole shares that Mark Zuckerberg wanted to sell. And then the banks, they actually take care of reselling those shares on the secondary market. To make it simple, this is how actually work. So just be aware that we are acting on the secondary market as value investors. And in this course, as I told you earlier, I mean, I'm only buying parts, portions of companies. And so we are in a typical zone of buying stocks or buying equity, of buying shares. And one of the key things as a value investor, that different shades of value investor from a growth investor is the following. Is that very investor typically asked for to kind of returns. The first one obviously, as you saw in the graph, is trying to buy cheap price and being able to sell the stock at least 3040, 50% higher. And this is what we call capital gains on the, on the share price. But as a value investor is going along, I do have positions that I have my portfolio for 234 years. I do have even some positions that I will never sell, like Nestle for example, I don't want to sell this company. And you gotta understand later on what's the reason for having a permanent position in Nestle? While nonetheless, I have decided at a certain point in time because the market was cheap to put my money into tenacity, into other companies. I want to have during the period of time that I'm holding that company. I want to have and I want to earn passive income. And a lot of people consider this to be dividends. But we're going to discuss differences between cash dividends, but also I'm share buybacks and how that works actually. But for me the important thing is when I buy shares of companies, I definitely want to have not just when money on the share price that goes up, but also earning passive income while my money sits still. So in this course we will only be speaking about stocks. And one of the things and I saw actually junior investors doing mistakes on this is that they don't understand. What's the difference between a common preferred stock. They don't know. They think that they are buying stock from their bank or from a broker. And actually they are not buying the stock that they were actually thinking they were buying. So the first thing to understand is different, and we do see this in some companies. And in the next line I'm gonna give you the example with BMW. So we do see companies that have two classes of stocks. Some companies call this class a, class B. Typically you're gonna see the terminology common stock versus preferred stock. Common shares versus preferred shares. And so what is the preferred share actually preferred chair is a share. It's a pot. It's a portion of the company's balance sheet, but very often it does not carry a voting rights. Why would Maine, let's say shareholder or board of directors do this is just to avoid and giving those people voting rights so that, that's the other shareholders can take decisions without the preferred share holder ONE AS and, but for that, for what I call buying the silence for buying this islands, obviously, the Board of Directors, the main shallows needs to give those preferred shareholders and incentive. And I said Russia and a concrete example of the BMW in the next slide. Then we have common stock. That's really the typical equity piece of a company, which gives actually to every shareholder owning that voting rights. And typically, again, this just as generalization, but typically one share. One stock means that you're going to have one vote to elect the board of directors to take decisions at the annual shareholder meeting. The another concept that you're going to see in the financial statements that we're going to use is what is difference between basic number of outstanding shares and diluted number of outstanding shares are typically in the Basic. That's just the number of shares of the company has while the diluted specifically in big companies, they do remunerate the employees as well with stock options, with Warren's, with convertibles, those kind of things. So the diluted actually takes not only to count the regular shares if they are preferred or common, but adds. To the basic number of shares, adds all of those shares, or let's say entitlements to shares. And this is what we call the diluted amount of share. So it increases the universe of the total amount of shares. And as I said, a mistake answer from some junior investors is that they think that they are buying a stock, the stock with this amount of dividends on it, and actually they, they made a mistake. They're not buying the right security actually. So one of the important things to know is that when you look at corporations, if they have public shares on the secondary market, they do have an international identification number for their, for their chef that security. So these were called the ISO number. So you can always verify an asset are gonna show it to you in the next slide. You can always verify that you are buying the rights, the right stock vehicle or share vehicle from the company. And again, let me show this concrete to you through BMW. So German car maker, probably most of you know BMW. So they have actually, in the example of common versus preferred shares, they do have actually two shares I've put to the I cinema. So you see that the isnumber is different. You cannot just go to the bank or to your broker and say, wanna buy BMW. You need to know which one are you buying the ordinary share or you're buying the preferred share? And what is interesting to see, and I've put you her table from 20092019. So do you remember that a preferred share very often does not carry of voting, right at the annual shareholder meeting. But for that, those shareholders want to have a premium that will have an incentive. And you can see in the table between ten hundred and nine thousand nineteen, that there is always a true sense of the Euro difference between the preferred share dividend and the ordinary share dividends. So whatever the price of the share is, but you get actually a little bit more year Libby more return by buying a preferred shop. But at the same time, you are giving away your voting right? But maybe you as a small investor, if you have 100 stocks, 1000 stocks, you're gonna say actually, I will not turn any decision around by just having such a small amount of shares, some willing to take a preferred chair. That's, that's the reason why those companies or some companies proposed two classes of shares, cos a plus b or ordinary versus preferred, may have companies who have 1020 classes of shares that obviously you need to understand what are the differences between those various classes. And if you take the example, that was early 2020. So April 2020, when I extracted from Morningstar, the share price of the BMW was at €5,198 and with a dividends of 250 versus 252. You can actually see that from a percentage meal perspective that the BMW ordinary share was little bit lower than the preferred chair. It's 0 dot 0, 4% difference between the two. So that's the $0.02 difference. So $0.02 of euro difference between the two shares in terms of dividends, one pays out 252 of dividends, preferred one, and the ordinary 250, it gives a little bit more or less of yields on the stock. Again, It's important that you know that those differences exist and that you don't mess it up when you're buying a share from the secondary market. That's why I wanted to make sure that you understand the difference between preferred shares, common shares, that you understand what secondary market is. And also at the different kind of investment vehicles and styles that exists. But again, as a value investor and again, that's my style of investing I hadn't universe of, and we're going to discuss later on a universe of 200 companies. Those are very, very big brands in the US, in Europe. And I look at those companies, I don't look at anything else, but that's my style of investment. But again, we're going to discuss later on when we're going to discuss about the habits of a investor. 7. Balance sheet, income statement & cash flow statement: Welcome back in this next lecture. So in this lecture we're going to tackle the topics around financial statements. And as you can already see from the topics, we're going to assess balance sheet, income statement, cash flow statements. And I'll try to through some exercises to start practicing your eye on reading financial statements and figuring out some important elements that you can find in those financial statements. But it's really a matter of exercising. But before we go into that and when typically we speak about financial statements, one of the most known financial statement is really the one that is called the balance sheet. And I want to come back to you have already seen this in previous lectures on the conversation of the cash being the circulatory system, like the blood is to the human body. And if you look here and you have already seen the various flows that we have here. So we have on the right-hand side, the investors or lenders that are actually making cash or money available to the company. And the company has to take the decision what they do with that money. So either they, well, they probably going to invest in some assets, but what kind of assets they will have to, they're going to invest the money into. And with the hope that the company and the company operations actually regenerate new cash profits from the assets. And then obviously the CEO and the board of directors, they have to take the decision if they're giving the total profits, profitability or income of the company back to the investors or maybe even to the lenders to pay back depths. Or they going to reinvest it into new assets to expand the wealth of the company and even become even more profitable. What is interesting to see here, and you're going to understand the parallelism with when we discuss about the balance sheet is that on the right-hand side, investors and lenders, actually they have claims on the company, it's a liability. The balance sheet, we're going to use a term liability. So lenders like a Bank or the family that you have been borrowing money from. So you owe them money. So they have a claim on you or us, or the assets of the company that you have, put this money, this cash into play. And investors are the same if you are the shareholder, This is a claim on the assets that the company, that the shareholders actually have towards the company. So that's on the right-hand side and you're going to see in the balance sheet we actually speak the right-hand side of the balance sheet is called the liability side. And on the left-hand side you're going to have the asset and actually you have here in this circulatory system, that's why we start from the right, which are the claims and the liabilities like in a balance sheet. And we go to the left where we actually have the inventory of all the assets, but we're going to discuss it in a couple of minutes further. So when I was mentioning that we're going to practice financial statements typically, first, you need to know what are the typical financial statements that are used. And we typically look at three reports. One being the balance sheet, which is more the stock of wealth of the company from the day of inception, from the day that the company has been actually created. And you're gonna see. Acids in it adapts the equity part so the capital that has been brought into the company, and also if they have been earnings that have not been paid out to the shareholders through dividends, for example, you're going to have also the retained earnings that actually are going to increase the value of the company. Then we're going to discuss the income statement and the cash flow statement. So those are typical financial instruments that I also, when I invest into companies, I look into and you're going to understand what the difference will be between the income and the cash flow statement. To stay with me in one minute, we are going to discuss this. And then on top of that, I always say it's not enough to just look at those three. Let's say reports, documents being the balance sheet and income statement, the cashflow statements. One of the things I definitely do as well is I do read the quarterly report with the annual report of the company. For example, in the United States, companies that are on the New York Stock Exchange, They have, they have an obligation of publishing a quarterly report, an annual report, the annual being audited, quarterly not being audited. And this is an this is mandatory. This is what we call a 10 Q and a ten K reports for the quarterly and the annual report. And for example, you have companies that publish also. And you have here an example very nice-looking annual reports with very, very glossy quality paper, nice picture as people smiling, etc. And need to be honest, I do not read those reports because that's marketing. And there is no legal obligation from the CEO and the board of directors or what they put into those into those reports. But I do read the ten K and ten K reports because there is let's say they are legal binding. What you see on the board of the right of the put into those reports. So the ten K report. So that's something that is really important where we're going to discuss 10 Q and ten K. I think in two chapters, if I'm not mistaken. And then a fifth element that I use to understand and to know what is happening in the company is the investor relations site. So the investor relations site, I mean, for the companies where I I invest into, I own a portion of the company even if sometimes it's a small portion when there are very big companies, I subscribe to the automatic notifications on the investor relations site. So whenever the CEO and the board, they are obliged to communicate something to shareholders, I'm sure that I will be getting an email in my mailbox automatically to get an update what is going on in the company, maybe there is a major events going on and they are obliged to report on that. So that's also a good practice to look at the investor relations site and if possible, to subscribe to automatic emails from the company that you're investing into. Moving forward. So said I'm imbalance should begin to practice. I think it's in the next slide after, but the conversation is about, first of all, income and cash flow statement. Why the two and is the income statement not enough? So as I said, the balance sheet shows you the stock of wealth of the company from the day the company has been created until now. While the income statement is actually measuring and monitoring the, let's say the ins and outs of the company on a specific over a specific period of time can be a month, can be a quarter or a year. But why? I mean, at a certain moment in time, even in the accounting history, people have asked for the cash flow statement is because the income statement carries what we call non-cash accounting items as an example, depreciation, and I'll give you a concrete example. Let's imagine you own a business. There is a limousine services business, and this limousine is VIP service you're providing to your customers. Vip traveled from the airport to downtown and from their hotel through VIP limousine back to the airport. Maybe you're going to take the decision maybe of renting the car. That's not an investment, but if you would buy a car, limousine car, you're going to have to pay the car manufacturer, the car retailer, immediately let say that the cost of the car is 30 thousand US $1.20 thousand euros. In the cashflow statement, you're going to see the cash out worth 20 thousands. Except of course, I mean, if you're not paying through cash, you're paying it through a you went to the bank and ask for payment down payment over a five-year period. But let's assume that you would do a immediate cash out of that 20 thousand US dollars because you don't want to carry interest on that. But that assets. So you have taken cash, have transformed that cash into asset. Remember our cash circulatory system, we took cash, we transform the cache into now a limousine that is worth 20 thousand US dollars. Well, that limousine will operate hopefully for maybe five years. So that asset will generate revenues and hopefully profits over the next five years. And this is where, as in this example, the difference comes between the income and the cashflow statement and the cash flow statement, you're going to see the 20 thousand being cashed out immediately. One in the income statement, you're going to use a depreciation mechanism and just reflect in year 1 fifth, if we are going on a five-year depreciation scheme, we're going to just reflect on 4 thousand US Dollars in terms of cost and not 20 thousand. And there you see that actually the income statement can look better than the cashflow statement because there is a difference how the assets and the depreciation of the assets are reported in the income statement, which is something that, again, when you do a full cash out, it will be reflected on reported as a for casual in the cashflow statement. And so that's, that's an important nuance difference to understand between the two. That's where we need to look at the three. So balance sheet, income statement and cashflow statement. And one of the things I also look at, and I do recommend you as investors to look into as well, is what I call the CEO and board. You are chips. So how serious, how good our CEOs and boards of directors at being, at sharing values of integrity and transparency. And when you're going to practice a lot reading annual reports, those kind of financial statements. You're going to see differences, even in cultural differences between how the report in Germany versus in the US, for example. But the CEO plays a very important role with the board of directors. How the annual reports and financial statements, what is the content? And I tend to say that's when it's super complex and they're throwing acronyms and abbreviations at you all the time. And it may give a sense that they are trying to hide things from you. And also typically when you have, you have some CEOs who like to play around with notions of definitions like EBIT and EBITDA. Earnings before interest and taxes and other and EBITDA earnings before interest taxes, depreciation, amortization. I tense and apologists for that, and I'm not the only one to consider when a CEO is speaking all the time of EBITDA that he tries to yeah, maybe not to show the true than it's trying to window dress and butyric do kind of a beauty condensing to improve the figures by, by taking some elements out from a cost perspective to increase the profits. I will not say artificially, but kind of nontheless. So some people call the EBIT earnings before irregularities and tempering EBITDA earnings before I attracted them auditor. So yeah, it's a joke, but, but sometimes it's a reality. So I think the important thing here is that you really tried to understand all their integrity and transparency differences between one and the other companies. And how good do you feel about the company bragging about their results or just being very factual about their results. So you're going to see differences, but the CEO, Stuart chip, is something that we're going to cover in the very last chapter of this training I think is lecture 25 or 26, something like that. But stay with me. You're gonna, we're gonna go into that later on. So let's start, as I told you for me, what is very important, even though I need to share with you some, let's say theoretical concepts and some vocabulary. As Warren Buffett said, you don't need a PhD degree to be a good investor, but you need to have some sense of accounting. Suetonius dance, what is being reported and how to value a company as well, and obviously an understanding of the business, but that's something that we're going to discuss in the next chapter. When are we going to discuss about the various habits of good value investor? So in this example, I've taken an example of a company is called XYZ, just for the purpose of the example. And that company is sharing in a simplified way to start practicing your eye, an income statement balance sheet and the cashflow statements. And, and you can see actually from the income balance sheet and cash flow statement that the company has made a profit 13,725 after taxes, that's net income. And you see also in the balance sheet that the company has a total amount of $88,300 of assets and around 35 thousands of liabilities. And then let's say earnings and retained earnings and equity as well. And on the cashflow, Stephen, you see that the ending cash position. Let's assume would be a bank account, cash bank account is of 35 thousand US dollar. So the question here, why I want you to start practicing is where in those three documents do we find, for example, dividends, because dividends is something that we're going to discuss later on, or at least the return to shareholders and dividend is a way of returning value to the shareholders. And so let me let me give you the opportunity to have a look at those three documents. And do you find the dividends in the income statements? Do we find the dividends in the balance sheet, or, sorry, do you find the dividends in the cashflow statements? So let me do a count of five here and then I'm gonna solve it. So 5-4, 32. Otherwise you stop the video as well and then you have a look at it and then you, you pause and then you continue playing. So 1-0. And so the dividends actually typically you find them in the cashflow statement and we're going to discuss this. So it's a, typically, it's a financing activity. So if remember in my cache circulatory system, it's part of the flow number four. So that's profits and having generated there is a cash dividend that is going back actually to the shareholders of the company. So here typically you see that in the year, so it's a yearly cash flow statement. In 2010, there have been $2 thousand of dividends that have been paid back actually to the shareholders. The next example, and we need to practice our eye on. And if you look in the previous slide, you had the balance sheet that was sequential Assets, Liabilities, Equity, but typically balance sheet, that's why it's called a balance sheet, is you have liabilities on the right-hand side, but what you can see here and assets on the left hand side. The first thing I want you, and again, you don't need a PhD for that, but it's reading Key I'm trying to share with you is to be able to understand that there is a certain order in a balance sheet. And I'll start with the asset. So normally the assets and you see it in the, in the slide here, we start first of all with very, what we call liquid assets like cash is cash, even if there would be a risk of the company becoming, going bankrupt or being liquidated. What we call our standards are going concern situation is cash, a dollar of cash will be transformed to $1 of cash. So it's a one-to-one conversion, so it's very liquid. Can you can take the money from the bank account and you immediately transform it into, into cash. So there is no conversation about being illiquid, it's very liquids. And actually there is an order in the balance sheet if you start with the assets. So first of all, we start with what we call current assets. Current assets are assets that are very liquids that are there, let's say that will be consumed over the next 12 months, for example, supplies, inventory, those kind of things. Then we have non-current assets. Here we typically find. Buildings are as giving you the example of the limousine service that we're and the company was buying a car that would be depreciated over five years, that's a non-current asset, a car if it is depreciated over five-year. So that's beyond the 12 months period. So typically find land, buildings, equipment, manufacturing plants, typically you will find it what we call PPE. So property, plant and equipment. And we start first with tangible assets and then also in the balance sheet. And we're going to practice this in down the road in this training. We also speak about intangible assets like trademarks, for example. Sometimes trademarks, I mean, like a patents, intellectual property, they have a cost associated to it or financial value associated to it. And if you buy a license, for example, from another company, you need to carry these in the assets as well. And so that's something what we call an intangible or immaterial assets at something that is actually very illiquid asset. There is an order you start with below 12-month assets that are currents that are very liquid, and then you go to less liquid assets like property, plant and equipment assets. And then you finish actually with what we call intangible assets. And I'm actually on the liability side in the balance sheet, you have the same. But you don't need to take it from a liquidity angle. You need to take it from who would be paid first in case of liquidation of the company. And yet the same principle like on the asset side, you have current liabilities. Actually, those are liabilities that have to be paid within the next 12 months. Imagine could be salaries, could be taxes that the company owes the governments within the next 12 months and they have accrued because they know they will have to cache the cost of those taxes outs. And then after the current liabilities, we have long term liabilities that we have. For example, if you are taking, for example, the car, you are going to the bank and you're asking for a five-year credits for paying the current set of doing a full cash up because you don't have the cash for 20 thousand US dollars. You were speaking before on hands. So So what would not be in the first 12 months will be carried as a line in the long-term liabilities. So let's assume you take the cost of 20 thousand as a credit for paying your limousine, your car. And in the current liability, you gonna probably see what is what you need to pay back within the first 12 months and then the rest. So let's assume would be 4 thousand in current liabilities and 16 thousands with interests in the long-term liabilities to make it simpler. And I was interesting in the, in the liability side of the balance sheet is that you're going to have the equity part as well. So remember what I said before when we're speaking about the cache circulatory system, is that equity is a claim, is a liability as well, not towards lenders because that would be typically in the current and long-term liabilities side of things. But this would be actually acclaim, a liability towards the shareholders. And that's why it's carried on the right-hand side as I showed you before, we have cached comes from either the shareholders or lenders. And those. That Kansas transformed into assets. So from right to left. And this actually what I'm showing you here in a very simplified balance sheet, that the equity is there as well. So if you look at the question, who is paid first? If there would be liquidation of the company, the company will go bankrupt. Would it be the lender? So those who have dept or would it be the shallow loss? Well, by older, if you look at the slides, the first wants to be paid out are the ones that are on the top of the liability side of the balance sheet. And the last ones are the shareholders. Actually, this, there is an order of, let's say, liquidation of the remaining assets of the company. So let us again continue practicing our eye. Is here the question that I'm asking you is you have so the same company we were speaking before. Now you have hopefully understood. So we go from liabilities, either from lenders or from shareholders that are carried in the equity part of the liability side of the balance sheet to assets. And so, so the assets of the casuist transform into assets. And what, what is the accounting value of this company? So to make it simple, helping you out a little bit here, the company has a total of 770 thousand US dollars of assets. You see it? That's the sum on the asset side of things in the bottom and on the liability side, the company. And obviously as it is balance sheet to the total liabilities and equity has to be balanced out. So it's the same amount we have 770 thousand on asset southern, 770 thousand on the liability side with the equity. And the total liabilities, you can see actually that the total liabilities of a company is 481 at 1000 US dollar. So what is the accounting value of that company? Well, for me, the accounting value is if the assets would be liquidated and you would pay out the lenders. So the people that the company has to pay back money, the accounting value would be here, 289 thousand US dollars. That's really what will be remaining between Retained Earnings. And let's say the value of the stock that the company actually has. So that's really what, what is remained as really the value of the company from an equity perspective. And obviously we can have conversations. The company is worth 770 thousand, that's true. But you you need to pay back $481 thousand to people that you have borrowed money from. That's why for me the value of the company is 289 thousand. And we're going to see, we're going to use this mechanism to determine also at a certain point in time, what we call the book value or the price to book ratio of a company, which is an interesting indication. If you go now into the income statement. So I hope that you were able to hopefully practice a little bit bad and sheep, but again, I can only recommend you too. Go into balance sheets, read them and really practice your eye on it. I mean, for me it's easy, kind of easy. I have more than 20 years of investing experienced behind me. But for you, it's good that take various annual reports, look into the balance sheet, look into the income statement and practice your eyes because you're going to see that the format and the lines will be different. So that's a very good exercise and practice to do, as I'm always saying, like a high-performance athletes, if it is tennis or something else, you cannot become a world champion from day one on a, it requires practice and practicing your eye, practicing the right reflexes and your skill. So I really can only infer, emphasize that you practice a lot reading annual reports and do it for companies that you're interested in. That's a good practice to do, first of all, if you haven't done it before, of course. So here are the income statement after accompanied us, pretty well known currently these days, which is Facebook. Facebook owns Instagram and Snapchat or WhatsApp doesn't matter. And so in the income statement, you actually see the revenue. So how much actually builds the company has been sending out to customers, and how much costs were associated to that revenue, turnover, we call it as well. Then you see actually, I mean, if you remove the costs from the revenue, what's the profit of the company? And here again, Justin, on the income statement. And here you have actually how Facebook has been presenting this. You see here 10171819. So you see, it's a different way of presenting figures because they put three years, one next to the other. And what I want you here to start looking into is, I want you to comments on the profitability of Facebook in 2019 verses 1817. I'd like you also to comments. What makes the biggest difference between those three years, but what is changing? What has evolved? So here what I recommend is that maybe that you pause the video, that you look into, the income statements and that you that you again resume the video when you're ready to do that. So let me, I recommend that you pause here and come back when you have an idea and I will explain to you how I look at this. Alright? So for me actually here, there are a couple of things that we can comment. So the question was, can you comment on the profitability of Facebook in 2019 and what has changed? So the first thing when you look at income statements is, and you're gonna see it's something that we're going to discuss later on when we're going to discuss about value traps, is we see that the revenues are growing a lot actually. So, so the revenues were 40 billion in 201755 million of new closer fit, 56 million in 2018, sorry. And 1019, there were close to 71 billion of revenue. So that's good. Companies growing apparently, and the growth is strong. So that's a good sign. But nonetheless, if you look at the line, the net income attributable to Class a and Class B common stockholders. You actually see that while the revenues have been growing between two thousand nineteen hundred thousand eighteen, the company posted a profit of 22 billion in 201818 dots 485 billion. It's 1019. So this is like, Okay, I need more explanations. The company has been growing the revenues from 56 billion or 55, 0.8x billion in 2018 to 76 billion in 2019. But actually they are having $4 billion less of profits. So let me try to find out where does this come from. And that's actually something that I recommend you again by practicing that you need to do. So if you look at the costs, so between the revenue side of things and the net income that is attributable to the common stockholders. You actually see That's the cost of revenue. That's normally what we call a variable cost. The variable cost of revenue is growing more or less at the same pace than the revenue. And again, I'm not going into all the details. It's not an accounting or financial accounting or financial analysis course here. But he typically you would calculate a compound a percentage between the cost of revenue and the revenue. You would divide 5454 by 4653 and do the same math in percentages and see if the percentage or the relative share of cost of revenue versus total revenue, how that will evolve over time. But that's not the purpose here. If you look at research and development, you see me, our revenues are growing. Company has been adding 3 billion every year on R and D. Okay, it costs more, but this is kinda set by the incremental revenue. So it doesn't look to be that one that is abnormal. Marketing and sales. It looks like the marketing and sales cost to revenue ratio. And you can calculate this as a percentage as well. So you take 4725 divided by 40653 for example, and do the same for 1819. It's growing, but it's growing kind of at the same pace than the revenue. And here you see that's the red flag or read curse I put next to it on what we call SG&A, sales general and administration hurts specifically general and administration administrative costs. We see actually that's in 2019. The GNA cost went up from 3451 billion in 20182104 billion. And that's something that doesn't sound proportionate. And this could be part of the explanation why actually the profits went out. I mean, they're still printing 18 billion of profits, which is great. Why the profits have gone down from 22 billion in 2015 to 180485 billion in 2019. So what I would do here, actually, I would go into the annual report, the quarterly report, and actually go into the details because in the in those financial statement reasons, you're going to have nodes and explanations. The CEO and board, they have to explain oldish, they shall explain why the cost of GNA went up as high as that. So from 34512104, 65, That's where actually you need to practice your eye. You need to go into the annual report. You need to know what you're looking for. And this is definitely, I mean, I'm not investing to Facebook because that's the value stock. It's a growth stock and you see through the growth percentages from the revenue year over year. But typically I would like to find out if I would have to invest into Facebook, why are there are 7 billion more of GNA costs? I don't have the answer. I'm not doing any stupid assumptions here, but I will go into the analog quarterly report and here would be an annual one because it's a full year view, 12 months 2019 ending. I would definitely like to have an understanding of that. And again, continuing to practice on our eye on cashflow statement this time. And what is interesting in the cashflow statement, and I believe I'm still on Facebook. If I'm not mistaken, I maybe it's another company, doesn't matter. The cashflow statement, you need to, first of all, understand how the cashflow statement is like the balance sheet was explained to you how it is set up. It's remember balance sheet, we have liabilities and equity on the right hand side and we have the assets on the left-hand side in the income statement have the revenue. So the builds that have been sent out to customers that Cosmos been charged. And then you have the various categories of costs that end up in a profit for a period of time, typically 12 months or quarter. And in the cashflow statements, so there's really giving you an estate of the, the, the, the cash flows and the cash in and outs of the company. So typically, it's categorized in three are subdivided into three categories. Typically, the company starts with operating activities. So everything that is cash flow from operations, then we have the cash that is being used in a, we call it Ada financing, sorry investing activity. So that's really investing into the business with depreciation and, and sometimes selling assets as well. So that would be carried also in the, in the cash part category related to investing. And then we have the financing activity is how is the company, what instruments, financial instruments the company is using other borrowing money? Are they paying back dividends? Are they buying back shares from the market? So that's the kinda thing that would look into Definitely. And what a value investor typically looks into is in the investing activity, we look at capital expenditures because I said that will create a difference between cash flow statement and income statement. And we want to understand, is the company. Investing into the business and how much actually are they doing? And also are they selling assets? Because when you sell an asset, the income may look good because it's an extraordinary item. But the asset that has gone so that acid, that acid was producing or generating revenues and profits, it's gone. So it's a one-off profits, but you have Joseph destroyed an asset. So that's the kind of thing that we would look into the as a value investor would typically look into capital expenditures and extraordinary items of selling assets, for example. And then on the financing activity and we're gonna practice later on what we typically look into. You remember when we were discussing the cache circulatory system, we will discussing that on the right-hand side, you have lenders and investors that bringing cash to the company, the cash, we hope that the company operations generate new cash, new profits from it. And there are certain money time the board and the CEO, they have to decide, are they giving a return back to the shareholders or the reinvesting it into the business. The, if you look up the flow number four, that was providing a return to the shareholders and to the lenders. Typically, what we would look here in the financing activities is obviously paying back depth, but also dividend payouts if the company is issuing new stocks or if the company is buying stocks from the market and Uganda. Later on we're going to discuss why would the company be interested. It was the difference between a cash dividend and a stock and a share buyback. But actually an already put it here. So because so that you know, it actually both mechanisms work normally pretty in a similar way with a difference that cash dividends is cash that you're gonna see on your bank account, but you will be taxed on it. While a share buyback, you will not see a cached landing on your bank accounts. Very often it's tax free for the, for the shareholder, not for the company, for the shareholder. And, and as you're going to reduce the number of shares, the pro-rated value of one single Russia should nominee go up. That's why some companies do share buybacks and some Charlotte's prefer shall buy bags than dividends, because dividends the shareholder will be taxed on the stock buyback. The end shareholder will not be taxed very often. And then as well also cache variation. That's something that as a value investor, we also look into is, what are the variations that we have in cash from one period to the other? Here what I'm asking you again, practicing your eye, that's really something important. I cannot emphasize it enough. I want you to start practicing here on the cashflow statements. The, We'll start with the cash evolution question. So how has cash evolved from thousands 14-15 and specifically from 15 to 2016. As I'm speaking, we are still on the covert 19 crisis situation. And a lot of companies, I mean, the companies that are probably going to come out strong or the company that had strong cash position. And we're going to discuss later on because that's a typical measure that we will look into. Companies, how healthy and what we call the solvency of the company as well. So here what I'm asking you is look, between 20152016, and the only tip I wanna give you here is look at the bottom of the cashflow statement. You're going to see the cash equivalents at the end of the year that went 1015.67 billion. And I'd like you to think, to pause my video, to post our video here and to think from 7.6 billion. So a 76, 85 dot 85 in 1015. How has that evolved into 2016? So pause the video here and come back maybe in five seconds, ten seconds. Because then after I'd like you to explain, where's the difference coming from. Okay, so probably have pause the video, resuming its so you see actually that the cash position from the company has moved from 7.6 billion to 1.2x. So actually they have kind of 6 billion in cash from one year to the other. Is that goods? It depends. I would say no, not good. But when I look at 2014, at that moment in time, they had two billions in cash. So here, it's not the purpose of going now into that conversation, but I want you just to practice your eye from where, what is the reason that the cash has gone down from 7.6 billion to one dot 2.2.3 for billion of US dollar. And if you look, actually, they have been increasing tremendously the amount of share buybacks. So they went, I mean, if you look in 2014 and you can follow that red arrow, you can see that in 2014 there were at three dot 2 billion share buybacks they were extracting, they were buying shares of their own company on the secondary market. So by that will say artificially increasing the share price because they are less shares on the market. It's an orphan demands economical, typical conversation. You see them 1015, they spend 6 billion on share buybacks. And in 2016, they again double that amount. And they are, they are around 11 billion of shares that they had been buying from the market. The reason for that we need again to read the annual statement going to the cashflow statement, maybe there's a good reason to that. Maybe they have the approval, maybe the stock was cheap. And it took the opportunity of buying a lot of stock from the market at a cheap price. But definitely that's one of the things that clearly had an impact because if you look at the cash provided by operations, it's more or less stable between 201416, it's decreasing a little bit from 607 billion to 605 to 6059. The calculus for investing activities where you see that they have been investing less into the business. Maybe there's a reason for that. Maybe they are not. They are no good opportunities for allocating money and capital into new, into new assets. And, But actually you see that the big difference is coming from the cache that is being used for the financing activity. So that one is one that is really fluctuating, which explains this is the biggest position that actually explains that there has been a six to 88 billion decrease in the cash flow statement. So again, what I want to hear is I don't want you to become an accounting expert, but I want you to practice your eye for those kind of things. If it is in the balance sheet, looking at the depth, looking at the assets, if it is in the income statement to understanding how the profitability evolves from one, from one year, from one period to another period. And in the cashflow statement, as well as specific as a value investor, you need to look into the investing activities or financing activities, what the company is doing with the money that they have available. With that we're going to wrap up this, this was a little bit longer lecture. I hope you enjoy it and stay tuned for the next lecture. Thank you. 8. Investor relations & annual reports: Welcome back value investors. So in this final lecture of Chapter one, so remember Chapter one, I'm trying to share with you main concepts that you need to have. And also starting to practice your eye on various looking into financial statements and various reports. So the final lecture of Chapter one is around investor relations site and also all the annual reports and what is the kind of information that the company will share with their shareholders? And so the first thing that I, I, and I was already stating this in a previous lecture that I definitely recommend to you as a value investor or as an investor is that you subscribe to the investor relations site. So obviously this will work on you for companies that do have investor relations department. And here I am giving an example of BASF. So the IC current stock position I have to be as EV is one of the largest. I think it's the largest chemical company in the world is a German company. And they have an investor relations newsletter and you can subscribe to automatic email notifications. Why am I doing this? Because I want to act as a business owner and it's the same thing that I recommend you if you put your money into a company is that you act as a business owner and you will probably not have enough budget to buy the whole company, but you will have probably small portions or medium portions of the companies that you're investing into. So definitely if the company has invested relations side and you can see it here on the right-hand side. This is an extract of my mailbox. I do get automatic notifications of important things like invitations to annual shareholder meetings, important news, what we call material events that are happening. So that's the kind of thing that you can get information automatically from the company that you have invested into. So that's the first recommendation, is do do registers after investor relations website if there is one and also attend the quarterly analyst calls where CEO CFO or explaining what is going on with the company. And then obviously the annual shareholder meetings or investor day. Some companies will have an investor day throughout the year. So that's certainly something very interesting to better understand the strategy where the he is going. And yeah, so that's really a first recommendation that is important as well, not just about reading document, but also subscribing to such a process. So talking about annual reports and I can elaborate a little bit further. And this is y also, as part of my, my investment universe, I like to invest in US companies and European companies because there are some legal obligations that they have to fulfill. And as part of the, sometimes you hear in investor cycles are talking maybe to your other investment friends or relatives. You gotta have the terms like ten, K, ten q report, 8K, et cetera. And Let me, let me elaborate a little bit on that. What are, what are those kind of things? What is ten K, ten q? And as I said earlier, specifically, if I take the example of US companies that are quoted on the New York Stock Exchange or the nasdaq. You have in the US, you have a law or you have laws around a Securities. And companies that are selling shares on the public markets, the needs to fulfill a certain set of legal requirements. And the Security and Exchange Commission, the SEC, as we call in the US, is looking at that and you can end up in jail actually, if the company is not fulfilling its legal obligations. Part of the legal of, let's say first before what kind of legal obligations they have to fulfill. It. It's something that has evolved over time. And the intention of the Security and Exchange Commission is really to provide more and more transparency and regular updates to the shareholders of what the company is actually doing. This obviously has a cost to the company because the company has produced reports to communicate and do Coles with Analyst with shareholders. But it's definitely something that's the SSE request to provide trust in the market in what is going on in the US. And I mean, it's evolving over time. You may have heard about the MCI WorldCom scandals and the Enron scandal is a couple of years ago. And definitely at each scandal, the latest one was the wildcard scandal in Germany. Probably at each scandal or very, or eventually, you're going to see regulations evolve as well. And so if we look at the kind of documents that I personally as a value investor, I look into their day or 31 of the most important ones is obviously the ten K report. The ten K is what it's the it's the annual reporting that the company is doing towards shareholders and towards the SEC. And this one is a legally binding one. It's not like the glossy annual report with nice picture. So this is really one. You will not see any picture that has a specific format. You see on the right-hand side, the first page of the McDonald's ten k report. And you're going to have all necessary information. And so inside that report, you're gone. Have the balance sheet, the income statement, the cashflow statement. And for each of those things, you gotta have explanations, notes. They're gonna explain also the risks. What's the strategy of the company? So it's very interesting to get a good sense of whether the company is going also the geographic distribution of revenues, also the revenues per segment, those kind of things. And so what is what is interesting with the ten K report, its report that is audited. So there is an external auditor that is verifying the figures and also validating that according to them the fingers are OK. It's not a 100% guarantee. If you look at what happened with Enron. The reportable audit, it's but nonetheless, there was a collusion between the auditor and and enron management. So but nonetheless, it most of the cases, the ten K report will be better than the ten K report, which is a quarterly report. Because actually the difference between the ten K and ten q is at the ten K is audited, while the ten q, which is a quarterly report, is not audited, is what we call analytics reports. But nonetheless, it gives you on a quarterly basis and overview about the company performance. And it's I mean, it's very similar content between the ten K, ten q with a difference that one is being audited, the other one is on audited. The third one that I like to to look into and this is where again, we come back to. If you are registered to the investor relations site, you're going to get those informations automatically as a shareholder, it's what we call the 8 K report. So the 8K report is actually a report where you have unscheduled material events or changes in the company that I important to shareholders. And as he sees or the Securities and Exchange Commission, they require that they are reported to the shareholders as soon as the event actually happens or the day after. So we're going to discuss this in, I think that one or two slides. So I think what is important here is that you need to have the attitudes of an owner of the company or acting yourself as a board member of the company. So you need to inspect, you need to read the ten K ten K reports. How often do I hear about people that have put their money into companies? And, and it's just because they heard the room that the company would be growing or that they read this in the news. But they never look into what the company is doing, and they never looked at the ten K or ten q repo to They have no no no understanding. If I ask them, why have you invested into that company? Probably just going to say because I heard that it would grow or what, because I like the brand and that's it. But they have done no homework on analyzing what's the company doing, how are the financial statements and those kind of things. So here again, and we're going to discuss in the next chapter about the attitude to have and the mindset to have as an investor. I always think act yourself as a board member, inspect what is, what is going on in there. You will not have the possibility to talk to the CEO. But nonetheless, it could give you a good sense of how the company is being run. And for me very clearly, the ten K and ten K report, I do read those reports every quarter. That's why I'm saying I cannot invest into 50 different companies because it would be too much to read. So that's why I am very selective in the companies I invested into. And then I do have the discipline of reading those reports on a quarterly or yearly basis and already can only re-emphasize at register yourself to the company Investor Relations newsletter and sites so that you get automatic modifications of material events. For example. And so ten K. Ten. Q. So that's the annual report, a quarterly report, again, difference between one and the other is audited versus non audited. And what is the 8K why I'm looking at 8K repos. I was mentioning that this is about material events. And so when you think about material events, and I've taken here screenshots from the SEC website. You have the URL as well in the training documents. So one of the typical things where very often 8K comes out is when there is, for example, a change in the board of directors or when there is a change of a majority shareholder. Those are important material events where a shower laws need to be informed minority shareholders. So that's the kind of thing where you're gonna see emails popping in and coming into your inbox and informing your others And 8K events. And this is it. And let me illustrate it through an example. And again, I've taken here the example of McDonald's. So this is an 8K form of McDonald's where you actually see that if you look at the upper right-hand side of the slide, you see an item 5.0.2, which is an SEC classification for a departure or change election appointment of what they call Officer. So for example, in this example there is a change in the board of directors. So that's the kind of thing where indeed it's important. But because of change in the Board of Directors has to be reported back to the shareholders. And that's the kind of thing where you will, if you are registered to the investor relations site, you're gonna get an automatic notification that an 8K. So material events actually happen and you're gonna get the link to it. And as an example here, you have an example of McDonald's. This was December 2019, example of an eight K a fourth R1. And this is not directly linked to the company that I'm looking into. So the companies I'm investing into, so asset as a summary here, it's registering to the investor relations sites doing a quarterly homework about reading those reports and which reports ten K, ten q. And then also looking at 8K material events. One of the things as a value investor. And if you look in my library here behind me, you can see a couple of investment books, including some books from Warren Buffett and Benjamin Graham. Is I, I like as well to look at 13 reports for some investment companies. And you can ask me about what is the 13 F3 put in 13 f report is actually a legal obligation by investment companies that have more than 100 million of assets under management. So it's an obligation by the SEC Securities and Exchange Commission where they need to reports every quarter in fruit transparency, what are their current holdings? And if you look at Berkshire Hathaway, So the Investment Company of Warren Buffett, Benjamin Graham, They do published because they are obliged. They do publish every quarter a 13 f report. And even after 20 years, I need to continue to learn to improve my or increase my, my, my mind sight, my mindset, sorry, being critical about different things, analyzing things, trying to understand things. It's also for me a good practice on a quarterly basis. To take an hour to look at what Warren Buffett has been doing for Berkshire Hathaway with Charlie Munger. And what are the variations that they had in their 13 F3 portrayal in their holdings. And again, on the right-hand side I've put the URLs, but on the right-hand side you have a screenshot of the 13 f report where you see their current holdings. For example, you see that they have very big brands like Apple Bank of America, Coca Cola, if I take the three top ones and the third and ever report gives you an idea about what has been changing from one month to the other. So you see, I think there is one position if it is not traveler's check where or if you look at what is Goldman Sachs, that's a thing. Position number ten on the right-hand side, you see that the valuation too, they have sold like a third of Goldman Sachs in the, during the last quarter. So 13, every pot is looking at the last quarter and they are obliged of publishing it on a quarterly basis. And typically, the 13 f report is published something like four to six weeks after the close of the previous quarter. So for example, if the quota ends March 31st, you've got to probably see and start off may end of April the 30th report coming out for Berkshire Hathaway, typically it's six weeks. So after the close of the quarter. So if it is closing of the quarter March, you can have a 30-year report by mid-May. And it is and of June, you've got to have it by MIT of August. So that's a good practice also for learning, trying to make up your mind also y is Warren Buffett investing into this company, into that company. So it's also interesting to see what they are doing. And I'm doing this info Black Rock for those who know blacker is one of the largest investment funds in the world. And I think they have couple of trillions of assets under management for external customers. And also I'm looking into where, where are they investing into what other big position that's always interesting to, to, let's say, read, trying to understand, analyze, and maybe learn what those huge successful investors are actually doing. So with that, we have finished Chapter One, just maybe summarizing here. So the key concepts that we discussed in chapter number one. So we were discussing about money and the cash circulatory systems from liabilities, claims of investors and lenders to assess in the hope that those acid generated profits. We have been discussing the various kinds of investments category. So from venture capitalists, private equity stocks, two bones very rapidly as an introduction. And also what are reasonable returns that you can expect from that. And remember that, as Warren Buffett said, and I tried to show this to you by, let's say, a little bit of scientific research, background research, is that if you are able to compound your wealth by 6-7 percent year over year, you're going to be super-rich. So and if you do this for 20-30 years. And then we discussed different investment styles. So technical fundamental analysis differences between the different investment vehicles, between stocks versus other options, et cetera, which is not my investment universe, I only invest into companies. We discuss little bit the difference between common shares, preferred shares. And then we started to train our eye with first exercises on financial statements. So balance sheet, income statement, cash flow statement, what are the differences between the two? And we ended then the chapter in this lecture about giving you, let's say other tools as a good investor. And again, my recommendation and we're going to discuss it in chapter number two. But the right mindset as an investor is indeed to invest as a business owner and do your homework on a quarterly basis, may be every six months, go and read those reports of the company is doing. That's really a very good practice and subscribing to the investor relations site to get automatic email notifications of material events. So with that, thank you for being with me and having closed chapter number one move with me and I hope it was interesting and you have learned maybe things that strengthened, things that you may be already aware of or have learned new things. And with that, we're gonna move to chapter number two, which is about the mindset of the value investor. So with that, thank you. 9. Circle of competence & investment universe: Welcome back investors. We're going to start now chapter number two. So this is about the mindset. So after chapter number one, where we look into some fundamental concepts that you need to understand as an investor's money risk return, inflation. This time we're going to, in chapter two, we are going to discuss about the mindsets before in Chapter three, we go already in the ratios and testing some companies on how they perform on those specific ratios. But let's stick with chapter number two. So the first thing we're going to discuss in chapter number two is what I call the investment universe or circle of competence and circle of competence or something that Buffett and Munger also use as a concept. The, when we speak about circle of competence, what Mangan Buffett, if you listen to them, what they actually say is you cannot be good at everything. And it threw me being a businessman as well. I refrained from investing into evidence. Industries are geographies that I do not understand. Or if I like to invest into them, I need to do my homework and learn about them and try to understand them. So that's really something that you need to define for yourself. What is your circle of competence? What is your investment universe? And I'm going to show on the next slide what my investment universe is. As in order to define the, this investment universe or circle of competence, you have couple of segmentation attribute. So the first one will be typically you have stocks that are growth stocks versus value stocks. To give an example, a growth stock will be typically those tech companies like that don't pay out dividends. I don't give a return to shareholders directly. And you would put like things like Huber into it, Facebook, those kind of companies while value stocks. And again, we're going to discuss it in the next slides. Value stocks of strong brands. But that's actually give more return to shareholders instead of keeping the capital, keeping the cash that is generated from operations, and we're injecting it into the operations that you have in terms of segmentation attributes, the cap size, so the market capitalization size. You remember we discussed in Chapter One, we have mega cap, so that's like trillion worth companies, like typically the Google, Apple, Facebook, Microsoft, and Amazon. Then you have like large caps, medium camps and small caps. And so for example, my personal arbitration, I own invest into large cap, omega cap companies. It's, it really doesn't happen very often reinvest into small cap or medium cap because I'm looking at strong value brands that have a mode, or we are going to discuss that later on. Then you have segmentation per industry. Examples of industries, automotive, former banking, telecommunications. You could put energy into it. For example, I do not invest into banking and energy because I contend amounts have not being knowledgeable enough in those verticals. But I do invest into automotive because I liked the automotive industry. I do like to invest into telecommunications, into luxury. Those are the kinds of verticals where say yeah, that could be an option if there is a good brand at a cheap price. May be an option that I invest into that segment. Then you have geographically markets currently. I do invest most in US, in Europe. And I'm currently trying to learn the Japanese market and Japanese companies and maybe China, but first it will be Japan. Some, I need to do my homework on that. Then you have instruments or like forex, commodities, derivatives. So as I already told you, I only invest into equities. So that's really shares of a portion of the business of the company or the balance sheet of the company of the assets. So sharing with you my, my investment universe. So as I already told you, I'm going I'm looking every quarter. When I'm having cash available at Mega camps and large-cap companies for the time being, it's mostly Europe and US. I have a list of, let's say, 200 companies. That's my investment universe. I didn't go outside of that investment universe and every quarter I update those metrics and we're going to discuss during this training what are the kind of metrics that I actually updates. So this is to show you and when you would ask them, but Kenny, where you find the names of those brands will just need to Google them. You're going to find, I have put your, here are two examples. Interbrand, which is a brand institute. Men have brand z. You're going to find the biggest brands and rankings every quarter or year, their updates or through it's pretty easy to find that information and to figure out what, what those marketing agencies actually saying about the brand in terms of valuation of the brand, of the trademark. And as already told you, the semi, when I come back and we discussed this in Chapter one, the risk versus return, let's say graph or equation. You can see here that my investment zone, my investment universe is typically Mega capture large-cap, as I told you, I have Universe of 200 companies that i look into every quarter. And maybe every quarter the market is changing. I may find cheap companies and it does happen indeed. And typically, so it's mega large cap, so you see it in the red, red circle. And for the time being only Europe and US, but with an intention over the next years to expand probably to Japan, if not China. An example of large. So I'm investing as utterly mega large caps, but most specifically value companies and not growth companies. So you can find brands like Gillette, Pampers, those are like Proctor and Gamble, triple am, Johnson and Johnson. Starbucks could be considered a value company. Coca Cola, Walt Disney, MasterCard, Visa, Louis Reshma in terms of luxury. So that's really the kind of company I have in my investment universe and I need to screen and we're going to learn this in chapter three. How do I go through some test to figure out if the company is currently cheap or not. So with that, we conclude the first lecture of Chapter number two, and we're going to discuss in the next lecture about the five core habits that an investor, a serious investor, not to speculate and need to have. So stay with me. And I hope you enjoyed this first lecture. 10. The 5 Core habits: We're going to start the next lecture in chapter number two, which is about the five core habits as an investor. So as I told you from the very beginning, I want you to act as an investor, not as a speculator, but for that you need not only to have technical tools that we're going to discuss in Chapter 345. But you need specifically to also develop a mindset of an investor. And I'm going to share in this chapter number two, and I think it's really foundational. It's important that you understand what are the five core habits and we're going to add a sixth one. But what are the five core habits of a, of a serious investor? And obviously, the, you don't develop this mindset from, from one day to the other. I mean, it's, it's a process. It took me a lot of years to develop this Mindsets. And this Y, actually I'm doing this, this training for you guys that you, that I can share my experience with you. So in the hope that it will not take you 15 or 20 years to develop that mindset, but maybe speed things little bit up. And obviously I was also reading a lot about other investors or this Peter Lynch, Warren Buffett, Charlie Munger, how those people actually became, became successful. And when. And obviously, I mean, I even went into university course on value investing. The another lot of university courses on value investing also into conferences, exchanging with other investors, also even professional investors that confirmed to me that indeed what I was doing was, was very professional. So this indeed gave me confidence over the last 20 years to continue developing this. And this is where, where I am today managing a more than a million personal farm with my own money but a set. So the intention here of this lecture is to share with you what are the five core habits that I want you to develop as an investor? So you can't see it here on this visual. So we're gonna walk and are going to walk you through each of those five. If it is courage, humidities are leveraged discipline and patients. So if I start with the first one, which is Courage, Why do I, do I speak about this disco habits? Because I believe that too many people on there that prey with virtual portfolios. And I was also, I mean, you, you have heard that I was also teaching some of my private friends about value investing. And that's all them. You assay the stress moment when you're going to push on the button and really by a piece of a company. And it's different from buying a virtual portfolio because it's your hardly earned money that you are putting into the, into the markets and buying a piece of a company. So it really takes courage and nothing will replace this moment of truth that is loaded indeed with, with adrenalin, with stress of telling your husband or your wife. I gonna put now this ten thousand, one hundred thousand US dollars into this company and in hope that you're going to earn money out of it and not lose money. So that's the first thing that you need to understand and develop as a mindset is you need to have the courage to do things. The second one is humidity. As in investor, it's easy to, when you are successful to brag and to say how good you are at investing and you want to become a better than your neighbors. We feel like there is a competition between, between investors and I think that's a bad habit to have unhappy when other people or more. Then I do, that's fine. But I have my style of investment and I really try very, very hard to stay disciplined and in line with that. And this is also how it avoid me to being wiped out through now more than 20 years because I really stick to this discipline. And I do make mistakes from time to time. I had once an investment in a Nordic I think was energy rated company and I made a mistake and I learned it the hard way. And also I like the Jeff Bezos quotes that he was CEO of Amazon, you probably know, and he was at the Economic Club in Washington DC. And I was saying when the stock is up 30% amounts don't feel 30% smarter because today the stock is going to be down 30%. You will not be happy to feel 30% dumber. So this is really the kind of the month that humans have always stay humble. And that's okay, that other people earn more money than you. But stick to your circle of competence and stick to your mindset. As an investor, don't try. It's not a competition to try to outperform other investors because it may cost you a lot in terms of being wiped out. Because you start to, to go outside of a circle of competence taking more risks. The third habits, and this is one when you are successful. And I went off in my younger years as an investor through, through, through the question, when I look how much return I can do with money that I, that I own, that, that I have earned through my work. And I could accelerate these by many burring more money. And even if you listened to Warren Buffett and Charlie Munger, the amount of money they borrow is very, very small compared to the amount that they have been able to pile up. And this is also a mindsets or an attribute of the mindset of an investment. I'd like you to have an I'm telling this to my friends as well, is when you are successful, do not leverage, please do not stop borrowing money from banks or from family. Tried to pile up money. But really try to avoid taking dept or unnecessary risks that the day that the market is going to turn, it will be tough for you. And this is really where you, you, I mean, it's, it feels it is tempting and it's very tempting to spend more than you actually own, but it really increases the risk. So my recommendation to you is really 0 leverage and this is really something that I do. I mean, I've been discussing this a couple of times with my wife as well. And even she told me, Yeah, but you could do more. And I said, I don't feel okay with that. So that's really very important to avoid too, to leverage it really if you leverage, if you take some that it tends to be proportionally very, very small compared to the amount of money that you really own. The fourth habit is about discipline, and I think it's very important then we were discussing about the circle of competence and how you can segment your universe is growth is in value, is it us, is that Asia? Is it automotive, is its industries, it's banking. You need to define the attributes of your investment universe. It's not something that I cannot tell you. You need to feel okay with it. I mean, you have your attributes of competence. You can see here behind me I have in my library, I read a lot as I told you. But I really try to stick to where I believe that I have some understanding of the business and at least I can try to learn it, but it will take me some time before the note-taker decision to invest into a new industry, There's really being disciplined about what you have the Assad in terms of attributes or even sometimes recommend to people rights, right, those attributes down. What are the criteria? And this is really something that I push even to my own private trends that do invest that I've been teaching value investing. I tell them I have a set of rules, follow those rules. And one of those rules of those tests is, I mean, doesn't doesn't comply to what you have decided in terms of discipline, then do not do the investments, do not gamble with your money. So there is really very, very important that you are disciplines. So really define your attributes and stick to those attributes. And the fifth one, it's kind of close to discipline. Discipline is really, you have to find a frame. You stick to that frame while patients is sticking to that frame of a period of time. And and it's very difficult. I mean, we had now we are now somewhat 20-20 and we had the, we still are in the COBIT 19 situation with the second wave coming up in Europe as well as in the, as in the US. And I mean, we don't know, there's still a lot of uncertainty on the mark and a lot of companies that are, that are really struggling. And I do remember in March when there was a bear market and I think the market was like 35% in a couple of weeks. And you see your investment that you believe in and the companies that you really believe in that are really going down by minus 35, minus 40%. And you say, Oh my God, what should I do? And people, when, when they have uncertainty, then they tend to do mistakes, stupid things, and loved people then start selling. And it starts with people that minus five, minus 10%. They said, No, I want to get out of this. And then obviously the stock market goes down to 15, 20% and people, other people continue to sell. And I just sticked to my positions and I said, I know I mean, and I'm going to give you evidence later on, but I know this will turn arounds because in the companies I've been investing into the war, there were sound companies. They had good financial fundamentals. So there was no reason to salad. And that's actually something that I think was manga who said that if you don't have the guts to support that market prices that your, your investments are declining by more than 50%, then you should not invest into the stock market and maybe you're better off going out with bombs or other things. Or maybe even keeping them on a, on a bank savings account. Even though you know that I'm not a fan of this because it will be eaten up by inflation. What we have been discussing in chapter one, but that's really something important is patients is like there's got to be. And I'm going to show you evidence that around with Peter lanes, there's gonna be a bear markets, even a market correction every two to three years. So you need to be aware of this. And this is o has always been the case and it will continue to be the case. So, but you need to have the patient of going along with your investments, believing in the company. Obviously you need to find the right attributes to the side before investing into company, but then you stick to that company even through bear markets. And it may take 5-6 years that you, that you restart earning money. You are starting to see returns on the money that you have been investing that are disproportionate. But that's very important. So patients is also an attribute that you need to have. And I wonder in this conversation around the core habits and we're speaking about five kilometers are going to add a sixth one that I use myself that I also been learning from Warren Buffett's. And I got to introduce your persona, this called Mr. Market. And you remember when we were discussing in the very first introduction chapter about the history of value investing, I was taking to that Benjamin Graham is actually the father of value investing and he has been a Warren Buffet, has been learning from him and working with him. And Benjamin Graham in his 1949 book, The called Intelligent Investor, even exist in multiple languages. I have it in Germany, I have it in English. You're going to probably find it in a lot of languages throughout the world if you want to read it as really an interesting one. And Benjamin Graham actually defines Mr. markets as a manic, depressive persona. And I mean, it's not maybe very inclusive that he called Mr. Market could've been a lady as well. But what is important here is the fact that this persona act sometimes in a very emotional way. You can have it from one day to the other that it super positive and it's giving you a very good price for your investment. And then you have some times where it acts in an irrational way and it will be depressive and the price will go down, which is typically what happens during corrections or bear markets. And one important trait that's also a habit that you need to have with Mr. Market. Is that Mr. Market is there to serve you. I don't want you to be the slave of Mr. markets. It's true that you need to have the discipline of understanding how Mr. Market works. And again, we're going to discuss about it, but Mr. Market will be optimistic Sundays and pessimistic other days. And where you're going to earn money is when it will be pessimistic because most of the people will tend to sell. While if you have. Let's say filtered out and you're waiting for being able to purchase super good companies at cheap prices. You're going to use from the pessimistic mood of Mr. Market when everybody else is kind of Sally, and you're going to actually buy at that moment in time. And obviously you need patients. And there may be situations where the market is not giving you companies and bargain prices. So then you need to have patients and piling up cash and are certainly anytime you're going to have cash available that you're gonna deploy. And by companies because the market is oppressive than you're going to buy. And here I was showing you here clearly see, it was around March with a covered 19 situation. What has been happening over the first three months? The market has been declining by 28's dot 50%, which is clearly when we are above 20% or be below 20%, we are clearly in a bear market, which is not a correction. And I got to share and I'm going to put it into the references, but I want to share with you this video and I really recommend you that you, you listen to this video of Peter Lynch. I mean, he has been very successful investor for a couple of years and where he's actually, and I'm going to summarize it here. And you have it as, so you can click on the URL and go into it. But he's actually saying that the markets, people they don't learn, they tend to be, I mean, they forget things. And the younger people always believe that they are better than the old people. I consider myself to be an older person in the meantime. But he's saying, You don't know. I mean, if you look at the Treasury Department, the Federal Reserve, they cannot predict the market more than three to six months in advance. They have some ideas about what's going to happen in three months, but nobody has a crystal ball. And what is saying in the YouTube video, I really recommend you to listen into is that people, they forget things and people don't learn from their mistakes. And typically also, he's saying that this video was shot in 1994, and I'm going to show you in the upcoming slides. When this was shot. That's what he's saying is that every two to three years is going to be a market correction to market correction is something more than a ten, more than 10% drop. And there's going to be bear market every six to seven years in average since a century. And a biomarker is a more than 20% correction. And what he's saying is that this will happen and it will happen because people tend to be manic depressive like Mr. Market. And then they, every time there is a bear market, people say this is a catastrophe and the market will never be the same. And there is a lot of fear, uncertainty, and doubt. And if you look at this next slide, and again, remember that this Peter Lynch video was shot in 1994. And he didn't have a clue when this video was shot, what would be happening between 1994 and today 2020. What did happen? Well, actually, we had a couple of market corrections and bear markets can give a couple of examples to thousands internet bubble. So bubble that, that exploded, you see it on the curve. Use you had the subprime crisis in 2008, the sovereign debt crisis, which was kind of a consequence of 2008 subprime crisis in the US. But then we had like countries like Greece, Italy who had a lot of issues in 2010, the Euro zone. So there was a sovereign debt crisis. Just look now 20-20, it's true that we had something like a ten-year bull market or bull market is really where people are super positive. And 20-20 covered 19 worldwide lockdown, economies being stopped. Airplanes can no longer flight. Cruise lines. Same story. And again, we have a bear market was, if I'm not mistaken, around 35% correction of the Stock Exchange. And today, when I'm shooting this, we are July and the stock market has come back to some extend, which is not good, but we don't have time to discuss this today. But nonetheless, the stock exchange has come back. If you've got the Dow Jones as the S&P 500, they are close to the level of where they were before the lockdown. So the only thing that you need to keep in mind is that there's going to be a correction every two to three years, and that's going to be a bear market somewhere between 678 years in average. And this has been true since three hundred, two hundred years. And this will happen again. We have the big depression in 19 twenties. And you have the Korean War, World War two. And just look at the graphs and just imagine that Peter Lynch who are seeing this in 1994 and this can happen in 2020, in 20102008 in 2 thousand. So you really need just to follow that rule. You don't have a crystal ball, but the only thing that you know is there's going to be at a certain rate, gamma correction or a bear market. Nor is interesting. And, and with the courtesy of Mackenzie investments, it's a grab I found on the Internet is a very interesting one where they were not just showing, like in the previous graph how the market wasn't as a P5 Fund and how it developed versus various corrections and crisis that happened and bear markets. But in this one it was showing what happens after a correction or a bear market. And you can actually see than in most of the cases. So a typical duration of a bear market is around nine months. So if you look now at the qubit 19th situation, we are in a bear markets in smudge. We're now July the restaurants. Some uncertainty we will see with the financial results of the companies and with the second wave of the covered 19, if there's gonna be a supplemental quarter of, let's say, less economical activity. But in average history has been telling us at an average length of a Bamaga is around nine months, which would bring us to November, December timeline in 2020. And the average gain in a bull market and the average length of a bull market is around four to five years in average. And the average gain is 129%. So with some more, some less obviously, considering the graph. But I certainly timed the market will, will come back. What is important obviously is that you invest into companies that have strong fundamentals to go through a bear markets. And even, I mean, I have invested into companies that they continue to pay out dividends during this period 19 situation and even have increased dividends or giving an example of B-A-S-F, which is a German, It's the largest chemical company in the world. It's competitor of dao in the US for those who know Dow Chemical. And they have been increasing, Nestle is the same. They have been growing their revenues and have been increasing the dividends and have been paying out dividends to their shareholders, despite the fact that we are in a bear market. So obviously, and we're going to learn this in chapter 345. You need to have the rights, glasses, the right attributes, the right filters to find those companies. But I have not been losing money during this bear market. And obviously I had the discipline of sticking to my investments and even buying more of the companies that already had in my portfolio. And I'm showing here the 2020 because in the previous graph we didn't have the thousands. So you saw the bull market between 20092019. So we're just looking at the graphs of the Dow Jones 30 and the S&P 500, you see that there was a huge Drop. It was a 3-5 percent drop in in a couple of days of weeks time. I mean, this is enormous in two to three weeks time to lose 35% of your investments. But if you panic at that moment in time, you're gonna lose money. And this is what happened to a lot of people. But if the companies you have invested into sound, they have strong fundamentals. The market will bring their share price back and just look at the graph, which is an average. It came back, it came back by June, July. We are at nearly the same levels as we had before. We're going to see what was going to happen now with the second wave of Cupid 19. But the market came back. Obviously, if you sell, when the market is very low, you're gonna lose money. But you need to do and what you need to develop as a mindset. Find strong companies with very sound and strong fundamentals. And then indeed buying when there's going to be a correction and the bear market. And in the meantime, you need to pile up cash. And you're going to have opportunities to buy those companies cheap because there's going to be Mr. Market is going to serve you. And I've been buying Rushmore Nestle when the market was low because it's difficult for those to bind to those companies because the prices have always been very, very high. Then I took the opportunity, I had cash available, now waited at the market, went down and I bought at a moment in time when nobody wanted to buy those companies. And today, after a couple of weeks, I have already earned a lot of money on those companies. So this is the mindset that you really need to develop. So as we said, you need to have the courage of investing into real money and not playing with virtual portfolios. You need to be humble about your investments. Don't borrow money. I, this is, I mean, I have 0 leverage on my investment in the stock exchange. And if you really decide to borrow money, it should really not be allotted, should be maybe, I don't know, 10, 20% maximum of the real money that you have. Little bit disciplines define your circle of competence, define your investment universe. What are the attributes around that? And then you need to be patient. You need to be patients. When there's going to be a bear market, you're going to be patient and certainly in time. And I going to teach also during the course of this training. At each moment in time you should actually sell also so that you can really bring in the profits and you're going to have some companies that you will never sell. So with that, we're going to conclude this lecture. I hope it was interesting for you. And in the next lecture we're going to add a supplemental habits, which I call the sixth habit, which is a Habitat. Also Warren Buffett uses a lot, and I also use a lot, but we're going to discuss that in the next lecture. So thank you for this lecture. I hope you enjoy it. And yet we continue in the next one with the six habit. Thank you. 11. The 6th habit: We will go for the next lecture, which is around the six habits. So I have been discussing in the previous lecture, the five habits that I want you to develop from a mindset perspective on top of defining your investment universe. And I got to add a sixth habit, which is the habit of reading, of developing your skills. And you see here in my library behind, I mean, I read really, really a lot. Because I consider that continuous education and reading is something really important. And that's something that you, it's actually very easy to do. And if you look at Warren Buffet and I've been listening, you know that I've been listening to all his podcast talking to shareholders of Berkshire Hathaway and buffets spans hit misery. He spends 80% of his time and reading. And in average, he reads around 500 pages per day. Be very fair. I don't read 500 pages per day, but I tend to read between 5100 pages per day. And He actually says that it's like interest compounds effect is like you, you're going to build up your knowledge and you're gonna be, you're gonna be like super perform an athlete better at investing. Because you're going to read and you're going to be curious about those things. And he says that he spends five to six hours per day reading into books, corporate reports, and also he reads newspapers every day. And and what is important is that he doesn't like to read other people's opinion. He really wants to read facts and then think about the facts that he had. So that's really something important. And if I take my my personnel also, let's say process as an investor. I think in the meantime, I had been reading more than 50 books on accounting and corporate finance, investing, value investing. I listened to all the podcasts. You can find them on iTunes, on the Internet, all the podcasts, the annual shareholder letters that Buffett is writing to his shareholders. And then indeed every quarter for the companies, I, o and I read the ten K and ten K reports and it always trying to improve my knowledge around the companies that I have. So I get a good sense of whether the company is going into, the market is going two. So really continuous education and reading is something that I can, I mean, it's so easy to do. And even with the Internet, it's even easier as it was like 50 years ago. So there is no excuse for not developing your knowledge on things. But you'd be surprised how many people actually don't do it. And that's really something that I recommend you to do. And this is why I've put this specifically as the six habits of an investor on top of humility. Patients courage, discipline, and 0, leverage is really learn, continue to learn through our life. You're going to be better at investing with this. And I've put you because there, there's a lot to read, some kind of like six Investment books maybe to start with. So you have the one from the modern which is very known on security analysis. Then you have the one up from Peter Lynch, very easy to read that one. The security analysis from Ben, from Ben Graham and David Dodd and tangent vector that we already discussed in management, Graeme. And then there are two that are actually very interesting. They're a little bit more technical, a little bit to read, which is the University of Berkshire Hathaway from Daniel pico and Kerry ran and Warren Buffett's and the interpretation of financial statements by Mara buffet and David Clark. And this is an interesting one because it really goes into financial reports and depict what are typical ratio that you should have to. This was, for example, the book that I'm speaking here is a very important one for me. So to wrap up, before we wrap up this chapter and in Chapter three, we're going to really go into finding cheap companies. And I'm not going to give you my tools as I do this as a value investor. So what is important is already sets on top of the developing the, your circle of competence, defining your investment universe with the attributes of segmentation that I told you in the beginning of this chapter. So two lectures ago. And then developing a mindset as an investor is always remember that as an investor, you are not a speculator. So as an investor, you own part of a company and I want you to feel like a business owner. And this is very important. And also we were speaking about Mr. Market. Do not forget that Mr. Market is that to serve you. You should not be a slave to Mr. Market, but Mr. Market should be your slave. Mr. McClellan said, Mr. Market is there to serve you. Do not forget that the net-net game of investing in the stock market is 0 operation. So if you earn $100.1 day, somebody else has lost 100 US dollars. So net nets, and this is what is interesting for the brokers. Actually they don't care if the market is going up or down and they care about the volumes that are transacted. But for you keep that in mind as well. And as already stated in the previous lecture, if as Warren Buffett was saying, so rule number one is never lose money. And rule number two is now forget rule number one. And as Warren Buffett has been stating, is if you cannot accept, if you don't have the guts of accepting that the potential of the market is going down by 50% during a bear markets. And you don't have the stomach to stick to your investments, to your positions. But even though you have invest into sound companies, then stay away from investing into the stock market because it's going to be stressful moment for you. And I'm just giving, I mean, I've been telling you about my own example that I invested into a Nordics energy company where I made him didn't stick to my I didn't have the right discipline at that moment. Itala was already now a couple of years ago and caused me some money. And I have I've learned out of it, but it didn't wipe me out because I didn't leverage and it was just a portion of my investments, et cetera. And And if you look at Warren Buffett, I mean, here's a multi billionaire. And he's also, he has also learned the hard way. If you look at investment that he had on craft times, for example, where there was an issue and Kraft Heinz actually they had to restate three years of their financial reports. And this is really something that that is not acceptable for a viewer. I mean, at the board of directors or you have to judge the CEO. Can it be that there has to be a three-year restatement of the financial reports and there was more than 15 billion right down on some assets, if I'm not mistaken. And the company's share price dropped from 48 to 2740. So that's kinda of 40, nearly half of the market value of the company that went just in vapor and, and Buffet. It cost him also lot of money. But, so what is important here, again is that you will do mistakes. What is important is that you learn out of this mistakes and those mistakes do not wipe you out. So as a wrap up, let's say message or conclusion, I really want to tell you and it's maybe easy for me to say this after 20 years of investing into the stock market, into real companies, that with the right attitude, will discuss about it. Again, reread, redo the lectures. But with the right attitudes. Value investing and investing in the stock market will be very easy, will be repeated. But remember in the introduction I shared with you this pyramid where I was telling you that you need to have obviously some technical tools, technical filters. But the very end of the day, you're going to develop a mindset and you're gone. Undo. Investing will be repetitive process. And it will be easy because you've got to develop those reflexes like super performance athletes, high-performance athletes. And you're gonna see it will be fun. You're gonna learn a lot of this experience and I really hope that you're going to enjoy investing to the stock market and seeing your wealth growth of a time. So again, assets, I guess business owner, keeping in mind the six traits, the six attributes that I consider to being developing the right mindset as an investor. As Peter Lynch was showing, I tried really to give you evidence, academic evidence that you will not be able to predict the market. But the only thing that you can predict there's going to be at a certain point in time, a correction of the market or a bear market or 1010 to 20. And even more than that correction of the markets. And those going to be opportunities for you when you're going to be able to buy fantastic companies, that's very cheap prices. So with that, we conclude the, I would even say the introduction because in Chapter three, we really go now into the meat of the training so that I can not teach you tools that I personally use for filtering out and splitting good from bad companies. But I think that's Chapter two with a mindset. Chapter one with some fundamental concepts that you need to understand as a investor, I think that you are now goods. You have the fundamentals. Go through the quizzes that I've prepared as well, and take the training, the videos whenever it is needed. And really I hope you, you, you're going to develop this mindset and a half Fe, that you're going to develop the right mindset as investor. With that, thank you for having done early chapters 12. And in the next chapter we're going to go really into the technicalities of finding fantastic companies at cheap prices. So stay with me for the next time. Thank you. 12. Blue Chips: Rights investors. Here we go with chapter number three. So as I told you in the closing of the previous chapter, we discussed the fundamentals, the main concepts to understand. And now we're going to start in chapter three and then continue this in Chapter 45. The intention is to give you the right tools to be able to invest in the stock market and finding great companies at hopefully cheap prices. As you can see from the topics that we're going to discuss in Chapter three, we're going to start with blue chips. If you recall, in Chapter two, we're discussing about the investment universe. And as I was mentioning that typically my investment universe are large cap, omega cap companies. So very big companies with very strong brands. I was sharing with you the, my 200 companies investment universe. So we're going to discuss about blue chips and how we find blue chips. Then we're going to discuss about earnings consistency is one of the tests that I do that is very important to me. We're going to discuss about price to earnings. And actually the PE ratio is, if you speak to any investor, everybody knows about the P0 to make it simpler. And a lot of people actually taking, doing investments and taking investment decisions, just only looking at the PE. But we're going to discuss the price to earnings. We're going to discuss return to shareholders. Remember in the cache circulatory system, how do you look at returned to shareholders? One of the things that is very important that not a lot of investors do is looking at the profitability of the company, looking at ratios like return on equity, return on invested capital, and also written on a net tangible assets. And also part of the financial fundamentals of a good company is having opposite will depend from an input change from one industry to the other. But having a good solvency ratio so that the debt-to-equity is absolutely reasonable than asset depending on the vertical intercept. So this is what we are going to discuss in Chapter three. And let's start now with the blue-chip conversation as a first way of finding great companies. So a, you may ask yourself, why do we call those great companies blue chips? Well, actually the term comes from the poker game. And in casinos, the blue chip is actually the poker chip that has the highest value. And, but if you take this in the, rubbing this back to the investing landscape, it's actually the, it's companies that have very well known brands that are very well established and that also that they are financially sound. This is what we call typically a blue-chip company. They normally, they set a very high quality and widely accepted products and services. It does not mean when I say that those are high-quality product or services, that those are super expensive. And it can also be high-quality but cheap products. So it really depends on the strategic positioning of the company. And you will also recognize, and you will see that. I have this and take the example of Nestle, which is one of the companies I've invested into. That Nestle is one of the companies that even in crisis situation, people continue to eat, people continue to consume food and anomaly. And it's not the only one. This is just an example, but you're gonna see a lot of those blue-chip companies that they are able to survive in a better way down turns versus other companies will be fluctuating. Actually more during the, during crisis situations. And they mean the blue-chip companies. They even sometimes able to Prince profits during a crisis situation. And also what happens very often is that when we speak about blue-chip companies, if you remember this risk to return graph, normally we speak about at least medium, if not large, two mega camp companies. The, one of the reasons why personally and Warren Buffett is, I mean, I've learned from Warren Buffett, So I'm learning from him just to be clear. But why people like to investment in blue-chip companies and white value investors typically like to invest into blue-chip companies is because we see couple of habits that the consumers have. So we see typically a consumer habit of purchasing habit, which is people tend to look out for the cheapest opportunities for some products and services. What is interesting with blue-chip companies is those are brands where actually the consumer is not looking at the cheapest opportunity, but the ones to buy a trustworthy brand and the consumer, he or she is even willing to pay a premium for, for buying that product. And I'll try to show to you the next slide what are the typical questions or attributes that you need to ask yourself to determine if, if that company has really such a strong purchasing influence on consumers or not. So let me elaborate a little bit on that. So again, this graph you have seen in the investment universe conversation. So you see very big brands like Starbucks, et cetera, and blue-chip companies that have, we'll define it in a couple of minutes. Strong modes, a strong differentiation. You can in fact, you can easily observe them. You can ask your friends and family, what are the drinks? That's your friends and family typically order in an airplane? Imagine will be Coca-Cola. What kind of smartphone or tablets to the US at home, or they are super-happy at next Black Friday or next Christmas holiday season. Tbi could be apple, an apple device, an iPad, maybe Samsung, Galaxy phone. In terms of fashion, which fashion brands to the irregularly by from iron, for example, I was buying a couple of years ago. I was not 100% sure about the kind of brands I would like in terms of fashion and I find Zara, for example, a very interesting brands. So I, it's really a brand that I like to buy from pastimes. Well, what kind of pastor would they typically by the grocery store and really be willing to pay a premium for that. Barilla as a very good example in Europe, for example, in Italian brands. What do we use for, for shaving? I shave, I only use Gillette. I tried once Wilkinson swore didn't work. And I stick to Gillette and I want to have my shit. I don't look at the price that I have to pay at the grocery store for, for Gillette, for example, which airlines people like to travel with. Wonder is already more complex because airlines specifically and discovered 19 situation. It's a tough period for them. But for example, if you have people who prefer to fly Lufthansa, other ones, British Airways, even though the differentiators between the airlines are not as clear as for other of the elements that we're showing here in the previous questions like pasta, fascia, and drinks, and then selling the drinks area, mineral water. I, I like to drink EVA, which was a French brand, which they are part of the Danone group, which is a competitor to Nestle. And I tend to want to have the opportunity to buy avian on TBI if that's it's, I am not looking at the price because I, I like the taste or like also the whole story around a VR, the protection of the environment and the quality of the water and strong brands. So these are typically things that blue-chip companies come with. So they, they are easily observable. And you can observe this. Just look at your friends, your family, your spouse, your husband, and see what are the brands they are willing to pay a premium for. They will not change, even they would find a cheaper brand next to it. And as a value investor, and you may ask yourself, why am I coming up with this Japanese castle? And it's not about the castle is what is around the castle is what we call a mode. And modes is for value investors, something that is very important. And you can also call it a council. And it's actually a, I would say, differentiator. Some people call it like elements that create resistance to change and hours giving you the example of drinks, of fashion. And do the test yourself with the people around you, with friends, family, and take a brown that they, that they really are even religious to it. And you would, really, what I would like you to have is to observe their reaction and to see if you would tell them, I'm going to switch your Apple Samsung. And you would ask me, I have an, I have an iPhone. I would say No way. I don't like the Google operating system on mobile. I want to stick to my habits of having an iPhone and iOS device, and I will not switch. And even if the device costs $100, well, I will not switch. And you have the same for our, as I told you earlier, I have bought into rich molecules, a Swiss luxury brand that owns Cartier from Kevin apples. And before buying, I asked my wife, what do you think about Cartier? And do you know the brand von Kevin? An rpoS. And I was I was seeing her eyes lightening up and saying, Oh yeah, those brands are just fantastic. And she's not an investor. But I clearly saw that she knew the brands and she would be excited to have the possibility to buy luxury articles from those brands. So it is really vary important that you, and it's not rocket science. Again, as, as Buffett and Munger said, you don't need a PhD to figure this out. It's actually very simplistic. Just try to look around. You, look for yourself. Where do we have brands that you consume every day or maybe every week, and that you don't want to accept switching from, away from those brands. And even if the, the premium to pay is higher and you would have cheaper products that could actually, I would say respond to the same benefits are requests that you have. You will not and you consider that the switching costs are too high and you're willing to pay a premium. And that's it. And this is typically what Buffett calls modes or the, really the thing that is surrounding a castles with it which makes it difficult to actually conquer the cancer. This is really the, that's why I was putting in here the photo of a Japanese castle with a moat around it. And you see, so this is water and it's obviously not easy to cross the water if you are trying to attack the castle in order to conquer the council. So this is a very important notion of blue chips and this is typically I look into an ion invest into companies are trying to invest into companies. We have mode. So that's the first, let's say, screen of filter that I recommend you to look into is the company that you are buying, that you're investing into. Does that company have a mode or is it developing mode? So that's filtered number one. And in the next lecture we're going to look at earnings consistency. So stay with me and an outlet already you enjoyed and understood the definition what a blue chip is specifically in the area of investment. So with that, thank you. And looking forward to talk to you in the next class. 13. Earnings consistency: Welcome back investors in the next lecture. And we are still in Chapter three discussing fundamental screens or filters or tests that you should do before investing. The second one, after the blue chips and the moat companies that we discussed in the previous lecture. The next one is about earnings consistency. And when, when you look, or if I tried to define what earnings consistency means, actually is super unsophisticated. It's very simple. Again, you don't need a PhD for that. One of the tests that I do after, does the company have a mode is, Did the company for the last five, if not ten years, print money, make a profit. As simple as that. And obviously you need to have a website, but you have a lot of public information that is available on Yahoo, on nasdaq, on Morningstar, et cetera. Where you can look at the revenues, look at the profits or net income of the company. And it's super easy this test, but you will be surprised how many companies fail this test. And so I said the test is very easy before I invest into company. So when I'm in my filter is a filter filtering process. I do look as the company posted a profit consistently since five years, hopefully since ten years. If that is not the case, the company is excluded from the list of potential investments. As easy as that. So remember, the first as I do is my 200 companies universe, that's the big brands. They have a mode to some extent in the obviously is changing over time. Second test is, is a company consistently making profits since five, at least not ten years? If the answer to that is no, the company is excluded before I move forward in the filtering mechanism. And if the company has posted profits for the last five to ten years, it probably means that the company is managed in more or less correct way. So this is really something important and asset test is super easy, but it's a tough tests and you're gonna be surprised how difficult it is for companies to stay that test even during crisis situation. And an asset, I think that if a company has been consistently printing money and profits over the last at least five years, if not ten years. And I'm looking at this is important. I'm looking at it from a yearly perspective. I do allow a company to make a loss on one quarter or two quarters, but the very end of the day, what counts for me is the full year view. Because you may there may be circumstances like covert 19. You may have companies that posed a loss now in Q2, for example, of 20-20. And I mean, that can happen, but I would like to see, nonetheless of the posts a profit if I look at it from a full year perspective. So very easy task to do it and you're gonna be surprised how many companies standard that test. And as I told you in the previous chapters, I want you to practice your eye on looking into financial statements and, and here specifically, this is an income statement. It's an extract from, which is a site that I do use, which gives a lot of information. And what I would like you to comment here is the revenue evolution. So you see it here. So in 2014, the revenues were short of 28 billion for this company, and in 2020 they were at 25 or 33. So the company has been printing profits. If you look at the pre-tax income line, you see that it was printing from 28 billion of revenues, two dots, 29 billions of profits. And in 2020 it has gone down to 0 dot 73 billion. So you can pause the video and look at these charts and build up your own opinion if this could be a good or a bad investments. So let's pause here, and I will expert after the pause, what I see about this company. Alright, so I consider that you have the time to look into it. So predict well, you would say, yes, the company has been making money consistently since 2014. I'm showing here six years of figures or seven years of fiscal exercises with 2020 not being fully executed as ridges in the middle of 2020. The here what you typically see. And this is why I'm always saying it's not enough to do one test or to tasks to decide to invest money. So the earnings consistency test is a past here, it's okay. So company is printing profits. The pre-tax income is positive since six years, seven fiscal exercises or 6.5. But the risk that I see in here is what we call a value trap. So we see that the revenues are decreasing and there is a reason for that. This is again where I'm telling you it's not enough to do one test like earnings consistency is OK. For ten years, are going to put my money into it now that's not enough. And this is what I want you to learn throughout this training, is that you have to develop or repetitive methodology of investing. And looking at earnings consistency is not enough. So here I would say, OK, it passes the test, but I need to know more. Why are the revenues decreasing systematically from 20142020? There has to be something have they may be sold. Assets which made the I would say the revenue drop. Typically, I could see this maybe between 20162017 or is there any other reasons why need to understand the industry these companies operating in, what is going on. So again, earnings consistency test is OK here, but that's not good enough. So you need to understand. And here we'll come back to what I was telling you earlier in previous chapters. You need to read, understand the business and read the financial statements of the company, the nodes, in which segment is company, in which sector this company is operating. That's really important to understand. So again, feels very simple for the time being in terms of tasks or first task was blue chips. Second answers, earnings consistency. And the next lecture we're going to discuss about price to earnings, which is one of the tasks that a lot of people, even junior investors, use when they invest into companies. And we will discuss it in the next lecture. So with that, thank you for having done this lecture and I hope you enjoy it and we will discuss them in the next lecture, the price to earnings, test and screen. Thank you. 14. Price to Earnings (P/E): The investors. Here we are back again, chapter three still fundamental screens. So we did in the previous two lectures, blue chips, earnings consistency, very simple tests, but for some of those tests they're pretty tough like the earnings consistency test. And in this lecture we're going to discuss the price to earnings so that also you cannot hear very often the price. So the PE ratio, which is a various, it's actually pretty simple test. And that I think that everybody who invest in the stock exchange looks at the PE ratio. But as I was saying in the previous lecture, one test is not enough to decide to put your money into a company. You will be surprise when we are going to discuss price to earnings. Home. Maybe asked your friends around you. If you have friends or people that you know that are investing in the stock exchange on which criteria they, they side to put their money into a company. And for those who don't speculate, sometimes you're going to hear that they look at the price to earnings. And if the price to earnings as a good ratio, and I will explain what a good ratio, I believe is a cheap ratio. They're going to put them on into, without looking at anything else which isn't mistake. So again, this why I am telling you, yes, p0 is one of the filters are used, but it's not enough. So we're going to discuss now in this lecture what the p is about. So let's start maybe with the definition. What is the p? So as I already said in the introduction of this lectures, what we call a price to earnings ratio. And dp measures the current share price relative to the current income that is earned by the firm on a per share, on a per stock perspective. So I've put your head the formulas. So you see price-to-earnings ratio is the share price. So if the share price today and the market is 100 and the company has been earning $10 per share. You're going to have a PE ratio of ten. And an obviously sometime, I mean, if you go on public websites, you're going to find the earnings per share, what we call the EPS ratio. But you can also calculate it yourself by looking at earnings and dividing the total earnings and maybe billions of dollars or millions of dollars by the number of shares that will give you the earnings per share. So you divide the share price by that ratio. So by earnings per share. And you're going to have a PE, PE, I look at it from a yearly perspective. It should be a yearly value can also compounded and calculate on a quarterly basis. But I believe it's more reasoning. But as I told you from the earnings consistency aspect that I look at, yearly evaluations of companies because you may have a quarter where there, there is an issue and what is very important in terms of interpretation. So people have been discussing this with other investors. I, I, I find out and then I figured out that there are a lot of people who invest into companies that have a low price to earnings. We're going to discuss this, but they don't understand what. P means, and let me just elaborate thirty-seconds on how to interpret the PE. As I'm as I told you, the price to earnings is a yearly value. So you're buying today. So if you are in the option of buying a company today with a certain share price at Mr. Market is giving you, and you're going to buy this versus an yearly earning amounts of dollars per share. What you need to understand in terms of interpretation is that the price to earnings, and this is very important. You are buying a number of years of earnings, another condition that the earnings remained consistent over that time span. So if we have, for example, and I've put you two examples of Amazon and Reshma. If Amazon has, as an example, a PE of 80, you are buying 80 years. You're buying 80 years of earnings with the earnings that the company has today. If Reshma, when I bought Richmond, for example, Reshma had a P of ten. I was buying at that time ten years of earnings. So this is interpretation that you need to do. So the point, what is important here, it means that if I buy at a P of ten Reshma and the earnings are consistent or even grain for the next ten years. In ten years time. To make it simple, I will have received a full return on our person written on the money that I've invested for Amazon. If you're buying Amazon today or when I calculated this P ratio, you will need to wait 18 years. I mean, eight years, it's a huge period. So the typical, and you can listen to the Warren Buffett podcasts as well. But the typical, and this is my personal investment style, one of the criterias. And again, repeating myself here, it's not the only one, but one of the criteria has been investing into companies is that the p has to be at least below 15 and even better below ten. Obviously, as I showed you in the earnings consists of you need to be aware that there could be a valid traps or when the earnings are decreasing in the company continues to, to print money and make profits. So you need to be careful about value traps. But you may have, this typically happens during market corrections and market bam, markets. During bear markets, sorry, is you gotta have peace. They will go down as it did for Reshma, as did for Nestle, and then a certain momentum they will go up. So that's the moment we're also, you're gonna see PE ratios that will go down. The, Just before we go to the next slide. What is important to understand on the interpretation that the PE means that you are buying an amount of years of earnings, you need to take into account. And this is a graph that I'm showing you here. There has been, I think, was a professor from a US university that was showing that the average lifespan of companies on the New York Stock Exchange on as if P 500 was going down from 60 years in the 19 fifties to, let's say, between 151520 years today. So it's buying ten years of a big brand. The chances are high that the brand will still be around in ten years time that you will not be wiped out. But if you're buying 80 years of a company's earnings, of the, today's company's earnings, you're paying, you're putting money with a lot of uncertainty when what will happen over the next eight years. And this is why I'm showing you the average lifespan of companies as they are today. So the chances are high that if you're buying a company with eight years of earnings, that the company will no longer be around in 30 to 40 years. With the example you have very small with ten years of earnings. The probability, again, it's probabilistic aspect, but the probability is very high. The company will still be around and that you're going to have a full return on the money that you have invested. And when when I'm because I'm giving this training as well, presented in not just by E-learning. I often get the question around Amazon and I've been updating this. I think it was end of March where the PE of Amazon was at 120. And I think even it's between one hundred and twenty one hundred and thirty now. So it means it's not a question. It's a fact that with the current earnings of Amazon, you are buying P of 119, you are buying 119 years of earnings. That's, that's a huge uncertainty where you're putting your money into. Some people will say yeah, but the P0 is not reflecting the, how the earnings will grow in the future. And that is correct. So this is where the p, we sometimes look at the forward price to earnings. And obviously if the earnings, if today you have a company where the share price is 100, the earnings today at ten. But you have a good feeling that the earnings will become 20. So your P E is no longer ten, but your p is even lower because you are dividing 100 by 20, so it's five. So, and this is where we look at forward Ps as well. So obviously if the, if the earnings will grow, maybe today you're gonna pay 120 in terms of ratio for Amazon. But if the earnings double in the next five years, if you buy today, your real, your forward p is not 120, but 60 or maybe 40. So the only thing I'm telling you here, because here we are already little bit drifting away from the value investing more going to the growth. Or sometimes value growth. Companies always remember that a company cannot grow indefinitely their earnings. Otherwise, it would outgrow the US economy, that would outgrow the universe, and that doesn't work for eight years in a row. So a certain moment in time, the company will reach a plateau, will flatten out in terms of growth. And this is typically what we see in value stocks like stocks like Nestle, they grow or Unilever, they grow by 2, 3% per year. But they tried to do this consistently for decades. And they have different growth rates like an Amazon or Uber of Facebook. So just be aware of this. And what is important here is really that you understand that PE ratio is price that you're going to pay today for an earnings per share that is known today. And obviously you may need to adapt this depending on how you feel that the earnings will grow in the future and this could bring down the P0. And here the example of Amazon at 120, I would never buy amazon at 120. But if the p would be maybe at, I don't know, close to 15 to 20 which happened during the bad market. Knowing that also with the qubit 19th situation, more and more things are shifting to online purchases then would be maybe worth buying Amazon. I do not know. Just telling you, you need to decide depending on your competence, your investment universe, your circle of competence, and blue chips, earnings consistency. And now we have a third test, which is the price to earnings. I typically considered that companies are cheap when the P or the forward PE is below 15 and hopefully even before ten, that's really cheap where you can buy companies. The two last things that I wanted to add before wrapping up this lecture is some people also ask me, do I keep some stocks forever? And the answer is yes, I do have some positions like Nestle. I will never sell them except if they're super overvalued. But consider that I will never buy Nestle, I will just buy more honestly, when the market or a bear market or market correction. Those are the typical companies like Danone, Nestle, L'Oreal. Part of those companies that are very expensive. But in bear markets there is an opportunity to buy into those companies. And some end, I'm trying as always, to give you some, Let's say, tangible elements about the expected returns based on how I invest and I'm just sharing my experience with you. I mean, you need to decide for yourself how you want to invest into the market. And here is an interesting graph. You have also the sources of it. Where the, there was a study that was done about when the price to earnings or how does the price to earnings compare versus written that you will expect in the future? And what is very interesting when people in average and you see it through the colors it was in the early 20th century. If it was in the late 20th century, in the mid-twentieth century, when people buy companies with peas or below 15, the returns, the annual returns above that famous six to 7% written that we would like to have for a 3040 year period. And this is very interesting if you buy companies with PEs. And this is what the study is saying when you buy companies with peas that are above 15 or above 20, while the returns will not be so high that even sometimes negative. So this is again a proof that where I'm saying Warren Buffett is right. Again, I'm doing this since 20 years. Is that when you buy companies where the p is below 15 centers even before ten, below ten, you can expect actually to reach that annual OK, return of six to 7% without taking too much risk. Specifically, if you bind the companies that are blue chips, if you bind the companies that have earnings consistency. So that's already you see now. And we're going to wrap up this, this current lecture with this, you see that we are building up here a story with a couple of attributes. So we said we have blue chips. So big brands, we have earnings Consistency, five to ten years, at least each time on a yearly basis, printing cash printing profits. And then we have now a supplemental filter, which is the moment you have cash available to buy an investment to the stock exchange. Well, maybe there is some kind of tangible elements that it's better that you buy with PE ratios that are below 15 and if possible even below ten, as long as there is not a valid trap. But remember, for the time being though, just three tests, you need more tests to be able to determine if it is worth investing or buying that company and if the company is cheap or not, because it could be a valid trap as well. So with that, we wrap up this lecture. So in the next lecture we are going to discuss return to shareholders. Remember that was in the cash circulatory system. We had this process of flow. Number five, how do we give returned to shareholders? But are the tools that the board and the CEO can use. And we're going to discuss in the next lecture. So with that, thank you. And I hope that the, the PEA conversation was valuable to you and see you in the next lecture. Thank you. 15. Return to shareholders: Welcome back value investors. So the next lecture as part of chapter three, where we are speaking about the fundamental screens and couple of tasks that you need to do to find out if a stock can be interesting for you to purchase or not to invest into. The next lecture here is about return to shareholders. So if you recall, when in the very beginning I was explaining to you how this cash circulatory system was functioning. So we go from the right-hand side. People who have cash can be investors, can be lenders like a bank or your family members. That cash is taken and transformed into assets. Assets can be, I don't know, a car manufacturing plant, retail shop, inventory of furniture, those assets. And as you can see here in the slide. So refreshing your mind on this. At a certain point in time, we hope that the investors and lenders hope is that the cash that has been transformed into assets at those assets generate new cache. Then the CEO and board of directors, they have to take a decision what they do with the freshly generated cash? Do they reinjected into the business to even further grow the wealth of the company? Or does it make sense at a certain moment in time that they give total or partial return of that cash that has been generated by those productive assets. And they give this back to the shareholders. So here's specifically one of the things that is important when you are investing in to companies is to understand how the company is giving a return back to their shareholders. And there are a couple of ways of doing it. And this, what I'm showing you here in this slide. I mean, some people consider that re-injecting, reinvesting the earnings, the cash that has been generated by the productive assets is a way of giving a return to shareholders by expanding market share, getting more customers, increasing the revenue. And that's processed number for flow number for that we have in this cache circulatory system. I'd consider that to be kind of an indirect return, the reinvesting of cash into the operations of the company. If, if now here in this section we're going to speak about direct returns because one of the things that you probably would like to have is while you have put your money and giving your money to accompany, you would like to have some written at a certain moment in time. And the written is, there are many ways of giving a return. And if we look at direct returns, there is one way of giving direct return to shareholders is by paying out dividends. Very often we're gonna speak about cash dividends, the other categories of dividends, scrip dividends giving more shares to customers, started to shareholders. And typically, I mean, when we speak here about dividends, in most cases considered this to be a cash dividends. So very straightforward vehicle of giving cash back to the customers. And we're going to discuss the pros and cons of it and we're going to practice, as I told you. I want you to practice your eyes looking at income statements and financial repose in general. The, one of the disadvantages I can already say here of cash dividends is that it's taxable. It's not only the company will be taxed on it, but also the shareholders will be taxed on it. But we're going to discuss this in a couple of minutes. A second way of giving direct return to shareholders is by having a, an increase in the share price. So if you buy today a share, or let's say 1000 shares of a company at 100 US dollars. If the share price is growing to 150, for example, over the next few years, the $50 of difference, that's what we call a capital gain or share price appreciation. I mean, there are ways of achieving this. One of the, let's say standard ways is indeed that let's say investors analysts the market, Mr. Market is positive about the company and the share price would increase. But there is a more artificial way that over the last, let's say the last decade has been used more and more by CFOs to return value to shareholders, which is that the company is doing stock buybacks. So the company is buying their own stocks, that ONE common stocks from the market and removing the amount of shares from the market and my that the remaining shares will actually increase in terms of value because there are less shares there on the market we're gonna discuss is, and I'm going to show you where, where you find these in the cashflow statement. The advantage of stock buybacks compared to cash dividends. But I can already say here is that stock buybacks. There is no tax implication for the shareholder. So it's just an, let's say tax implication for the company that is doing the share buybacks, but not for the shareholders. So it will mean if you are being exposed to a tax, let's say threshold of or level of 26%. It's like you will have to pay a quarter of your gains, dividends, cash out, you're going to pay 26% to the government if you have a company that has being stock buybacks for you and through that the share price will appreciate will increase. I mean, you will not pay any taxes on it when the share buyback is done by the company. A third way of increasing the, it's actually than the book value of the company. Remember that on the right-hand side of our cash circulatory system, we have shareholders, but also investors, but also a lender's like a bank. So thank typically, you will find this as a liability that the company has. So the company has borrowed money from those lambdas and they need to pay it back through that reimbursement. So if by the gains, by the cash that the company operations have generated, the company can pay back some depth and reduce the amount of liabilities in terms of depth that it has. Obviously the equity will increase and this will increase the book value of one singular share or the number of shares that you have for the company. So this is what I call direct return. So consider there are three ways. We have cash dividends. Have share buybacks and you have debt reimbursements. And this is really what you need to think. How a CEO and the board of directors, they can think about giving back return to the shareholders and then there is an indirect return, as I said before, is this flow number four of taking the cash that has been generated by the productive assets or by the assets of the company. And that those assets, so the Cas9 has been generated by those as it is reinvested, reinjected into the business to expand even further than wealth, the revenue of the market share, the number of customers of the company. So you can already hear, understand that there is some kind of trade-off between the two. And sometimes, I mean, in most cases it's never black and white decision. Some companies, they say PR default, 30% of our earnings go back to shallow loss through cash dividends. Some companies may say 20% will be in cash, the other 20% will be share buybacks. And the other remaining 60% were going to reinvest that money into our business to expand our market share, the number of customers, and having growing revenues. As well. As I said since already a couple of chapters, I want you to practice your eye on reading financial statements. So here you can see accompany, don't remember what the company is, but it's a company where I've extracted the income statement and the cash flow statement for this exercise. And then we discuss about written to shallows. We don't need the balance sheet. So here, what's the question that I'm asking you is, can you spot the number of shares and can you calculate manually the amounts of cash dividends in dollars per share? And how does this relates to a dividend yields? So let's do first things first, let's build this up. So the first thing that you need to understand when you look at the income similar cashflow statement is that the number of outstanding shares is typically in the income statement. Sometimes it's in the balance sheet, it depends, but in any case, it's in the financial statements. In this example, it's in the income statement and you see the very bottom, and it's framed in red here, you see the weighted average number of shares outstanding. Sometimes we call it the Washoe. And maybe you have the question, what is the difference between basic and diluted? I'll explain in a simple way. First of all, you will always take the diluted one because it's bigger than the basic one. The difference between the basic and diluted to experience easy way is that in the diluted you're going to have for big corporations that are giving stock options to their employees or warrants are convertibles. So there are specific investment vehicles that can be used by the company to pay to some, let's say to some shareholders or potential future shareholders. And the typical example is stock options. So that's a guarantee that the company gifts to an employee that at a certain point in time, the employee can convert their stock option into real shares. And this is actually the diluted value to make it simple so that you're gonna take the weighted average shares outstanding, diluted, which is always the bigger one. So that's the first thing you need to spot the number of shares and any financial reports in if they are publicly listed companies, you're going to see the amount of outstanding shares and the difference between basic and diluted. So use the diluted to one then what you need also to to do a manual calculation, but you need to take here because you want to bring this calculation. What I'm asking you is doing the calculation on a per share perspective. Because what you have, what you know, you have a amount of cash dividends that haven't been paid out that you can find in the cashflow statement that is little bit more than 3 billion. So you see it on the right-hand side framed in rats or 300, 58 dots too. So you need to take that amount and you divide it by the number of total shares outstanding. Remember, we prefer to use a diluted one. And by dividing, so 30582 by 861 dot two, you're going to be at 355 US dollars of cash dividend protects diluted. If he would have taken the weighted average basic one, you would have been at 361 US dollar. So you set difference is not huge, but nonetheless, I recommend that you use preferably the one with the diluted version and you can see the detail calculation in the formula here. What you need now to calculate as well, you haven't our dividends per share. What is interesting? Remember that as an investor, you need to do, need to take decisions on, on your capital allocation. And remember that we said that sixty-seven percent average return on a yearly basis is good. And you should not be too aggressive on wanting to have more, but you should not get last. You remember the conversation yet about the bank savings account where we typically get today around 0.5. percent of written, which is by far below the level of inflation, which will destroy your wealth. And if you're unsure, go back to chapter one in the lecture when we were discussing about money and the utility and value of money over time, if you're unsure about that. So by having compounded or calculated the dividends per share pre-tax or three, 0.6c, one US dollar. That's not enough. What we need to understand it is worth today buying shares of that company. You need to look at the currents at what Mr. Market is giving you in terms of share price. And I've made her an extract from Morningstar. And Morningstar. When I prepared this handout, is saying that the company has a current share price of 186 dot 8-10 dollars. So it means that for one share that you're going to pay today, 186 dot 8-10 dollars. You're gonna get three dot 61 US dollar. In order to calculate now the return that you get is you need to take the value of three 0.6c. Pretax and remove, sorry, divided by 186 dots ten. This will give you a yield of one dot 9%. So three 0.6c one divided by 106 points, ten will give you a yield of one dot 9%. Is that good or bad? Well, if you want to achieve a six to 7% average return on a yearly basis. Well, it wasn't that nine is below this. If we can tell that average inflation is at 2% over the last decade in average worldwide inflation on that 5%, you actually not creating more wealth with dividend yield of one that 9%. So this is a way of checking. If when you get a cash dividends, cash dividends is high enough in terms of return versus your expectations. And to add on top of that, one of the things that is also important here is to look at what I call the payout ratio. So this is a supplemental has on return to share her loss. So what is a payout ratio? The payout ratio is the amount of cash that is taken from the net income to give a cash return to shareholders. Here in this situation, we have around 446 billion of net income after taxes for the company. And what has to be looked into is how much of that net income is going back to the shareholders. What you can see here. And this is not something that you're going to see in the income statement. In the income statement, you will just see the profit for the period. But you need to look at the cashflow statement and you're going to see, for example, we've looked at the payout ratio. That's if you look at the line common stock dividends, the company has been paying out around 3 billion of cash to the shareholders. And you could then make the comparison. How does what is the proportion between three billion and four hundred six billion? That's actually a lot. Yeah, it's true. It's, it's it's a lot. So you could say, well, that's an important amount of money would accompany not be better of injecting money into the business yes or no. What is important from a payout ratio prospective independent of the Capital Allocation conversation is that on the payout ratio conversation, I consider that if a company has a penetration between 30, 70% or 3070, it can continue to pay out cash dividends over longer-term. But if today are ready with, if you're getting a one dot 9% dividend yield, which is not a lot. And the payout ratio of the company, the company is using 100% of the profits to give this back. To their shareholders. In my opinion, they will not be able to sustain that speeds and ratio of payout to probably, you're going to see the dividends in terms of US dollars or euros per shy go down over the next years. So it's also important. So first of all, to look at the dividend yield. How is the dividend yield versus your average return that you are expecting six to 7%. This is what I am expecting. And then also looking at the dividend payout ratio, is that sustainable over time? If it is within the window of 30 to 70%, well, the chances are good that company will continue paying out cash dividends. If it is above that, there are chances that dividends at the second antenna will not be able to pay out the dividends. But what is important here to understand moving forward now on the share buyback conversation, to remember there are three vehicles to, to return money back to the shareholders. One is a cash dividend, the other one is paying Baghdad, but also share buybacks. And when you look just as a cash dividend yields, knowing that on the three 0.6c one US dollars that we have calculated here. For example, it would be a German company. You're going to be taxed at a 6%. I think in the US it's 15%. In France, I think it's 19% of taxes. So companies have decided to use another vehicle, which is themselves buying back their own shares. This called the share buyback. And it's a way of rewarding shareholders to, and it's actually a good one because the shareholder will not pay taxes on this. The, so one of the advantages compared to cash dividends is needed as I'm sitting here in the slide that you will, the company will do it for you and you will not pay taxes on the share buyback, the advantage for you. And this is the example that I'm giving you. For example, let's imagine it would be a company that had 50 shares. And those 50 shares, we're representing an initial equity, initial capital of 100 thousand US dollars. So 11 share book value. So the book value of one single share is 100 thousand divided by 50, that's 200 thousands. If the company would say, well, and you need to imagine this at a larger scale with companies that have billions or millions of shares. The company would say from the 50, I'm going to go on the market myself and I going to buy five of those shares and retrieve them from the markets. What is the impact for you as a shallow because you own, let's say ten of those 50 shares. And ten of those 50 shares. If the 50 shares or the full equity, that's actually 20% of the equity. If you have ten of those 50 shares, that's 20% of the equity. But if the company is removing five or ten shares from the market, artificially and mechanically, you're ten shares are no longer worth 20%, but they're worth much more. And this is the example I'm giving here. If we bring this down on a per share value perspective, you had. 50 shares. Each share has a book value of 2 thousand. If the company removes five shares from the market and the equity has not changed, the book value of one single share artificially and mechanically has grown to 2222 years dollars, you did not do anything, you did not get any return, but artificially, the value has increased. And this is the way how CFOs and CEOs and boards of directors. These are something that we can call it tricks, but it's not a trick. It's a process of removing the amount of shares that are freely available on the market, like free float. And by that, pushing the prices up, which will then generate for you a capital gain share price appreciation. So we have here two examples, how this boosts the book value of a share, but also the earnings per share. Because if you have a million of earnings and there are 1 million shares outstanding, the earnings per share is $1. If they are 40 thousand less shares available, the earnings per share has increased. And this is what analysts and what shareholders would like to see is that the earnings per share increase in terrorism, share price appreciation or capital gain on that. So it's, it can be used in a positive way. The same story. There are some cons and prose to process. Charlotte doesn't pay taxes on share buybacks, something that I do not like. And I've seen companies doing this is sometimes an artificial way of fooling analysts and investors specifically. And this is really the worst situation when the company is raising depth, is borrowing fresh money just to do those buybacks. That's, that's something I consider not to be healthy. And, but again, Who am I to say this? Just can tell you that for me, If a company is doing share buybacks and burrowing fresh money for that, I don't consider that to be a good stewardship from the CEO and the board of directors. So, so as I said, so what is important to understand when we speak about return to shareholders, we have, so we have cash dividend payouts. We have different vehicles on there, but consider that a cash dividend payout is very straightforward way. We have stock buybacks. But what also sometimes happen which creates the reverse effect of stock buybacks is that the company is printing new shares, for example, for the execution of stock options that they have promised to the employees. And remember that the difference between a cash dividends and share buyback is at the cash dividends. The negative aspect is that you as a shallow, you will pay taxes except if you sit in Dubai, United Arab Emirates. But most of the countries you see here you have this 15%. Germany is more than 26, Switzerland indeed, on Nestle, for example, I do pay 35% of taxes between Luxembourg and Switzerland on the cash dividend that I got from Nestle, which has the advantage of share buybacks because you as a shareholder, you don't pay any taxes on it. Coming back to practicing your eye looking into financial statements. But I would like you here to practice is I'd like you to on this company. So you see, you have seen now that on this chart I've added it. Just looking at the cashflow statements, remember that cash dividend payouts, share buybacks, printing new shares, stock options. Those are financing activities and financing activities. You're going to see them in the cashflow statement in the financing activity section. This is what you see here in the cashflow statement. What I did here is I've put three years, 201420152016, in terms of cashflow statements. And what I would like you to do is to comments, the evolution of the share buybacks, the cash dividends, and the execution and the printing of new shares through stock options that most probably this company is giving to employees. So I would recommend that you pause the lecture here for a couple of seconds and then you take the time to look into the red frame and that you try to do interpretation of this place. And then when you are ready to resume, you press play and I'll explain to you how I interpret this. So go for pause now and try to interpret. Alright, so coming back here. So the interpretation I'm doing here is the following. The first thing that I would look into is the net income. So I do see that the net income is pretty stable. That's the first line between 20141516. So it was followed 7 billion fold at five billion, four hundred, six hundred six dot 5 billion. So that's pretty much okay. And so, but it is interesting to see that the share buybacks, which is here in this cashflow statement is called treasury stock purchases. You see that between 2014 or from 2014 to 1515 to 16, the company has been doubling year over year, the amount of share buybacks. So they have been using 3.What, 2 billion, so 3.1a, 98 billion of US dollars to buy back shares in 2014, they have been removing 61 billion or using 601 billion US dollar to buy back shares from the market. And in 2016, they have used more than 11 billion US dollars to buy shares from the market. So you clearly see that the company had a very aggressive strategy on returning, on giving written and value back to their shareholders. If you look at it from a cash dividend perspective, that's the common stock dividends. So you see that it's pretty stable in 14, it was three dots to 161 in 1015 or three dot 230. And in 2016 it was 3058. So a little bit less actually. And so which is like okay, so they are able to continue to pay out the cash dividends in pretty consistent way, while at the same time doing more share buybacks year over year. Which is really, I see here that the company and the board of directors want really to give a return back to the shareholders. And in terms of stock options, which has the reverse effect. So the company is printing new shares. So it's below 300 million per year in terms of stock options to it's actually not a lot. Probably this is to pay executives, employees, et cetera. So the proportion is very small compared to the amount. I mean, here you need to compare the amount of stock share buybacks. So if you take the ratio 299 dot four verses 11,171 million, I mean it's marginal difference here. What is important here to understand and to analyze in the interpretation, we do see that the company wants to give written to shareholders when we look at those three categories of financial cashflow. So treasury, stock, share buybacks, cash dividends, so that's the common stock dividends. And then proceeds from stock option exercises, that's really new shares that are printed. What worries me a little bit here in the interpretation of this cashflow statements. So it's a three-year cashflow statement, is if you look at the amount of cash that the company has at the end of each period. And that's the very, it's the line in the very bottom. So it's cash and equivalents at end of year. And you see that the company had to billions in cash in 2015. They increased a lot the amount of cash they had, so they went up to seven 0.6s, 85. And because they have done so much share buybacks, you see that from the seven dot 685, they have consumed 6 billion in terms of cash. So their cash position has been decreased enormously from 10152016. So there will be for me like a warning sign at a certain time, except that this is a very mature business. There will not be able to keep this amount of share buybacks and they will have to reduce this amount of share buybacks and even maybe the cash dividends. I would have the feeling that they have been consistent on paying cash dividends to their shareholders. I would expect that here in 2017, they would have reduced the amount of share buybacks because it's not sustainable to do 11 billion moving forward in 2017 except if they are revenues would grow and the profits would grow. But as I see that the net income is pretty stable, I would expect that it will be stable at 1017. So my expectation would be that Shabbat X would go down. So having said that, what is important here is to understand that maybe summarizing before we go into the conversation about dividend kings and aristocrats, the what you as a shareholder should expect from the companies. And this is again, a test screen that you should do, is that you get to some extent, some unit to check how much is the dividend yields in terms of percentages. But also adding on top of that how much share buybacks the company is doing. And you can calculate this on also a percentage perspective. If you are with the two, if you are somewhere maybe between six to 7%, taking into account that you're going to have an average of 2% inflation. You're going to be pretty much okay. So this is the kind of thing that I look into specifically in blue-chip companies, as I told you, Can I land with a share buybacks and The cash dividends somewhere at the yields, at least a 5%. That's the way how I test it. If I'm below 5% and there is no opportunity that this will grow in the future. I'm excluding the company. So that's very strict test that I'm doing when I invest into companies. And let me open here small brackets that we discussed, dividend kings and dividend aristocrats. And we have been discussing also the compounding effect. Over time. There are a couple of companies out there that we call the dividend kings and aristocrats that pay out and that even increase their amount of cash dividend per share every year. Nestle, which is a company I have, is doing this, I think since 1959. So for 70 years in a row. And so the difference between an dividends aristocrat and dividend King dividend aristocrat is more than 25 years, have always been paying out dividends to its shareholders. And with the dividend King, it's above 50 years. And I've put a couple of examples of US companies like triple m, like Coca-Cola or like Colgate-Palmolive, Johnson and Johnson Procter and Gamble in Europe, BSF, it's part of that. You have Nestle, as I mentioned. So those are companies that not only do they pay a regular cash dividend every year for 25-50 years. But the even increase that cash dividends. So imagine if today you are buying that company of the dividend yield of 5% and they doubled that amount of cash per share in ten years, your 5% will grow to 10% return by doing nothing, just being passive. And this is, this is a huge, this is super powerful. And this is where actually I'm always saying it's very important when I invest into companies. One, I put my money into that company. I'd like to have a passive income. I'd like to have a return. Hopefully there is at least 5%. Nasa, for example, today I met below 5%, but I know that in three to four years I will be above 5%. And in 101520 years time, if nested continuous like this, it's the largest food manufacturer in the world. Probably I'm gonna be at crazy returns of 12-15 percent. This is how buffets became super-rich. It's having this what I call the snowball effect. And this is something that you really need to think about it. But again, remember, you have, if you look at the list, there are some companies that I do not know. I do not know the companies like genuine parts like a Hormel foods Corp, Emerson Electric. I do not consider those companies to be blue chips. So again, remember what I'm telling you here in chapter three. When you do your first level of screens, of filters, of selection criteria, it's a combination of all those screens. So we started with blue-chip companies. Here in this list of companies, I do not consider that all of those companies are blue chips. Coca-cola is a blue-chip company. That's true. Procter and Gamble is a blue-chip company. That's true triple and probably as well, Johnson and Johnson as well, Colgate Palmolive as well. So blue chips, earnings consistency. And then we have the PE ratio below 15, hopefully below ten. And then we have the total dividends yield if it is through cash dividends over this, through share buybacks. And if they're on the cash, or sorry, on the total dividend yield, you are with a cash dividend and the share buyback, you are somewhere at, let's say, close to between three 4-5 percent. And on top of that you have a dividend king or dividend aristocrats. That's already, it's strict as filtering, but the chances are high that you're gonna make a lot of money by investing into that company. So closing down here, the lecture, one of the things that, again, I want you to understand when we look at compounding effects is how dividends work when you invest a dollar in year 0. So imagine you would invest a dollar here in year 0 and you get 0.5. percent bank savings accounts rates. After ten years you want dollar has become wondered 0 $5. So every C $0.05 more on the dollar after ten years because there was a 0.5. percent written. But take into account as we discussed already in chapter one, when we're discussing money, that you're going to have inflation and inflation here I've put it at one, not 5% in average of the next ten years, that a dollar today will. Discounting the future, you need $1.16 to have the same purchasing power as $1 today. So if you put your money into 0.5. percent bank savings accounts, you will destroy 11% of your wealth over ten years because net-net inflation will be faster than the bank savings accounts. And then you understand the 0.2. You do the same with a 3% compounded, with the 5% compounded. Just look at the proportion. If you do this on a 5% compound rates and your money increases every year by 5%. Dollar today will be $1.63 in ten years time. If you have one node, 5% inflation, a dollar today, you need $1.16 in ten years time to have the same purchasing power as $1 today. But net-net, if it is a difference between 163116, you will have earns 47% more than leading the money and doing nothing with it, even if it would be on par with the GDP inflation. So here you see again a snowball effect. And if you do this, this compounding effect on the various scenarios with shares. Imagine that you would buy a single share at $10 today and you earn in scenario two, scenario one is that the share value of the company will go down. As you see, it fluctuates between 10975 and Mr. Market says it's 1075 goes up to 12, sorry, goes back to 115 and Denisovan tundra is maybe a crises. The share price goes back to eight dot five. And imagine that you would have a, you would get five. 0 dot $5.50 per share. So that's a 5% annual dividend yields. And you would have bought 100 shares with that. When you get the dividends, cash dividends, you would re-inject that money and buy new shares at them at the market prices is what we call cost averaging. You can see that even though the share price in U1 has gone down from ten to eight dot TH2. After ten years, we have lost 20% of the share value. By having this snowball effect, your wealth has increased from 10 thousand to nearly 13 thousand US dollars. Passively, you have not done anything. You have not been selling shares, you have just been using the dividends and buying new shares with the cash dividends. That's plus 30% over ten years. That's really good, right? Imagine you would be in a catastrophic situation where the share price and scenario two goes down from ten US dollars to $5.6 dollars. But the company is able to continue paying out this cash dividend and consistently they pay No.5 euros dollars on a share or Persia. And you see that your marked to market value even though the share price has lost 44% of compared. So in year ten verses u1, because of the cash dividend cost averaging mechanism and the snowball effect. Nonetheless, you are positive, not by a lot, but you are still positive by 11.70% in year ten. And obviously imagine you would be in price appreciation or share price appreciation or capital gains scenario where the share grows. Single share price goes from ten US dollars in year one, so today and in ten years time, let's assume that the share price would be at 12 0.6s shares, US dollars per share. And the company decides it's not even a dividend. Aristocrats dividends, king, It just says, I'm going to continue to pay No.5 US dollars on a share in terms of cash dividends. And you have bought 100 shares today, you get 500 US dollars of cash dividends, you take those 500, you buy new shares with it. Look at the snowball effect. I mean, this is just enormous. This is exponential. You have just moved your from 10 thousand US dollars. You have multiplied nearly by two. The wealth, the initial capital of 10 thousand. So that's after ten years. That's an 88 dot 42% increase. Okay, you need to remove inflation. Let's say that on tenuous time you remove 15% because that's the component factor of one, not 5% more or less what we have seen before. And it's 16% if I'm not mistaken at one, not five over ten years time component on inflation, you have still generated 73% of increase of your wealth. The only thing that you did is you took the cash dividends paid by the company and you cost averaged. You bought new shares without cash dividends. And you get every year passive income that you reinvest and reinvest and reinvest. And this is a huge snowball effect. And so this is the kind of thing I want you to understand how companies can give return to shareholders. And, and it's part of the fundamental tasks that you should do. I do not invest into companies that don't give some kind of passive return to its shell as it can be cash dividends, it can be share buybacks. But I would like to have a passive return while my money sits still. This is for me mandatory and this is part of the tests that were discussed. I invest into blue chips. I want to have companies that haven't earnings consistency. So at least five years, ten years, that's better. That's half a price to earnings that is below 15, hopefully below ten because I'm buying less than ten years of earnings today. And then I would like to have a return, a passive return that hopefully is at least 5% between cash dividends and share buybacks. So you see that I'm now combining already a couple of filters to have very powerful snowball effect. So we are going to conclude the lecture here. This one was a little bit more complex, probably will need to go through it. I have planned also, as I do for each chapter, some quizzes that you can practice as well the questions, but feel free to rehearse Gauguin through the video, take the time to look at the financial statements and understanding how cash dividends and the dividends yield is calculated and works. And the next thing we're going to look into is also profitability, which we're gonna do in the next lecture. So stay with me. Thank you for listening in. And let's go for the next lecture. Thank you. 16. Profitability (ROE, ROIC, RONTA): Welcome back investors. So we are already more than half down in this training. And one of the also very important screens that I run on companies before investing into them is already, I mean, rehearsing or in money of what we have seen that trials looking at Blue Chips, not just looking at five to ten years earnings consistency, PE ratios that are very low below 5010, and also having some kind of a passive income being through dividends, cash dividends or share buybacks. But in this lecture we're going to look specifically at profitability because not the only one, but I believe that it's very important for a company to generate profits. And there has to be a way of measuring how good a company is at measuring SRE at generating those profits. And here's what we're going to look into, more depth into this. In this lecture, we are going to discuss about profitability ratios of companies and also again, practicing our eye on those kind of things. So with that, let's get started. Alright, so the, you remember this scheme when we were discussing that on the right-hand side, you have founders of companies. So the early shareholders, investors that's bringing, very often they bring in cash. Sometimes you have lenders, banks, family that the shareholders borrow money from and those liabilities, remember, we are here in a simplified example of a balance sheet. They are transformed by the board and by the CEO into assets. And those assets they run the company. They provide products, services to the customers. And what we're going to look today when we discuss about fundamental screens or looking how good a company is generating profits, were going to look at profitability. So you see the red arrow in this scheme here. And before, before we go into the ratios, again, very fundamentally, you need to understand this kind of thing. So if we, if you look at a balance sheet again from a company, when a company starts the very initial state, very often of a company, it starts with the initial investors, founders bringing in, putting in cash into the company. So you have a very simplified balance sheet. On the right-hand side, you have the investors, shareholders, which is liability. We have brought in cash and that cash sits in the asset side of the balance sheet. What then very often happens nearly each time because the camera is not there to remain in cache except if it isn't investment funds or investment vehicle. But typically that cash will be transformed into hopefully productive assets. And in very beginning, probably you're going to buy, or the company is going to buy a car or maybe an office. Computers, those kind of things. Machinery to provide or to generate, create the products and services that they need to provide to their customers. So this is after the inception phase, you have this kind of simplified balance sheet. So where actually the very initial cash has been transformed into assets. What happens also in some companies, even at, during the inception phase. So at the creation phase is that there is a supplemental need for money that's invested. Shareholders cannot bring in and they turn into two families for external people or even to bank and ask for money. So we have then. Not only the investors, shareholders for bringing cash, but also third parties that are not owners of the companies like Bank family assets. And again, this is so lenders as we call them in, and you see it here in the red frame. And this is what we call a liability. Again, on the balance sheet side, on the right-hand side of the balance sheet. 11. Short note here. Very often I receive the question, which kind of vehicle should be used for? For, for investment purposes. So typically you can see is that a high risk investments should be funded by cash, in my opinion, because the risk is, the risk is very high. The money may be transformed into 0 because of the high, high volatility, high risk that is included in such investment when there is a low risk investments? Well, they're probably, you may look not using cashflows, but you may look at raising debt for this. So as I said, we are going to discuss in the next chapter, solvency and debt-to-equity ratios. But the depth is not necessarily bad. It may allow the company to accelerate, grow, mock, grow, market share growth, customer as well, grow the customer base. But so just keep this in mind. My, my style of investing is high-risk investment should be funded by cash. Low-risk investment should be in funding, should be or could be funded by depth if there is no better use of the cash that the company has. So now coming now into the conversation about profitability to so we have here a simplified balance sheet. So we have on the right-hand side liabilities, we have investors, shareholders, we have lenders, and we have on the left-hand side of the cash that has been brought in by the investors, shareholders, and, or by the lenders, that is transformed into assets and you have some cash that is remaining. And, but most of the casual probably be used for. I'm creating assets, as I said, a supply chain, a factory, and office, whatever, and profitability. We typically look at three metrics that we're going to discuss in the upcoming minutes is ROE, which is return on equity, ROIC, which is return on invested capital or return on capital, and return on net tangible assets, which is to be very transparent. Something I heard the first time when discussing, when listening to podcasts from Warren Buffett and Charlie Munger was during an annual shareholder meeting where they were discussing by return on net, tangible and that's tangible assets. What we are going to discuss this whenever things that before we go into the definition and how and also concrete example how to calculate RE ROIC and Rhonda. This, you cannot necessarily compare the profitability of a car manufacturer with chemical industry. You cannot compare profitability of a bank with a, with a retailer. So those metrics are sometimes, let's say very often they are used to look at comparing companies in the same industry, in the same vertical. So comparing maybe Walmarts with a Macy's for example. As an example, they are both in the retail industry, maybe comparing. I don't know. Dymola mercedes with Ford Motors, for example, because they have similar, let's say, kind of products. And there you can see you can differentiate between which company is better at generating profits in the same, in the same industry. And I do remember to speak about a private example. And again, it's not a solicitation to buy any of these companies. But when I bought into publicist, which was the third largest advertising company in the world. I was comparing a publicist with WPP and Omnicom. So that couldn't, I could look into who is better at generating profits between the three companies that are more or less doing the same. And also we're going to use the net operating profit or income after taxes. We will just abbreviate it as no paths. So it's actually okay how much the company has generated in profit in a specific exercise. And we need that figure, but you're gonna see it in the example in the next, in the upcoming minutes. So first, we're going to discuss return on equity. Because written and equity is the, let say, the basic way of looking at profitability of a company. And the ratio we are going to calculate is how good the company is generating profit from its initial equity or from its current equity. So remember that equity can come in two ways. The first one is being introduced by shareholders at inception, so called shareholders equity. And the second one can be actually retained earnings, so earnings that the company keeps for the future. And this woman, Tom, began deploy those earnings and maybe transform into new assets. So that's really what about equity? So the return on equity is, it's pretty easy to calculate. It's you take the net operating profit after taxes and you divide it by the amount of equity, as easy as that. And this will give you a ratio in terms of percentages. And we're going to practice this. Let's go first through definitions and then we're gonna practice as comparing two companies, one with each other. When, when you look at profitability, one of the things that I definitely like to look into is not written on equity, but I do like to look at the whole capital. And for that, I need to include depth into it because just looking at profitability generated from equity may give a different interpretation because you're not looking at the app to I definitely like to take in the analysis of the profitability of the company are definitely like to take that into account because It's, it's written liability, but it's capital that the company has received through external landers. And it has to, it has to fit into the equation and it tends to be added into the equation of looking at profitability. So when you look at return on invested capital, it's actually pretty similar like return on equity. Return on equity is the net operating profit after taxes divided by the equity. But here we're going to divide the net operating profit after taxes. By the equity and the depth. So we're going to add the depth into it, which makes it a little bit more tough for some CEOs. If they are benchmark towards with other companies is the chemotrophs look at return on equity because if they have high levels of depth, obviously the profitability will go down because you add depth into it. But again, we'll discuss it in a couple of minutes when you go through a concrete example, let's go first with reinforced three fundamental definitions on profitability. Then the third one, as I told you, it's something I didn't know. Couple of years ago. I was listening to a podcast of Warren Buffett and Charlie Munger. I think it was an annual shareholder meeting of Berkshire Hathaway. And where Buffett was actually stating that he liked to look also adds when, how good companies are generating profits. Looking also at tangible assets. Why not including intangible assets? Because and again, you need for the time being to, otherwise it will take too much time in this course to go into the details of it. Maybe I'm going to do a separate course on that. But premiums of acquisitions like Goodwill, intangible assets like trademarks, et cetera, is something that they say that's not directly productive assets. So something I can agree to is that indeed, you need to remove the intangible assets because the CEO can play with impairment on those intangible assets. And sometimes they are very difficult to estimate, for example, the trademarks or those kind of things. And if you look, remember having discussed with the person, the balance sheet or Facebook, just have a look at the balance sheet of Facebook, the amount of intangible assets that it carries in 2019, years earlier compared to the number of the amount of tangible assets that it has. So I do agree with Warren Buffett and Charlie Munger having learned from them that indeed a good measure of looking at profitability is taking the tangible assets and looking at how those tangible assets generate profits. So for that, you need to remove from the total assets, the intangible assets, but you need also to remove all the liabilities, so the depth part of things. So that's why we call it net. So net of depth, tangible assets. And so the calculation is very easy. You take the tangible assets from the asset side of the balance sheet. You, you you remove all intangible assets or anything that has goodwill, everything that is trademarks, those kind of things. And you also remove the long-term dept part of things. So those are the three things that you have it here again in this slide is a summary. So the three ways of looking at profitability is typically written on equity, return on capital, or return on invested capital, and return on net assets, tangible assets, what I look into is definitely a return on invested capital and return on net tangible. Assets. But let's go to make it practical, let's go into an example, an exercise, our eye and this formulas. So what I've prepared here for you is an example of two companies, Company a and B. You have here a very simplified balance sheet of 2001. Again, as I told you, you don't need a PhD to this, it's common sense, but you need to practice it. So you have two simplified balance sheets. Company AUC has 10 thousand US dollars of cash, property, plant and equipment for 5 thousand and has a small goodwill of 200. So goodwill is a premium for an acquisition they did just for the sake of the example, company a has no depth and has total equity of 15,200, let's say US dollar. So the total balance sheet, remember the asset liability side has to balance out. So it's 15,200. Company B, similar very simplified balance sheets, 20 thousand in cash, a little bit more cash, a little bit more in property, plant and equipment, or 7,500 and a smaller goodwill of 150 has a depth of 10 thousand and has 17,650 of equity. So the total balance sheet, the sum of the assets or liabilities of 27,650, as you can read from the simplified balance sheet of a company. So what I want you to calculate now is the ratios that we were discussing before. You have them again here. And as always, I'm going to ask you to pause the video, take maybe a pen, paper, and try to do the calculations by yourself. So what I'm asking you here is to do six calculations, calculate the return on equity for company a and company B. Do the same calculation in the sense of calculating the return on invested capital for, for company a and company B. And do the calculation of the read written on net tangible assets for company a and company B. So thats makes six calculations. So remember that for the return on equity, you take the net operating profit, you have them here. So company a has, and that's an assumption in the year 2001, hands on net operating profit after taxes of 1000 US dollar. And company B has done little bit higher profit of 1500 US dollars during that exercise of 2001. So take that as an assumption. So ROE return on equity, you take the NOPAT, either 100 or a, 1500 for company B divided by the equity. Do you do for the written invest capital, you need to add depth to it. Always taking the notepad and you do the same for the return on net tangible assets. You take no part of company a, u divided by the net tangible assets of company a and u are the same, the ROM type of company B, you take the notepad, which is 1500 US dollars for Company B, and you divide it by the net tangible assets of company B. So recommend pause the video here and come back when you are ready in and I will walk you through the calculations. All right, so coming back to the calculations, so you can see here and again, this is a very simplified way of looking at balance sheets and operating profits. But you can see on the left-hand side, the calculations that I've made you. So you have the return on equity for Company a is 1000 divided by the equity, which is 15,200. So it gives you a return on equity of 658. What is interesting to look, if you look at the return on invested capital of company a, where remember the difference between return on invested capital and return on equity is you need to add depth to it, but this company does not have any depth. You sit in the balance sheet, it has 0. The ROIC is the equivalent of the ROE. So it's 658% because to the 15,200 of equity you add 0. There is no depth. The company has not raised and adapt. And looking at the return on net tangible assets. So company a, so you need so you no longer have 15,200 of assets, but you remove the goodwill so you end up at the cash plus PPE. Cannot conversation if cash is a tangible asset, but consider for the time being that cash is an asset. And so it's 11000, which is no part of company a, divided by 15 thousand. And as there is no depth, it's minus 0. So we see that the ROM tau is of 666%. If you compare it to company B, you can see that the ROE of company B is actually higher. It's at 850%. Remember you take 15 hundreds and you divide it by the equity. The equity being higher at 717,650, but the company has generated higher profits. So the ROE defined or express or calculating percentages is higher. Which could tell you, yes. So actually company B, and this is the kind of interpretation I want you to do is if you compare the ROE return on equity of company a with the ROE of company B, you could do the interpretation that Company B is better than company a and generating profits. Why? Because you compare an eight dot 50% of return versus 658. So in it, if you just, if you would only look at return on equity, company B would be, let's say, kind of a better company and generating profits than company a. But here comes the thing and this is an explanation why I'm looking at ROI seem Company B has to generate those 1500 US dollar. And this is really important. Please take your time maybe to read, listen to this once or twice or three times as much as needed. But why do I look at ROIC and not ROE? Because to generate Company B, in order to generate those 1500 US dollars of profits, has not only been using equity, but also has depth on its balance sheets. And 10 thousand of depth. So to be fair to compare for, in comparing company B with company a, it's better to take the ROIC as a benchmark versus the ROEs that you include depth into it. And when you do that, you see that the ROIC of company B, when you add the depth to it, it generated 5000 US dollars of profits with 27,650, let's say, of capital. So the return is only, let's say it's only 5.3f 42% versus an ROIC of company a, which is at 658. So here clearly you see that if you would only look at return on equity, you could have the feeling that Company B is better generating profits, but it's not the case. You can see if because you look at the ROIC, that company a is better at generating profits. In terms of benchmarking processes, company B, because company a does not have any adapt. And with the small equity of 15,200, was able to generate 100 of profits. That's a 658. While the other one company be needed much more, let's say cash much more capital. So 27,650 to generate a 1500 US dollar of profit. And this is why the ROIC of company B is lower, Being at 5.42% than the arising of company at 658. So here, my preference would go into investing into company a versus company B. Reason is we're going to turn to the next chapter. There is no depth, okay, or not, but it's better at generating profits. So RAC is really something that is important. And then you have the Rhonda where you see that company B has an 857% at generating profits from its tangible assets. Again, under the assumption that we consider a cache being a tangible assets, while the wrong type of company a is only at 60, 0.6c, 6%. To remember, you remove the goodwill each time from the calculation. Again, this is just for the sake of the example. But probably in terms of, let's say, an investment decision, I would probably invest into company a versus company B. Because I typically look at ROIC as a very, very important measure of profitability. So and you have the calculations again, please take your time, look through this, try to understand the interpretation and maybe look, I mean, you have sites like which gives you, which already pre calculate those ratios for you. They call it return on equity, return on invested capital. Sometimes you have the return on assets. Just be careful about how they, how they calculate the return on asset sometime it's not the net tangible assets. So you have those ratios and what isn't potent. So again, just summarizing the lecture here is at, so you have two things to memorize here. The first thing is there are three metrics to look at profitability of a company. Return on equity, as we discussed, return invested capital. You have understood and hurt that. I do prefer looking at return on invested capital. So take the total capital, not just the equity. I look into depth as well. And I look into how much capital that the company needs to generate a certain amount of profits. And then I compare this in between companies want to have maybe two or three companies I have the opportunity to invest into. Then also return on net tangible assets, which is also a good measure when the company carries a lot of intangible assets in the balance sheet. And then remember we're discussing here in this chapter and in this various lectures we are discussing about fundamental screens. And one of the, I mean, are we already discussing, I gonna re summarize it. Here. I specifically on profitability. I do look at return on equity and return on invested capital that is above 10%. That is really my criteria. So if you and with that mechano already rap up this perfectability conversation you see again, it's not super complex. You don't need a PhD for this. It's common sense. But you see now how already I'm putting one next to the other, those screens. So I have blue chips, remember, because brands in the world, very well-known brands earnings Consistency five to ten years without losses on the yearly accounts. So every year they were able to post a profit, be smaller profits, but it has to be profit, no losses on the income statement for the last five, if not ten years. Price-to-earnings, remember, p below 15, preferably below ten. Return to shareholders. I'd like to have a passive income either by cash dividends or by share buybacks, hopefully somewhere, let's say around 5%. That would be really, really great. Now, I've added into this profitability. So I'm expecting companies that stay, let's say in my filters, as an opportunity for investments, they have to be good at generating profits. They have to be around 10%, at least in order that I keep them. I don't don't throw them away from investment perspective. So you see how already with such fundamental screens, if you run this through your investment universe, these earnings consistency, PE ratios, cash dividends, share buyback yields. And also now you add to this profitability. It starts getting tough for a lot of companies to remain in those fundamental screens. And you're going to see if you do this on a quarterly basis, maybe on a yearly basis depends when you get cash that you will have less and less companies that remain in those filters. Because those filters are getting tougher and tougher as we go through them. And we're going to discuss now also in the next lecture, debt-to-equity. But again, so here specifically on, on this lecture, my expectations or have understood, I'm looking at return on invested capital as a key criteria. And I'm specifically expecting or asking from the companies that I may invest money in to that they are good at generating profits and how much around or at least above 10%. This is a way that I look before I invest into companies. So I said in the next chapter, and actually the last lecture of a, what I call the level one investor training we're going to discuss also at solvency. And specifically if you look through any major crisis, we are today in a qubit 19 crisis situation, solvency, having cash available is something very, very important for the survival of companies. And we're going to discuss what are good ratios. We're going to discuss what the debt-to-equity ratio looking at various companies. And that will be our last filter. Because I don't like to invest into companies that have high or to high levels of depth. So that closing the profitability conversation, remember ROE ROI is here on top and I'm expecting ROIC to be at least around 10% or above. With that wrapping up this lecture, I hope you enjoyed it. I hope that you have learned something out of it and talk to you in the next lecture. Thank you. 17. Solvency & debt to equity: Alright investors, we are wrapping, wrapping up this level one course contents or the fundamental screens chapter. And we're going to add a final screen that I personally like to look into, which is this time looking at the solvency of the company. So how good is the company at managing crazy situations and having cash at hand? So we're going to discuss specifically with are now bringing in Eurasia is called debt-to-equity. And I'm gonna explain to you what this is all about. But first, let's come back again and you see I'm again using the balance sheet here. And when we look at solvency, So how good is a company at? Let's say going through a crisis situation, pain back, let's say even dept, paying back suppliers. One of the things that we need to look into is how much debt the company hands versus the equity, but also how much cash the company has available and gender. And those are the two things that we're going to discuss here. And the first ratio we're gonna bring in is the debt to equity ratio, which is a common ratio. Again, very easy to calculate. Well, you take the amount of adapts and you divide it by the amount of equity. And this allows to those figures are first of all, they are easily readable and available on the balance sheet. And it allows to evaluate the financial leverage of the company. And I'm always thing here, having low depth may sound interesting, but sometimes it doesn't allow the company to accelerate and to gain market share and to gain your customers. So it's important for a company to systematically. So when we discuss here about Board of Directors, CEOs, they need to think about how can they expand their market share, expand the customer. So that's the reason why companies are investing is exactly to respond to those questions that come from shareholders. How can, can either shareholder earn more revenues or more profits from, from that company? How can the company guaranteed to me as a shareholder the future revenue streams? Can I outgrow my competition? And that's the reason why companies and CEOs, CFOs have to take decisions, investment decisions. And a way of accelerating is sometimes shadows. Don't want to bring in your cache. Sometimes the productive assets, the assets of the company, do not generate enough profits to fuel further growth. So the companies, sometimes the CEO, the CFO, they turn to external analyse and say, I'm going to need fresh cash, not from the shareholders, not from the profits that the company is generating. The income statement. Productive assets they have, but I really need fresh cash to outgrow my competition and gain new markets. And for that, they raised dept. And if you look specifically now in this qubit 19 situation, a lot of companies have been raising fresh cash through depth because they were short on cash and the running costs without having the opportunity to deliver services and products to their customers. There wasn't this balance between the costs, running costs, operating costs of the company, versus revenues. Revenues were we're of look at cruise, cruise lines, airlines. They have nearly the revenues that are close to 0 during the pandemic while the costs are there. So, and so the question is now why companies raised that as alternative? Sometimes shareholders don't have the opportunity to bring in new cash or they don't want to. And sometimes the company doesn't generate enough profits from the productive operating assets to bringing your cash today, they turned to external endless to adapt. What is interesting sometimes with depth is the depth can be less expensive than the cost of equity. Because a shareholder may say, Yeah, but if I bring in new cash, I'd like to have a 78, 6% to 7% return. And the CEO will say, yeah, but maybe I'm not able to generate those 67%. And they look at the bank. And if you look now in 2020, and the bank may give them interest rates that are, let's say 1, 2% for raising fresh cash, which is definitely lower than the cost of equity. And this is where sometimes it's interesting to raise depth. So again, I'm not saying that it's not good to have damped. I'm only saying you need to look at the cost of opportunity of raising debt. Interest rates are today very low, so that's easy money. That's interesting. On the, on the other hand, you need to look as well into a home much that the company has versus equity. So it should not be, the burden should not be too high. And this is exactly what the debt-to-equity ratio is giving. Similar to looking at profitability ratios. If you remember our saying that profitability, it's best to look at it in the same industry in some vertical depth Jack beauty is similar. You should look, obviously you can look between industries, right? If you look at energy companies, utilities, they have a very high debt to equity ratio compared to and maybe digital e-commerce sites. So debt-to-equity. So here I've started with an example that we were discussing in the previous lecture, which is company a and company B. And I've extended the calculations to show you how you calculate the debt to equity ratio. So for company a is very easy. You have 0 depth versus 15,200 US dollar of equity. So it's debt-to-equity ratio is 0 obviously because there isn't adapt. While on company B, if you can, if you see on the balance sheet, the debt-to-equity is 10 thousand divided by 17,650. So the debt-to-equity ratio is 0 dot 50. How do I interpret this? Well, both companies have low debt to equity ratio. I do consider. And again, this is my investment style that a below tool below one No.5 debt-to-equity ratio, depending obviously on the industry. But that's really like as a reasonable because it shows the company is investing. And maybe today the cost of money is cheap because the supply of money, the interest rates are very low. And, and, and I'm saying, yeah, okay, so the company is taking some risks to expand and to grow the market shares, bringing new products outgrow competition. And if I look now at a real-world example, because the company a and company B example a, very simplified for the purpose of having you understand in very easy ways how debt-to-equity is calculated. Here I'm taking from site, I'm looking at debt to equity from the latest quarter and specifically at the car manufacturers, at the largest part of the largest manufacturers in the world. And so if I look at, and you can compare, if you look at Ford versus Dymola versus Honda. And here we go back into interpretation and you see that investing is not an exact science. It's really having an understanding of the business. But you see, for example, that Honda has a 0 dot 49 debt to equity ratio, which is actually very low, versus a diamond that has a 1.So 60 to adapt to equity ratio. So it means that they have much more data and they have equity. Now the question, as I said, it's about interpretation, is that good or bad? Told you for me below to below on that farm seems okay to me. And if it would grow this debt-to-equity ratio, there has to be reason behind it. So again, reading the annual report, reading what the company is doing. And I know, for example, for dime law that they are investing in new supply chains for hybrid cars. They have been working a lot on the new CO2 norms in Europe which are called W LTP and those kind of things. So they are investing a lot. The reason for that is they want to outpaced competition. They want to be the, not the first ones because Tesla was part of the first ones, but they want to be really fast now on changing from combustion engines into hybrid or full electric engine. So they are, they are raising depth for the future. And this is why their current debt to equity ratio is higher. Will that pay off in terms of return for the future, in terms of future revenue streams, we don't know it's a bet that they are taking. And this is why it is fun running businesses because you're taking risks and you hope that those risks will pay out and you're going to have a nice return versus maybe other companies that are investing less into new models, into new supply chains, into greener engines. And that may be irrelevant. In a couple of years because they were profitable today, but they have just forgotten to invest for the future. So there is no, let's say, clear precise way of looking at debt to equity ratios. The only thing I can tell you is that when I look at companies, I consider that reasonable debt to equity ratio is somewhere below to below one dot five. If you have companies that have debt-to-equity ratio of four or five, that would be for me a Kao criteria. I would really filter them out because I would say there is really too much Adaptive versus the equity. So this, this may be a huge burden for the future. And as we are in the conversation about solvency. So it's not just about depth to equity, but also how much cash the company has on hands. And that's something that also, I mean, when you're listening to the podcast or Warren Buffett, he also likes to look into what is the cash position of the company and what are the right ratios? And again, you see it's not an exact science, but you need to understand what is a good ratio. And I'll give you the following example. Then we're going to discuss again a real example on I'm gonna stay on the car manufacturers. When you have a company that has received a lot of cash, the purpose of the cash is to transform that cash into productive assets to generate profits and generate a return for the shareholders. That's the purpose of cash. So obviously it's not goods. And when you listen sometimes to the analysts, specifically on the big tech companies like Apple, Microsoft, Google. They have huge amounts of cash available. And they are pushed by the investors to take that cash and transform it by acquiring new companies or given a return to shareholders. And they have so much carries the generate so much profits that it is a challenge for them. And and if they would not invest, if they would keep that cash and not invested into another asset, either an acquisition of a company or developing new products during your investments, those kind of things are giving it back to shareholders. You remember with the causes of inflation, they're gonna destroy value. That's the whole conversation. So what is the right level of cash versus, let's say assets or versus market capitalization. So there are two ways of interpreting this. The way I like to interpret this, the following, When I look at the market capitalization. So remember the market cap is the current share price at Mr. markets that we introduced earlier is giving you multiplied by the number of outstanding shares. And when you have something around 10% of cash versus that market capitalization, that feels to be a, the market says that the company is financially stable when the company has around 10% versus that market capitalization. Obviously when the company has too much cash in the bank, it's missing opportunities. So if you have a company that has, let's say, 80% of cash available. Versus the market cap. I mean, that's not good. The CEO, he or she is not taking any investment decision. So I would really push that company to invest more to think about opportunities, at least giving a written than to shareholders because the company is not doing anything with that cash. All the CIO has to explain that they're waiting for a good opportunity to invest that money into market. This is sometimes when you listen to Berkshire Hathaway, which have huge amounts of cash available, this is sometimes the conversation that Warren Buffett has and Charlie Munger with their shareholders is that they're waiting for the right opportunity than to deploy that cash. And and here, if you look there, we're looking here again at car manufacturers to stay in the same vertical industry. You can see in the column the percentage of cash versus market cap. And what is interesting is to see that for example, companies like Ferrari, porsche, they have very low amounts of cash versus market cap. While companies like Ford and I have very high percentages of casual smart market cap. How can we interpret this doesn't mean that the company has too much cash. Well, it's maybe the case, but I interpreted the following way. I consider probably the company is being undervalued when the percentage of cash to market cap is very high. And if you look at, just take the example of Ford, Ford has when, when I took out this statistic, it has a percentage of cash to Market Cap of 82. Sweet had 17 billion of cash, let's say in there in its balance sheet. And it was valued at 22 billion. So it was this interpretation, it was nearly valued only for its cash. But if you look at the amount of, this is just current assets. It has 114 billion of current assets. So this could be an interpretation that the market is undervaluing the company, that the market has lost faith in Fort. And if you look at the statistics, I mean, this fluctuate over time. You know, Mr. Market is a manic depressive Persona. It goes up, it goes down. And when you have the other way around, if look at porsche, ferrari, They have no lot of cash in the bank. But on the other hand, the market capitalization is very high to this couldn't mean it's not the only task to do, but this could mean that the market, currently, Mr. Market loves those brands and is overenthusiastic. Future forecast of those brands the ways they're gonna generate revenues in the future. So that's maybe a way of interpreting it. But the second way of interpreting it, it may be that the company has deployed a lot of its cash in order to. Into investments to generate future revenue streams to outgrow competition. So that's really the way how you should interpret it. And from a solvency perspective, one of the things that I sometimes look into, specifically when there is a crisis situation. And I always keep a certain amount of cash available that I can really buy. Cheap companies when they are undervalued, when there was a crisis happening. And you remember there is every two years that there is a market correction. Every five to seven years there is a bear market. And remember, if you don't remember that, go back to the session with Peter Lynch where I was showing you some statistics about how often those market corrections and bam markets happen. And one of the ways I look into the solvency is obviously debt to equity and how much cash the company has versus its market cap versus it's damped as well. But one of the ways I sometimes by chip companies is when the market, when Mr. Market is valuating the company close to its cash position, it means that really the market is super depressed about the company. And that's maybe a good opportunity to buy that company at a very cheap price because the market, Mr. Market is nearly valuating the company only on its cash bank accounts. And obviously the company has much more assets. If a company would sell those assets, it would generate, it would be worth much more. But this is the way that sometimes you can look into finding cheap companies, but remember, it's not the only test that you should do. So remember that a key thing before we wrap up this lecture, and in general, this chapter is that it has to be a combination of multiple things and I want you to develop your style of investments so as utterly hours shrink you, why I only invest into blue chips. There is a reason for that. I told you that I have decided from the earnings consistency that I would like to have at least five if not ten years of positive profits. So, so positive results and profits on a yearly basis. I'd like to buy companies where the p is below 15, are below ten. I'd like to have passive income through cash dividends who share buybacks and having a yield between maybe 5%. And I look also at how good the company is generating profits. So we discussed about return on invested capital and I'd like to have at least 10% debt to equity is I like to be below two if possible, below one, that five. But remember what is important is first of all, you need to define yourself. What are the right ratios that you feel that you're okay with that? I have no way of interpreting it. You may have you may develop your way of interpreting it. But the most important thing, really, what I would like you to walk away from this chapter number three is it's a combination of things. As I told you when we were discussing price to earnings ratio, please, please do not be like junior investors that only look at the market by looking at all the P is below 15, it's below ten. That's bargain are going to buy that company. No, but maybe the company has has a very, very serious issue. You need to look into that. You need to look you need to read those financial statements. So that's why I'm telling you. And we are just discussing here the fundamental screens are going to, in the next chapter, we're going to discuss how to value is how to determine the intrinsic value of a company. And we're gonna discuss price to book. We're going to discuss free cashflow and those kind of things. But again, if you would just use fundamental screens, do a combination of it. Maybe you need to add one. You feel comfortable adding supplemental test, not just the ones I was showing you here, but I'm showing you here how my investment universe when I have cash available, how I go through the First Fundamental screens and I can tell you from 200 companies when I do this every quarter on have cash available, I may end up with 1510 companies of those 200 that passed those tests. Because some companies are maybe expensive, so they have a PE, There is a 30 and other ones because the market price is very high, the dividend yield is at 1% or 1.5% and that's a no-go for me. So maybe I just keep my cache them. And I'm always saying you are not obliged to invest when you have cash available. Maybe the market is not giving you a right, the right opportunity to buy. Cheap companies maybe keep, pile up your cash. And as Peter Lynch has been telling us and history has been showing us even until 2020, there's gonna be a crisis somewhere and it's the moment that you will be able to buy cheap companies and now is giving you an example of Nestle. I had to wait a lot of years until I bought into nasa and I bought during the crisis. And obviously I'm earning more money because the market has come back. And can I bind Nestle? No, no, it's too expensive, so I have to wait for the next opportunity, for the next prices, maybe to expand the number of shares I have in Nestle. And again, it's Linda solicitation for you to buy Nestle. I'm just telling you how I look at things and sometimes the market is not giving me on the universe, on investment universe of tunneled companies. Maybe I didn't find a cheap company to buy. That is sound and a good company. But I'm telling you here is those screens are there to filter already out the good from bad opportunities, but we need more. It's not enough. Having those screens, we need to be able to calculate also the intrinsic value of the company because there will be, some people call it the holy grail, but that will be the core thing on top of those screens that you can add into it. So with that, thank you for having done this fundamental screens chapter with me. I hope it was interesting for you and that you're really going to look into when you going to put your money on the market and deploying your cash to buy part of companies that you have now a better sense of how to do that versus heavy. I've been doing this before, so thank you. Stay with me. And in the next chapter we're going to go into determining the intrinsic value of the fundamental value of a company. Thank you. 18. Price to book: Welcome back value investors. So as we have finished in the previous chapter, the first fundamental screens. Remember we discussed that price earnings ratios, we discussed earnings, we discussed earnings consistency. My investment universe being blue chips. I will discuss returned to shareholders with passive cash dividends as an income stream or revenue stream for you or even share buybacks. And we also discussed profitability. So we looked at the return on equity return, invest capital, return on net tangible assets. And we finalize the previous chapter with discussing solvency aspects of a company. So as we go now into the next chapter, I think what is important to, to understand is what we discussed in the previous chapter. Those are just ratios. And those ratios are not good enough to tell you what is the real value of a company. And you remember in the introduction, I said that the purpose of my training and sharing my my 20-year experience with you is that at the very end of the training, not only are you becoming a better investor, but you will also be able to determine the real, what we call the intrinsic value of a business. And being able to separate good from bad businesses. And through that, being able to do better investment, taking better investment decisions versus poor investment decisions. So in this chapter, we are going to start with the conversation around intrinsic value. And you remember this graph that I was already in the introduction of this training sharing with you, where the whole purpose of investing is that as Warren Buffet Mongo, Benjamin Graham, Peter Lynch were doing, is that you buy companies that are currently, let's say, undervalued. But those companies are nonetheless good. Company has good investments and the people who will consider this difficulty, it's not as difficult as that to be able to determine. I have Mr. Market giving me a specific share price today. How does that share price of Mr. markets that Mr. Market is giving me today, compare with the real value of the company. And this is what we are trying to solve in this chapter. And for that, we're going to use a couple of methods that I'm gonna share with you. The first one will be price-to-book. And the price-to-book is a, let's say, evaluation method that is actually again, very easy to use. And they are going to walk you through this. We're going to practice it through concrete example. We're gonna use Coca-Cola into next at least two lectures for looking at there the intrinsic value of Coca Cola with first price-to-book and then brand reevaluation or let's balance sheet readjustment. And if you look at the price-to-book iteration, so we call it the price-to-book ratio, the PB ratio. It's the purpose of this price-to-book is being able to compare the current share price, the current street price at Mr. Market is giving you with the accounting value of one single share of that company or that business. And what is important I won't already now here to call out it's an important aspect. As always, it's not just about one ratio. It's important that you look at companies through various glosses and not just looking now in this specific case at price-to-book ratio that will be very low. And consider that the companies on the valued, so it's a bargain to its great TBI. Know, always remember, you need to combine or certain number of tests, of filters, of calculations to being sure that it looks like a good investment and not just relying on one single ratio. So when we discussed this a, this price to book, the first thing that we need to calculate is what we call the book value per share. And actually what is book value? And some people call it a counting value or equity value. So if you take this simplified balance sheet and you look on the red part of the, of the simplified balance sheet. So as usually have investors, shareholders on the right-hand side with lenders. So the investor shallows r, that's the red frame. Lenders, third party, non company owners. That's in the liability side of the balance sheet. Letter B here in this case, then we have the assets. So the cash that has been brought in by shareholders or by external lenders has been converted into assets. And this is what we have here on the left-hand side of the simplified balance sheet under the letter a. And the book value actually is very easy to calculate. It's the equity, so it's the difference between the assets and adapt as easy as that. But well, we need to calculate to be able to, to compare the current street price, market price of a share of a company. And how does that compare with the current book price? We, the book value is not enough. We need to calculate the book value per share. So the first thing, so it's a two-step, very simple calculation that we need to do for the price to book. The first thing is we're going to calculate, we're gonna calculate the book value per share. So we're gonna take the equity. So that's a minus b, so its assets minus liabilities. And this will give us the remaining equity. And we're going to divide that equity by the number of outstanding shares. You can take the diluted one if you would like to recommend to take the diluted one because that's also liability that accompany house towards future shareholders through war and stock options, those kind of things. And this will give us a value. And again, we're gonna practices in couple of minutes with the Coca Cola example. And then that's the first step. So this will give you a book value per share. That's an amount in either euros, US Dollars, Yen or whatever. And then you're going to take, in order to calculate the price-to-book ratio, you're going to take the current share price that the market is giving you. And you've got to divide this by the value that you just calculated, which is the book value per share. And this will give you a ratio and we're going to do the interpretation of that ratio as well. And let's start, let's practice it with already a very simple example before we go into a little bit more complex but real one, which is Coca Cola. And we're going to do those two calculations so that you follow the reasoning here and Again, I'm using a very simplified balance sheet here we have 100 million of assets on the left-hand side of the simplified balance sheet. And then we have on the right-hand side, 50-50 speeds of 50 millions of external liabilities and 15 million of, let's say, liabilities to shareholders with retained earnings. So that's the equity part of it's. And so remember the book value is assets minus external liabilities. So it's 100 minus 50, so that's 50 million. And you know, do you remember that in order to come to a conclusion on the price-to-book ratio first, we need to calculate the book value per share because a 50 million of equity, the 50 million of book value, you need to divide that by the number of outstanding shares. So let's take as an assumption at the number of outstanding shares is 25 million. So your book value per share is to hear. So the book value per share does not tell you more than what is currently the accounting value of one single shares of that company. So if the company has today is worth 50 million tons of equity and there are 25 million shares. One single share is worth two. Now, to calculate the price-to-book ratio, we know the accounting value of the company per share, and we need to compare this with the current share price that Mr. Market is giving us. And again, just as an assumption, as an example, let's consider the markets. Mr. Market is giving us a share price of $4 or four bucks per share. And you divide that current market price by the book value per share that you just calculated, which is two. This will give you price to book ratio of two. So $4 current market price divided by two. So ready here, I mean, the first interpretation that you can do is that the current market price is twice as high as the book value per share. This is what the ratio of two is telling you, is that from an accounting perspective, the company is worth, it looks like it's worth two. And the market says the company is worth four. So the market is overpricing BY $2. The book value, which is of $2. That's why, that's how we come to the $4 of the current share price. So this is again, it's Mr. Market stating this. Investors, analysts, they are people who say, Yeah, we feel the company is worth four. But the company from an accounting perspective today is worth two. So it's, it's overvalued by $2 on a share or Persia. And as a value investor. And again, I'm just sharing my experience here, what i look into or January value investors, they, they like to look at the price to book value because they, they look at the fundamentals of the company. What is really, what isn't the balance sheet of the company now gives the company a generating profits and how, how consistent those profits are. And as investors, we consider that price to book value that is below three. Personally, I like to look at price to book value is below one No.5. That probably means that the company is to some extent valued close to its book value, to its accounting value. But always remember that price-to-book values. As we have a portion of the calculation that comes from Mr. markets, they may be overvalued or undervalued emotionally because remember, Mr. Market is a manic depressive persona. And at the same time, one ratio again now I want to repeat and emphasize and call out again that just looking at low price to book ratios is not good enough because you have companies that have even price to book ratios that are below one. And if you would only look at the price-to-book ratio, you may end up investing into bad companies. But sometimes when the market is depressed, you may have fantastic companies where the price-to-book ratio may be below one or close to one. But again, it's a combination of things. So remember in the previous chapter, I gave you some kind of fundamental screens to look into. And here I'm already giving you, we're really going to the Holy Grail, which is about valuating the company. And this is what we are trying to do here. As I said from the very beginning, I want you to practice your eye. And so what I'm doing here, I've taken the income statements of the Remember, which is at 2019 eighties from Coca-Cola and also the balance sheet on December 31st, 2019 of Coca Cola. And what I would like you to calculate is the current price to book ratio of Coca-Cola. And so remember that for the price to book ratio, you have two steps. The first step is to calculate first of all, the book value per share. And the second one is that you divide that, that the current market price, the current share price of Coca Cola given you by Mr. markets, and you divide it by the book value per share you have calculated. So in order to do that, we're gonna do it step-by-step. So the first thing you need to do is in order to calculate the book value per share, you need to take the amount of equity that the company has, and you divide this by the number of outstanding shares. So let's do first that calculation. And again, our recommended that you pause the video and then you resume when you have done the calculation. So first what I'm asking you here is, please do calculate the book value per share, which is the equity divided by the number of outstanding shares. Dilute it. So let's pause here and resume the video when you are ready. Alright? So the in order to calculate the book value per share first, you need to look in the income statement and balance sheet for the two figures that you need. So first is you need the equity. You can see on the right-hand side of the equity of Coca-Cola by end of 2013 was 21. There were 98 billion of US dollar and that the total number of shares outstanding, and I'm recommending you that used diluted one is folded 3 billion. So the book value per share is 21 dot 098 billion US dollars divide it by four dot 14 billion of shares, which will give you. A book value per share of four dots 89. So this is what the accounting value. So this 4.1a, 89 US dollars is what the accounting value of the company is. Napoleon remark, this is based on assumptions on valuating those assets. And we're going to discuss in the next chapter where I gonna teach you how to read a balance sheet and maybe you will need to readjust the balance sheets. But here, let us consider that the valuation of the balance sheet is done in an, in a way that it is here. So the balance sheet is worth 86 billion, and from those 86 billion, we have 21 billion of remaining equity, which is the book value. And so you have another book value per share. I said it's for dot 89 US dollars on a share. And what you need now to calculate, remember that we're looking at that we want to achieve calculation or ratio, which is a price to book. So determining how the market's compares, what is the current price that the market is giving us compared to the book value of Russia. And for that you need to know the current market price of Coca Cola. So he have taken an April 17th, so it's couple of months old just after the crisis were, so Coca-Cola was worth on that day, 48 dot 0€6 dollars per share. So you take the market price. So if you want to calculate the price-to-book ratio, takes the market price, you divide it by the book value of the company, and you take 48 dot 06 years dollars per share. This is what Mr. Market is telling you. And you divide this by 489 years old or per share, which is the book value that we have actually calculated. And this will give you a price-to-book ratio of 9.82. So it looks like 90 to the interpretation of those nine dot 82, it looks like that the market is valuing one singular share, close to ten times the accounting value of Coca-Cola as a company, which is very expensive, to be very clear. So 48 is pretty much expensive. If we only look at price-to-book ratio, Coca-Cola would be too expensive to buy. But again, reemphasizing. Please do not look only at one singer ratio, but here you can already see that the current price to book ratio, given these assumptions, the company is worth 489 and the market is giving us at $48. So that's actually a very high price to book ratio. Remember that as investors, we like to have PB ratio that is for sure below three if possible, even below one dot five. So that's the first thing. So that's price-to-book. And you know how, through this lecture, you know how to calculate the accounting value of one single share. We took two examples, very simple one and then we took a real-world example of Coca-Cola y, we know what is the value of one single chef from an accounting perspective. So with that, we're going to close this lecture. So I think you have already first to, to valuate a company and being able to determine is Mr. Market giving me the company at a cheap price or not. And so, but we need more and this is not enough. This is the first, first calculation, this book value per share. But in the next lecture we're going to discuss that there are opportunities to re-adjust the balance sheet and you're going to see that. And we're gonna do this specifically on the example of Coca Cola staying on the same balance sheet. You're going to see that we can readjust the balance sheet and you're going to see that it will give us a completely different perspective on the book value per share, but stay with me in the next lecture. And I hope that it was really interesting to be able to see how we determine a book value per share for any given company. Thank you. 19. Brand valuation: Welcome back. In the next lecture, we are still in the valuation methods. How do we evaluate the real value of companies? And say from M in the previous lecture, we discussed how to calculate the book value of a company. In this chapter, we're gonna extend this, and so we're going to do a balance sheet readjustments. So we're going to look, and this is where again comes the importance of reading financial statements and going to give two examples. Or you can re-evaluate the balance sheets of a company. And you're gonna do this on trademarks, which is an intangible asset, and we're gonna do this on property, plant, and equipment as well. So, So as we want to determine the book value, so the intrinsic value of a company. There is an agenda sharing my experience, one of the things and you remember that my investment universe are big, big, strong brands. One of the things that's once per year comes out is a global brands ranking. And you have various, Let's see, organizations like Interbrand, WPP who bring those out. So if you, if you just Google the largest brands in the world, you're going to find those listings and you're going to find the ranking year over year of how companies and brands a change over time. What is interesting is that those marketing agencies like Interbrand, WPP, they are specialized at doing the evaluation of those brands, of the trademark. And you can imagine that they are not doing this for all the companies that are quoted, for example, in the New York Stock Exchange or an European stock exchanges. And this is again a reason why I only look into big brands, not just because of their mode as we have been discussing in previous chapters, but also because I do have a external institutes that are calculating, that are estimating what is the brand worth. And and what is, what you need to understand is that some companies they value and brown is a trademark, it's an intangible asset. And you remember, I'm not the biggest fan of intangible assets in the balance sheet. But in this specific scenario, as I am in invested into big brands, I'd like to look at the valuation of the big brand and how the brand, how the trademark is valued independent sheet in the intangible assets of the balance sheet. And you remember that when we discuss about modes, brands, you can estimate that the value of the brand is how much it would take to, for competitors to come in and reproduce the same mode of that brand is what we call the cost of reproduction. And if you look, and you can see a couple of examples. If you look at Google, Google, at least in 2018, had a intangible trademark that was worth, according to those institutes, of 155, of billions of US dollars, Amazon 100 billion. And you see also how it increases from one year over the other. So it's pretty interesting to see. How consumers, how customers perceive the brands, and how those are used. The Interbrand Institute to look at the ranking of global brands, how the valid that. So it's, it's, it's, it's very interesting. And why we do this is because typically in balance sheets, you have some assets that are under value it. And we're going to discuss CEO Stuart you later on. But the two examples that I am giving you here and which are typically undervalued is the, let's say the value of the trademark. And I'm going to show you this concretely for Coca-Cola. Because you see here Coca Cola has It's in frame number five. Coca-cola is worth, according to Interbrand, 66 billion. You're gonna see that in the balance sheet. I think it's below 10 billion how they vary the trademark, but also proper dependent equipment you have. And that's an accounting conversation. If a fourt or Coca Cola has bought a building, let's say in a cleanser, are they carrying the building at the current cost, at the current market price of that building of the real estate? Or are they carrying in the balance sheet the building at costs or how much it costs? And obviously there you can have discrepancy. So differences between they carry an older building that they bought a hundred, one hundred years ago, and they carry this at cost. I mean, we know that the price of real estate have moved exponentially over the last 100 years. So let's go into concrete example. Let's start with Coca-Cola. So I was showing you here is Interbrand in, so in 2019 the ranking came out. So this is 1018 bass global brands. Coca-cola was ranked number five part of a global brands. And Interbrand considers the brand, the brand value of Coca Cola being worth 66 dot billions of US dollars. But what's interesting is if you look at the balance sheet and you look at the trademarks with indefinite lives. This is how a Coca-Cola cause it. You're gonna see that Coca Cola is pretty conservative, pretty defensive, and did something, for example, that I like from the CEO and the board of directors that they didn't brag, they don't they are not arrogance on how they value the assets. And here they are valuing the trademark at 966 billion. While the market and external Institute, interbrand is valuing the same trademark at 66 billion. So what you can do is discuss question, wonder, why do they don't reflect this worth at 66 billion but was at 9 billion. And this is where am I going to walk you through complex app or you're gonna do then re-evaluation of the balance sheet on the example of the trademark. And still with me, I have another one before which is related to property plan and equipment and we have the same let's say it's typical undervaluation of assets that we can find in company balance sheet, which is Ron property, plant and equipment. But obviously, if you don't read the footnotes, and I've done here the extract of the footnotes of the Coca-Cola ten k report where they say that property, plant, and equipment are stated at cost. So probably they are undervalued if they would have to sell all those property, plant, and equipment assets. So it would be an opportunity to reevaluate the balance sheet. And obviously, if the price of the current market price wouldn't, would be probably very, probably much higher than what is here. It's 10 billion, then the balance sheet goes up. And by that as well, the book value per share will go up. But let's do this through concrete example. So what I'm showing you here, remember in the previous lecture, we had calculated the book value per share of Coca-Cola. So you remember that a certain many time we did the calculation that the book value per share of Coca Cola without doing any adjustments to the balance sheet was worth four dot 89 US dollars per share. If you remember how we calculate this, please go back to the previous lecture and do that. Well, we're gonna do here is, and I'm just gonna do the adjustment of the trademarks. Remember that Coca-Cola considers that a trademark is worth nine dot 2 billion US dollars. While Interbrand, which is an external marketing Institute, considers that the worth, the cost of reproduction of Coca Cola is worth 66 billion on the trademark. So what we're gonna do is we're going to change, let's say the trademark and we're gonna replace the 9 billion by the 66 million. So we're going to add, and you see this in the simplified balance sheet, we're going to add 57 billion worth of intangible assets to the balance sheet of Coca-Cola. Well, what does that have an effect? And you remember that the balance sheet has to balance out between assets and liabilities. So by doing a readjustment of the trademark of Coca-Cola from nine to 2 billion to 66 dot something billion. We're adding 57 billion of intangible assets. And as we have to balance this out, we are increasing the book value of the company by the same amount by 57 billion of us dollar. And by having done that, our book value has increased and is now worth 78 billion US dollars instead of 21 billion of US dollar. And we can discuss this. We can, you can, you can say I do disagree on this. You can say I prefer to take 50% of how Interbrand values the trademark of Coca Cola, okay? But you would still have the opportunity to readjust the balance sheet of Coca-Cola. And you could do the same with property, plant, and equipment. But for that you need I mean, it takes you more time. You need to know where which property Coca-Cola has. Some. Sometimes some companies do not, do not share this, so it requires more, more analysis. Most study. Homework and you could adjust the property plant and equipment instead. If you remember in the previous slide, it was carried at cost. You could carry it at fair market value. And by that you could probably very probably you're going to increase the asset side of the PPE and that you're gonna incredible value. So the equity side of Coca-Cola on the liability part of the balance sheet. And what I'm showing you here is the previous lecture I was showing you that we were at 489 years dollar on a share for the book value of Coca-Cola per share. While here by doing this readjustment of the trademark. And again, it's argued, but I'm just showing you how I do it. But I do it like this. I look at the trademark. And indeed, by that's my equity figure as moved from 21 billion to 78 billion. And I divide this by the same number of outstanding shares. Remember, independent sheet, it was, sorry, the income statement was mentioning was four dot 314 billion shares. And now my adjusted book value per share has become 18.12 instead of four dot something. And if I want to bring this back to price to book value and I'm adjusting this now I am calling this an adjust price to book. And so the market is still giving me the price or share of Coca-Cola at a street price of 48 dot 06. But now I am going to use the new adjusted book value per share, which is 18 or 12. And I divide 48 0's six by 18012. And now you see the effect of readjusting only readjusting the trademark is that my price to book value has come down from 9.82, which is very expensive, to 2.2K 65. So it starts getting interesting. And again, remember, one ratio is not good enough. You need to do multiple tests to value a company and to decide if it's a good or bad investments. But if you are just isolating, hear the conversation on the price to book value. The Press book value is below three. It's not below one No.5, but the market valuing Coca Cola at 2.5 times its current share price. So that's already a reasonable price to book ratio. And this is what I wanted to show you, how you can readjust balance sheets. And here we did it with the trademark. You could do it with property plan and equipment. You could maybe do it with other things. But this is where you need to have a minimum understanding of a business of valuating various assets of the company carries in its balance sheet to readjust the book value of one single shares of that company. So, and here's an important so that you have seen it's, again, not very complicated to do this. So we did the book value per share in the previous lecture. In this lecture, again, summarizing, we have adjusted the balance sheets and we have looked at some examples of trademark property, plant and equipment. And we took the trademark, and we have adjusted the trademark in the balance sheet, which increases the book value of the company on a per share basis. Um, and so we're going to wrap up here the conversation on the price-to-book and the adjusted price-to-book. And in the next chapter we will going to go into the dividend discount model guns cause what? The Gordon model. And then we're going to go into what a lot of people use when they go into company valuation, which is future earnings and future clash cash-flow model calculations and conversation. So without wrapping up this lecture, thank you for having listened into it and talk to you in the next one. Thank you. 20. Dividend discount model: Welcome back investors. So in this lecture, we are going to be moving forward in the conversation about how to value, how to determine the intrinsic value of a company and this on a per share price perspective. And after having done in the previous two lectures, is price to book or the book value per share calculation and explanations. And having done a readjustment of the balance sheet where we discussed about how to re-evaluate. I'm an asset like a trademark or property plant and equipment. The next two lectures will be a little bit more, let's say loaded with formulas. And because we're gonna discuss mathematical models about how to calculate the intrinsic value in this lecture based on dividend discount model. And in the next one you go and discuss discounted future earnings and discounted free cashflow methodologies. So let's get started with the dividend discount model. And before doing that, again, re-emphasizing on this slide that you have already seen in the very beginning of the full training. And where I was explaining to you that good investor tries to find fantastic companies at cheap prices when the market is, for example, the press of the market is giving the company at a cheap price. And you know, this graph where we try to estimate the intrinsic value. So that's a calculation that we have to do. We did it already in the previous lectures with book value per share or adjusted book value per share. And now we're going to use dividends model and dividend payments to estimate if that amount of dividends would go on forever. How can we value then a per-share or a share of a specific company? If we just look at dividend cash payments and we're going to add to that the share buyback estimation as well. So very often when, when you discuss with, let's say a little bit more seasoned investors, you're gonna hear the term dividend discount model or the Gordon Growth Model, which is one and that is mostly use and those models are good approximations. But let's try me to give a first to set the formula. So what Golden and I think it was in 19 fifties and 19 sixties. He wasn't, I think you guys are Canadian economist. What he was stating is that you can estimate the intrinsic value of a company by taking the amount of share, the, sorry, the amount of cash dividends, and dividing that by the cost of opportunity or the cost of capital. So typically, we're going to practice this is you have a certain amount of US dollars per share that is being paid out and you divide this by, let's say, 56, 7% because that's the return that you would like to have and this will give you a value. And then you compare that value with the current share price, with current market share price of that company. What Gordon has been adding to this. Is the fact that you may have companies that grow the amount of dividends year over year. And the formulas of the golden format takes this into account. And you not only just divide the dividends per share by the cost of capital, but from the cost of capital is substract the percentage of dividend growth year over year. And if you do this on the first concrete example, let's take the assumption that we have a company, whatever the company is, that pays out No.5 US dollars on a share pretax. And you would like to have a 6% return on when you invest money on the stock exchange and realistic whatsoever. So if you look here in the formulas, we will do the first calculation without any dividend growth. So that's v1 value. So you take the amount of dividends per share pretax, so that's eroded F5 and you divide this by 6%. So it's actually you divide your 0.5x, 0 dot 06. This will give you an intrinsic value of the one share of that company at eight 0.33c US dollars. If this is a pretty interesting, if that company would grow the amount of dividends that the company pays year over year. And let's assume it's average 3%. You need to add those 3% of the formula. So you take the same formula, some calculation as you had before. So 0 dot 5-years dollar on a share pre-tax, you divide it by your cost of opportunity, cost of capital, because you expecting 6%, you could change this value by five or seven or maybe already happy with four. I typically put something between 5, 7% here. But you subtract from that cost of opportunity from the cause of capitalists abstract the dividend growth that the company has been paying an average or has been increasing in average year over year. And what is remarkable is you see that with the 3% dividend growth, you the intrinsic value. So the V2 value of the stock of one share of that company has moved from eight, 0.33c to 16, 0.6c, seven. And when when I'm having an even in with the friends that I've been teaching value investing when, when I was discussing the, said this seems so obvious, so easy. Why aren't more people doing this? And I said, yeah, it looks pretty much easy indeed, if the company is able to pay forever dividends, if there's growing or not. That's another conversation that we are going to elaborate in ten seconds, but at least you have a possibility to evaluate those, the intrinsic value of the company because this is cash actually coming to you. So you're going to put a certain amount of money to buy one share and this amount of money will give you a return that you can value through the V1 or V2 calculation. On the V2 calculation, some people challenge, say yeah, but I mean, a lot of companies don't grow the amount of dividends year over year. And this is where I'm coming back and we discussed this in. Lectures in this training. If you look here, you remember that we discussed about dividend aristocrats and dividend kings. And you can see that if you have a company that has been growing year over year by two or three or 4%. It's dividends year over year for 25 years, 50 years. You can obviously imagine what is the impact on the intrinsic value of the V2 calculation versus the V1 calculation where there is no growth on the dividends. So we're going to bring in a v3 evaluation as well. But this is not more complex than this. But this is the golden dividends model, the Gordon Growth Model that is actually used by some investors to estimate its an approximation but rapidly estimate the intrinsic value of a share for a given company that is paying out cash dividends to its shareholders. And you, what you need to bring in is what is your expected return on capital that you have? So in this example, we have taken 6% 1 of the things that I have been missing in the Gordon Growth Model. And it's a trend. I mean, in the 19 fifties, nearly nobody was doing this probably that's why it did not come up. But one of the things I was missing is adding into the cash dividend also share buybacks. You remember when we discuss returned to shareholders in the previous chapter, and I was telling you that as an investor should not only look, so definitely you want to have a passive income stream, but you should not only look at cash dividends, but also share buybacks. Awkward. And you remember that share buybacks and they are not taxable towards the shareholder. While if you get a cash dividend, you're going to be taxed because this is considered like a revenue. And you remember the thing about the buyback. Where, how does that work accompany has the amount of shares in the company is using its own cache to retrieve a certain amount of those shares from the market, which brings down the amount of total shares outstanding, which by default it will increase the book value of one singular share. So it's really, some people say it's artificial. You remember what we discussed about that. But it's a way of increasing the book value of one singular shared because there are less shares for the same amount of equity that are available. And what is interesting, and I've taken here the example of Microsoft, where what we would like to end up is that much of is paying cash dividend. And I've taken here a screenshot from the website, which is a site that I'm using. And you can see that you can calculate dividend yield as we did earlier on a cash dividends. What is the amount of in terms of percentages? But one of the things that sometimes investors do not realize that when the company is doing share buybacks. This can also be calculated as the yield in terms of percentages and you can add the cash dividend yields with the buyback dividend yields, which gives us then a total shareholder return yield. And this is what we're gonna do here. So and again, this is my, my own, let's say formula that I have been amending the Gordon formula. So in this situation, what we are doing is that the value of the stock is no longer the dividends. Expressive, let's say US dollars or euros per share divided by the cost of capital minus the percentage of dividend growth year over year. But we're going to add as well the amounts of buyback per-share to come up with a total return to shareholders. And here, and this may feel a bit more complex, but stay with me, you will see that the calculation is not so complex. So remember that this company was paying 0 that 5-years Doris has cash dividends and we have an expectation of 6% on, on our written and on our investments. And that the different growth rate is about 3% year over year in average. The company in 2019 has used 100 million of US dollar of cash to buy back shares from the market. And the current share price, let's say that the average share price that was used was 14 US dollar per share with a total amount of outstanding shares or 500 million. So what you can see is that with 100 million of US dollar of cash, the share price of 14 million, the company was able to buy back a little bit more than 7 million of shares. So the new number of outstanding shares has gone down from 500 million to 500 million minus the amount of shares that have been bought back. So minus 77 No.1 for 2 million, which is actually more or less 492 million of shares that are outstanding. And with that, you can estimate and earning in terms of share buyback per share. And this gives you a calculation. That is, if you look here at the formula, you can see that you come up with a different valuation because you would need to add the amounts of 0 dot 1988 US dollars on a share. So how do I come to this amount is because actually as I'm retrieving 1.4c, 2% of shares of the markets. If the market is pricing the company at 14 US dollars, I have to remove one, not 42% of those 14 US dollars, which makes 10 dot 1988 or 0 dot two US dollar per share. And if you add this now, you will have the cash dividends, but you will have an equivalent of buyback in terms of US dollars per share of 0 dot-dot-dot 1988. So you add zeros at five with zeros of 1988. And you divide this again by the cost of capital. And you subtract with the dividend growth and you see that the total intrinsic value has changed. You remember that in the previous slide I was showing you in the previous calculation that the V2 was at 16, 0.6c, 7%, sorry US dollars. And now here. You have here all the calculations, the intrinsic value adding the share buybacks has moved from 1667 US dollars per share, two, twenty three, twenty nine. So we have added another seven US dollars on the Share. So what you need now to do is to estimate, well, first of all, between v1, v2, and v3, we're going to take the assumption that the company has been buying back shares and that the dividend continues to grow and you have companies to do this. And you need now to compare this with the current share price, the market share price, what was the market is giving you? And you're gonna take here the assumption that the share price is currently at 14, as we said in this previous example, that's the share price is at 14 US dollars. If you would buy it from your broker. And you need not to compare 14 with V1, which is A33, with V2, that is 1667. And with v3 there is 2329. So if the company would only be paying out and this is interpretation that you need to do if the company would only be paying out No.5 US dollars on a share pretax and you have a 6% written expectation. The company is currently processed 14, you don't have enough margin of safety. So actually the market is overpricing. Looking at the dividends model here is overpricing the value of one share by 40%. So A33 is what the dividend model tells us. This is what the one share is worth, but the market is pricing at 14. So this is a no-go situation. You would not buy that chair if the company would increase the dividends on a yearly basis forever. So you remember, we calculate the V2 formula, which is, which gives us 1667 US dollar on a share price. If you compare this with a 14 US dollar share price, you are actually, if you would buy today at 14 US dollar, the intrinsic value is around 19% higher. So if the market is suitable in time prices in what you have calculated in V2 somewhere over the next year as most probably and very probably, the market will reflect a prize that will grow and will not leave it at 142. It means that today the price at 14 is somehow depressed versus what you have calculated here in terms of intrinsic value. If the company would do. We're taking the assumption of V3 now, which pays 0.5x is dollars per share plus share buyback. There is whether 1-0, 0.2x, 0.998c, eight US dollar per share it with the same expectations of cost of capital, which job 6% and you know, that will grow by more or less 3% per year. Obviously, with a share price that it today, that is today at 14 US dollar, the intrinsic value is telling you how the company is worth 23 dots, 29. So the current market price is 66% on the values versus the estimated valuation of the company. And this is, I mean, this is very, very interesting. And if you look here in this table, I tried to summarize how I think about and, and I gotta throw here also a rule at you, which I do use is typically I'd like to have between 2530% of margin of safety so that the current share price is 25 to 30% lower than my estimation of the intrinsic value of the company on a per share perspective. And you see here on the right-hand side of this the slides, what I call the evaluation zones. So if I kind of put the v1, v2, and v3 variations into that graph at a certain moment in time. You see that v1 obviously being at eight, 0.33c, 3-3 US dollar per share. Sorry. You see that we are in the overall valuations on. So the market is pricing the share at 14 and we know it's worth a3, a3. So we don't have any margin of safety. So we would say that we would not buy the share or if you would have it, we would sell it because it's currently overvalued. So we would bring in the, let's say the increase margin that we did on buying this sham maybe earlier in the future and it was under priced. In the yellow zone, you see undervaluation zone. So this is typically enough for V2. As I told you, I'd like to have between 2530% of undervaluation. And here with 19, we are short of that. So probably I would consider not buying a share, but maybe I would continue monitoring. Maybe there's going to be again, Mr. Market will be depressed over the next weeks and potentially I would then buy in because probably v2 will move or let's say the margin of safety between the current market price and v2 would go closer to 25-30 percent if the company is paying those 0 dot 5-years doors on or share with a 3% dividends growth and the buyback 11, not 42% of the cost of capital of 6% if my intrinsic values at 23 and the current market price that 14 beyond the 30% margin of safety. So probably, and again, this is now in Polymer, I'm going to say probably are going to buy the stock. But again, I do want you and I will do the same. I want you to do more tasks than just relying on the Singletons, Which is dividend discount model. And that's something that you need to look into. So we discussed in the previous chapters, there are some fundamental screens like debt to equity, price to earnings, et cetera. So please, please are really more than recommend you do multiple tasks before you decide to buy. But at least it from a dividend perspective, that share would pass the towns of that company would pass the test that it could be. In the buying decision, because the current market prices at 14 versus intrinsic value that is estimated at 2329 US dollars per share. And then last but not least, before wrapping up this chapter, there is another way of calculating this, which is the discounted version, I call it the DD M2, where you can go instead of using infinite values, which Golden is actually saying. So he, Gordon formula says that this is over an infinite lifetime. You could also bring this bag and limited over an amount of years. And you could say, well, instead of having a linear growth of dividends, I taken assumption that the dividend would grow by this amount between year, the next year and plus ten years. Then the growth will slow down a little bit of the dividends because maybe the payout ratio becomes just too high for the company. And maybe I have a third window of between years plus 20 plus 30 where there will be no dividend growth. Who can do the calculation with me? You will need an extra sheet or something like this, and you need to bring this back obviously to the current value of money. So discounting the amount of dividends over time as well because there is a cost to it. And you remember we discussed in the very beginning of the training, you need to bring back the current the amount of money in the future to discount this to the cost of capital or the cost of opportunity as well because there is inflation. So with that, we wrap up the dividend discount models. So I think what is important here is what I've been showing in the previous slide is that you are able to calculate with those formulas. Or if it is the Gordon Growth Model formula, you use my own one where you ads, you need to add the buyback yield as well. Then you have an idea. How does, are you estimate how does the intrinsic value compare versus the current market price? And then you have, I'm taking, I'm showing you, are showing you how I do it with three valuation zones. Where does the intrinsic value sits versus the current market price. And then you decide is it's a no-go TBI. Do I still need to a little bit if maybe the market gets depressed or are we clearly in a situation to buy the shares? But again, reemphasizing, you need to do more than just one single test. And we're going to discuss it in a couple of minutes or after the next lecture when concluding these valuation process chapter. So with that, we're wrapping up the dividend discount model. I hope was not too complex, specifically adding the buyback keel and how you calculate this on a per share perspective. But this is a very good way for companies who pay out dividends. You have some companies who don't pay. And this is what we're going to discuss a next chapter. But for companies who pay out dividends, this dividend discount model and my own one where I add the share buyback guilt is a very good approximation to give you a sense of what is the intrinsic value of a company but a set? Well, we're going to discuss in the next lecture is companies who do not pay our dividends. How do you value at those companies? And we're going to discuss discounted future earnings and discounted free cash flow in the next lecture. So with that, thank you. I hope it was interesting for you and hope to having you listen in into the next lecture when we're going to discuss a discounted future earnings and cash flow models. Thank you. 21. Discounted Future Earnings & Free Cash Flow: Alright, investors, we have nearly finished the valuation process chapter, as I said in closing, are wrapping up the previous lecture. You have some companies who don't pay out dividends. Or for companies who pay out dividends, you can use the golden formulas or the extended Gordon formula where you add the share buyback yield into it. But how do you value companies who don't pay out dividends? So obviously, the dividend discount model will not work for that. You can use a price-to-book that will work. But readjusting also having an adjusted price to book. But the dividend discount model will not work for companies who pay out 0% of dividends. If they pay share buybacks, you can do the calculation, but the portion of dividends will be 0 of cash dividends and you will only have their share buyback yield. So something that is mostly used by a lot of analysts to value companies is really looking at future earnings and free cashflow. And the first thing is why do we call those models discounted? And remember already studied in the previous model that the value of money evolves over time because of inflation. And you remember in the introduction of the whole training I was discussing with you, a cup of coffee had much lower cost 20 years ago than it is today. And so you need, when you're using those models to estimate intrinsic value of a company, you need to discount back the value of money to the present using a discount rate or the discount rate has to be reasonable. I used typically between 5, 7% as a discount rate because this is typically what I would like to have in terms of return, in terms of cost of capital when I deploy money buying shares of companies. And so that's the first thing we need to understand why we call them discount it is because we will bring the value of money back over time. The second thing is why, why do we have to, why do we look at future earnings and cash flow? And because those are two different accounting concepts, you remember as well that when you look at financial statements, you have a balance sheet and an income statement and cashflow statements. And there are differences. If you leave the balance sheet 1 second aside, if you just look at the cashflow and the income statement, they are differences. The timing differences when cash comes in versus business transactions. Remember that maybe you can now serve a customer and with some, some products and services. And so that's revenue that you have. But you have not collected yet the cash from the customer because you are sending me to that customer and invoice and the cosmos 30 days to pay that invoice. So you see that there is difference between the could be differences, timing differences between cash movements and business transactions. But what is important is at the very end of the day, in the long term, the cashflow and the earnings, they, they actually shallow converge. They should come together because cash will be collected and cash will be paid. And so it is accounts payable, accounts receivable. Those are just temporary position that is certainly in time you're going to see that the cashflow and the earnings should match at a certain point in time. And let's do this really concrete example. I was giving an example of an invoice with 30-day of payment terms. Let's take the example that we have a company that's called Tracey limousine service. And I'm showing you the changes in terms of cash boss versus the income statements over time. So as it is limousine service, Tracy decides to buy a new car and you limousine. And what are the what will happen in the cashflow statement versus the income statement? If and here we under the assumption that the company is buying the limousine, it's not renting it. But if a company is buying the limousine when the car is bought or is being delivered, obviously, the tracing him was in-service. Company has to pay the full price to the car seller and to the car dealership. So and again, we under the assumption the car is being bought by tracing and was in service. So there's going to be, let's say ten thousand fifteen thousand US dollars of cash that flowing out from the bank account to the car dealership. From an income statement perspective, what you need to take into account is that this assets. So from a balance sheet perspective, now the company has a new asset, which is this white limousine that you see on the photo here. This asset will be used over a five-year period to generate revenues. And this is what I'm showing in the income statement. And why, why we are using sometimes discounted future earnings and discounted free cash flow is because we want to see, we want to evaluate the company on both aspects. In this example, the cost from income perspective, from a revenue perspective, the cost associated to the revenues should not be booked on year one. It should be booked and depreciated over five years time. This is what I'm showing in the income statement. You see the red parts of the income statement. So we are taking the cost of the car, dividing it by five and being linearly depreciated over five years. And we hope that this asset will generate some revenues over the five years. This is what I am showing in green where the revenue is actually fluctuate. So this is important to understand that you may have in companies differences between the cashflow statement and the income statement because of those kind of, let's say accounting concepts that that are difference because as the example here of the limousine, you need to pay directly the full price to the dealer when you get the car. But you're going to use that cholera which comes a productive assets over the next five years. So you would like to have a fifth of the cost absorbed on a yearly basis and matching this yearly revenues in terms of limousine service that you are going to provide your customers? And this is where I'm saying, well, when I look at company valuations and I need to determine what is the intrinsic value of a company using, in this case now discounted future earnings and discounted cashflow models. I use both. I use both so that I have. I compare them both as well. Because as I told you, there has to be a certain atomic convergence between the two. And the formula is pretty easy. And you already have seen those formulas. How we discount the value of money over time is you take the cashflow amounts and you divide it by the expected cost of capital, but you put it on a yearly basis, so it is on year one, you just divide it by the cost of capital if it isn't new to you, the exponential 2-year three, exponential three, etcetera. And you get a series calculations. And this is how it looks like. So as I told you, I'm using two methods. You see this is an extract of my Excel file that I use when I analyze companies and I use discounted future earnings and is counted free cashflow. And what I do, I have Somalis, if you would look on the internet that use a terminal value, and I don't like to use that terminal value. What I like to do is I do an evaluation on ten years, 20 years, and 30 or so if the company we generate ten years of, let's say, of earnings and the company would disappear after ten years. What's the intrinsic value the company would generate will exist for 20 years. How much earnings and cash flow where the company generates for the next 20 years and then it would disappear. And the same for 30 years and I don't go beyond 30 years. What is interesting as well is that I think was 1995 podcasts from the Berkshire Hathaway annual shareholder meeting where Warren Buffett was also kind of agreeing that when he looks at companies, he doesn't go beyond 30 years. So he takes maybe higher growth assumptions between year 12, kind of middle average growth assumptions between years 11 to 20, and then having no growth between years 2130. And this is how he comes to the Intrinsic Value Estimation. So what I do, and we, taking here again a concrete example because I want you to practice this. I'm zooming in into my Excel file. So what you see here is a company where you need to have a couple of variables and numbers. Ready? So the first one is you need when you look at the total amount of earnings or cashflow. And I'm doing both someday discounted future earnings and discounted future cash flow. So I'm doubling actually what you see here in the XML file. I have one line for this counted earnings about 30 years and have the same for the discounted free cash flow for 30 years. And so you need to know the amount of outstanding shares diluted today of the company and also the current share price. And so what I then do is I do every ten years, I summarize, I do a sum of one to 101 to 2130. This is what you see in those three blocks. And you can see here that I've taken the assumption that the company is earning around 4.5 billion of earnings, nominal, what we call nominal earnings on a yearly basis. And if we discount this, And it will give us obviously a lower number because the value of money changes and decreases over time. And this is why we are using a discount factor. And I think I was using 7% if I'm not mistaken, and then I have to bring in some growth assumptions and I conserve this company is not a growth company and we are here with 3% growth rate. It's more a traditional company, probably a value stock. And you see that between years 110, I use 3% growth between years 11, 22% and between 2130, just 1% of growth, which is pretty conservative. And when I, how do I come up with an intrinsic value? And you see that I'm not using any dividends here, I'm just using the earnings on a yearly basis and I do the sum of the discounted earnings. And I ended up after 30 sorry, after ten years I end up at around 35 billion US dollars of earnings, discounted report or not nominal, but discounted earnings over a 20-year periods are going to be at around 58, 79, 0 billion US dollars of earnings. So that's the amount of earnings that the company would generate over the next 20 years and over the next 30 years, if the company would persist over the next 30 years, and I want to have a certain amount of growth and the cost of capital is 7%. The company is going to earn around 72 billion US dollars of earnings. If I divide that number with the current amount of outstanding shares, it will give me the intrinsic value of the company on a per-share perspective. So if a company would only do ten years of earnings, the current US dollar per share price, intrinsic value, which I call the IV ten, is 33.31 US dollar on a shaft. And if you compare this with the 43 dot 94 US dollars, obviously you don't have the right level of margin of safety because the fundamental intrinsic value of the company is worth less 3331 years. There was pressure versus what the market is giving you today at close to 44 US dollar. So 4394, if you take the assumption that the company will produce 58.790 billion US dollars over the next 20 years. The intrinsic value of the company and of one single share that company, if you divide it by one dot 069 billion number of shares, it's going to be 4050, 4.1a, 35 years or as per share. So here already you see that if that company, if you're sufficiently, let's say certain, if you have a good certainty that the company will provide that amount of earnings over the next 20 years. You actually can buy today the company at 20% below the intrinsic value. So you can buy it at 4394 versus $54.95 per share. And obviously you can imagine that if you add ten years of earnings with the current growth assumption of just 1% for the years 21 to 30, the company will generate 72 dot 439 billion US dollars of earnings from year one. So from next year on for the next three years, with the current amount of outstanding shares, intrinsic value of the company is at 6771 US dollar per share. So they are obviously you're increasing your margin of safety. And having said that. Here the interpretation and analysis you need to do is how sure I am about at this company were still exists in 30 years because if you're selling the company and your shares in ten years, somebody else needs to buy them. So they need to be certain that they're gonna also get some return. And this has to be reflected in the sales share price. For example, if you decide to sell the company in ten years time. So you would say it's not more complex than that. Well, you need to do some calculations. You need to have something like an Excel file. And you need to have, what I recommend is that you do the exact same calculation for earnings than for cashflow. I mean, you could do exactly the same here, just replacing earnings by cashflow. And this will give you an estimation of what is the intrinsic value of the company based on free cashflow instead of earnings on future earnings. But the principle of discounting it on taking assumptions on the growth rate is exactly the same. So this is really, really very strong. And I said, I do not use a terminal value because in a lot of free cashflow models, discount models, it's kinda cute earning models. The terminal value really creates what I call a bullwhip effect to it will always make the business case positive. So that's why I prefer to take a 20-30 year perspective on it and I don't go beyond belong beyond 30 years. And again, reemphasizing, why am I doing this is because initially I was not very happy with the final terminal value of those free cashflow models or discounted models. And I was listening in a podcast from Warren Buffett a couple of years ago. And, and indeed he was saying that, yeah, he does look at ten years, 20 years, and 30 years. And he doesn't go beyond the 30 years. And he put some growth assumptions that are pretty conservative to together and goods valuation of the intrinsic value of the company and buy that from one single share of the company. And comparing this with the market price that Mr. Market is giving you today to this wraps up chapter on evaluation process. So again, just rehearsing that as we had in the previous chapter, there is not just one single tasks. And I'm going to show this now in the upcoming seconds that I run. One, I have to do the Intrinsic Value calculation of a company. I do run a couple of tests. I run. I do the calculation on the price-to-book. I do the calculation if I can maybe adjust the book value. You have seen trademarks, you have seen property plan and equipment. Then indeed, if the company is paying out dividends, which happens very often for value stocks, I calculate the dividend discount model with share buyback. If there is some share buyback is always interesting to bring in the yields. And then I do indeed do both calculations, discounted future earnings and discounted free cash flow. And Lemmy does elaborate for, for couple of minutes here further and give me an example of company law. And again, as usual, I'm misstating. I'm not telling you buy this company, I'm just showing my experience here. So company of Rushmore is. One of the largest competitors tool we've, we turn and you see here the brand that they used, a very well-known and jewelry watches as well actually watches also Oman distribution and some other fashion and accessories brands that they have. And I do I mean, I'm a small, shallow, but I'm ashamed of that company as well. What I'm trying to show here in this slide, and I did this before buying into Reshma a couple of months ago. And you see this was May 28, 2020. I was looking into and you see that I did all the tests. What is the the calculated intrinsic value on Reshma? And I did this using earnings. I used the dividend discount model, free cashflow as well. And for 30 years, and indeed, for each of the tasks, I landed somewhere between sixty eight and seventy four, seventy five, seventy six US dollar on a, sorry, this is Swiss francs on a share. And I've been buying the company at around 55. And I think currently it's at it was at 60 something to remember exactly where it is today because I'm not looking at it every day. And so indeed, I mean, the intrinsic value was telling me that at 55, I was buying below the intrinsic value of the company of one singular share and had enough margin of safety to take buying decision. So again, what is important here is not the conversation about Reshma. Conversation is, first of all and kind of summarize now the two core chapters that we have been discussing so far. The first one is we have been discussing ratios to filter out in your investment universe, peace, earnings, consistency, those kind of things. But now in this chapter we have been and have been hopefully teaching you a couple of methods. The book value per share, adjusted book value per share, dividend discount intrinsic value, and then also intrinsic value through discounted future earnings and discounted or free cashflow models. So, so do those Tasman, there's not just 11 single test that will tell you the truth. You need to multiply and you will see a certain trends. And as I'm always saying, when I look at intrinsic value, it's a window. So its window values. So cuz it's not rocket science. You don't have a crystal ball. But here in the example of Reshma, my guts feeling was telling me that the company is worth between 6876 Swiss francs while the market was pretty depressed, giving me the company at 55. So for me it was a good opportunity to buy into the company and maybe I'm going to be wrong. And maybe the price will not move up to 68 or even 76. But nonetheless, I have a good feeling that, that this will happen because I did my homework doing those intrinsic value calculations. And also taking into account what we saw in the previous chapter that Reshma was passing all the previous tests of low PE when it was at 55. Earnings consistency. The depth was was absolutely okay. So you see now here, as I'm building this up, you see, let's say behind the scenes how i do invest into companies. And again, it's guesswork. I, I mean, I don't have a crystal ball, but I try at least to make repeatable decisions using those tests, if it is filters, what we saw before and the fundamental screens or doing having multiple tools to intrinsic value calculations of the share of a company. With that, we're going to wrap up. As in the next chapter, we're going to discuss mode and intangible metrics. So that's something that is that I add on top of the previous chapter on the chapter that we just wrapped up on fundamental screens and evalu