The Art of Value Investing - Complete course

1. Course Introduction: Dear investors, dear Loners, thanks for taking this course. The Auto Value Investing. First of all, let me introduce myself and what is my relationship with Value Investing. So my name is Kenny Carrera. I'm half Luxemburg, half Spanish. I've been since around the year 2000 value investor with more than 1 million in equity invested and no debt, but that's something that we'll discuss later on about the attitude and the mindset of a serious value investor. Thanks to value investing, in fact, I was able with my family to retire since 2022, so I no longer have a full day job, in fact. So when people ask me what is unique, is that I have my financial and intellectual freedoms now since three years. And this is thanks to Val investing. That's why I decided actually already in 2020, when I was preparing my active retirement, I wanted, in fact, to at least share how I was able to retire actively by building up wealth and the snowball effect as Warren Buffett calls it. Prior to that, my professional experience, I've been in cinemnagement positions including in Microsoft. I'm still today an independent board director. I'm lecturing at University of Luxembourg and also the ASCA School of Management, which is one of the leading French business schools. And I have also done executive certifications from ISL, for example, for being a certified independent board director. And I will cover the conversation about Vin GPT at the end of this intro lecture. I'm also the co founder and in the meantime, the CEO of Vin GPT, which is an AI companion for Val Investors. You want to know more about me, if you want to follow me, you can follow me on LinkedIn. I've put you here the links. You can also follow our YouTube channel and also go to our website. Now, going back to ValieVsing, what were the underlying assumptions when I decided to write this course? The first assumption is that, I mean, you may see here in my background, I have one of my libraries, and there are many, many, many books about corporate finance, ValianVasing, books from Benjamin Graham, Peter Lynch, Warren Buffett, et cetera. And what I was really missing is like a summary of all those books. So I decided and this course, the first time it has been published, has been August 2020. So I decided to write across that kind of summarizes all my learnings over the last 25 years. That was one of the first assumptions writing this course. The second one is that I spend and you don't see it necessarily in the background, but I have a book about all the annual shelter meetings of Berkshire Hathaway, so Warren Buffett and Charlie Mangas holding Company. I've spent hours and hours, weeks and weeks of reading those annual Shala meetings, listening also to the podcast to learn from Warren Buffett over the last 25 years. And I also tried to extract from those from the time that I spent and invested into reading those annual Shelter meetings and listening to the podcast as well, of the annual Shala meetings, including the Q&A part of those show meetings to really try to extract the essence of them and bring them into this course. Third one, and as you already have understood, I learned a lot from Benjamin Graham, Warren Buffett, Chol Manga, Peter Lynch, Aswadamodan, as well, speaking about company valuation. But one of the things that I was somehow missing was, I mean, Warren Buffett, and we will discuss it, of course, in the fundamental analysis of a company. Warren Buffett has been speaking a lot about modes. So modes is, in fact, the water around the castle, and the broader the mode, the wider the more, the more difficult it is to attack the castle. So this is trying to symbolize a little bit how strong a company is actually and how strong a company can defend its current market position. Was missing in terms of mode because on Buffett is very often speaking that a way to observe a white mode is that the company is able to have a very high return on invest capital, which is something that we'll discuss, of course, in this course, when we speak about profitability of companies. So he was mentioning often that having an RIC around eight to 10% for at least five years in a row is a way of observing a white mode, meaning that the company can probably earn higher margins on selling its products and services, and customers are probably happy with the products. Hence, they're willing to pay a premium price, so the switching costs are high for those customers. Or the retention is high, meaning the churn, the customer churn is low. But one of the things I was missing, with all due respect for An Buffett is a way to quantify this. And, I mean, who am I? I'm a very small investor compared to those Black Rock type of companies. I don't have I cannot call the CEO of Coca Cola or Pepsi or Microsoft and try to get inside information. Believe that a way of capturing signals how a company will also develop in the future is trying to find elements about customer satisfaction and employee satisfaction. And that's something that I added on top of my learnings of Warren Buffer, holly Mongo, the people I mentioned a couple of minutes ago. And I added what is called the Level three or the mode and intangible matrix where I'm actually sharing how I look at white modes, not just from an profitability perspective, but also how the company is perceived by customers, employees, and also what is the brand perception out there. So this is something that also I've put as an underlying assumption is actually ongoing research, and I'm adding this type of elements into the course as well. So the learning objectives, I mean, I will walk you through also the agenda or the table of contents of the cross. But one of the main elements, if you want to be a serious investor, you need to understand the main concepts of risk versus return because, I mean, as an investor, if you have money available, you can invest into multiple types of assets, and not all assets carry the same amount of risk. And it's important to understand that I mean, the type of return expectations that you're going to have will also depend on the riskiness of the asset and on your risk appetite, actually. Key thing to understand even financial statements, I will explain to you the circulatory system of money. So where money and capital is coming from with debt holders and equity holders and how this is then reflected in assets in the balance sheet of the company. But understanding the system of money is something key as a serious value investor. Other things as well, we speak about the mindset. So I'm always saying, even though you only have maybe $5,000 to invest into a company, you should always think like a shareholder of the company. So if you would have unlimited firepower, so unlimited budget, would you buy the whole company, even though you may only have 5,000 or 50,000 or half $1 million? So that's in terms of the mindset, that's something that also I want you to understand that one of the objectives going out of this curse is you think as a business owner and not just as a speculator to earn very rapidly a little bit of money. What is already said, so the intention of a value investor is not to be speculative. So investors value investors, they go in for the long run. Typically, they act as business owners as shareholders. So as Warren Buffett ways said, when he was buying into companies, he would have accepted that he would not have the stock market give him a price over the next couple of years because he was trusting in the company and, let's say, the operations and how sound the company was running its operation and also its customer supplies and employees. Intention of this course as well to give you a repeatable investment process. You're going to see this. So the course is structured into three big parts. I mean, to summarize it, we'll call it level one, level two, level three. So it's fundamental analysis, intrinsic valuation, and then the mode and intangible assets. You're going to have at the very end also a one slider that even I have here in front of my desk, always to remember what is my investment process as well. As part of the repeat investment process, you're going to have also what a lot of value investors consider as the holy grail of investing, which is being able to calculate what is the intrinsic value of a company? So what is the value of a company today versus what the share price, what the market, like Wall Street or the Euronex is giving you today as a market price, in fact, and being able to see the difference and determine if today the market is super excited and too excited about the company, and you would be paying a premium, and you're going to see this in the intro lecture, where Charlie Monk is mentioned that the company is not worth an endless price. It has to be somewhere limited versus sometimes the market is so depressed that you can actually buy a company's great companies at a very high discount. Being able to determine the company mode, you already discussed it. That's the mode and intangible metrics, including net promoter score for CSMAs and employee net promoter score for employee satisfaction. And also, you will learn how to navigate into accounting data because at Rom Buffett, the lingo of business is accounting and corporate finance. If you want to be a serious investor, you need a little bit to understand how that works. And this comes back also to the circulatory system of money. Right. One thing that is also and always important in the courses that I provide and I try to share my knowledge as a former company executive, but also as an independent board director is that, of course, there's going to be elements in this course that will be about theory, but will try to practice as much as possible with examples. And as I'm always saying to my students, being a high performance sports athlete as an example, require us to practice a lot. And I mean, it's not just about knowing the theory. You have, for example, to read those financial statements. You have to practice doing the intrinsic evaluation. And I will give you tools how to do that that will actually make you win a lot of time. Now, in terms of table of contents or course content, so I mean, we already in the introduction. This is the first lecture of the introduction part. We will then discuss key concepts, though it's a little bit like the foundation of the house, understanding risk versus return, the circularity system of cash, for example, understanding the different types of investment assets as well, and also the three main financial statements so balance sheet, cash flow statement and income statement. Going to discuss the mindset that's going to be very pretty short chapter. But it's important that you understand also how to think as a serious investor, and I will share with you those five plus one attributes. Then this is the core of the course. So this is going to be this repeatable investment process, what is called the fundamental analysis, the fundamental screens or the level one screens. The level two, the intrinsic valuation process. I'm going to share with you various methods, how to calculate the intrinsic value of a company. Then the third part of your investment process that at least I do is looking at how customers feel about the company, the brand strength, and also how employees feel about the company. So that's the whole idea. The intention is really that you're able to go from top down to bottom up that you have the right mindset and that you can then go into the details, even being able to read and understand financial statements. But also on the other way around, if you're able to read and understand financial statements that you take actually that you have a repeatable investment process and that you have the right mindset. This is, in fact, one of the most important slides that I want to already share in the very first lecture, which is a slide and let me explain what the slide, in fact, means. So typically, what you have is markets, they fluctuate, and I will introduce the persona of Mr. Market, as Benjamin Graham has been introducing this person in his books, also the Intelligent Investor. And Mr. Market is, as he's explaining, sometimes depressed and sometimes very excited. What is important for a serious investor is that you're able to calculate, to understand, to weigh from waiting. So to weigh what is the company value per share. And comparing that intrinsic value with the share price or the price that the market is giving you today, a good value investor does this homework and sees opportunities typically when the market is giving you the company at a discount of 25% 30%. This is what is called the margin of safety. I'm sharing with you, and there's something I learned also from Graham and Buffett that typically when you have a margin of safety of 25% to 30% and you have done your homework and you have understood which assumptions brought you to this intrinsic value. We're going to be discussing this and practicing this as well. That maybe actually, and if the company has sound financials, there may be a buying signal, in fact, this is what this graph is all about. So the intention that you take rational decisions. I can already tell you you will not be able to perfectly time the market. I have been sitting sometimes on companies for five years until the market recognize the real value of the company, but I will give you a way also on how I earn passive income money while the market, sorry is not recognizing the intrinsic value of the company. So I will explain those two levers on how I actually have been growing our family wealth. Last but not least, so we will do labs as well. So as part of the Level one, Level two and Level three chapters, at the end, you're going to have labs where I'm introducing Vin GBT. So Vin GBT is a GBT, so you probably know HGBT. So it's a GPT that has been built by us. For the value investors out there across the world. We already have hundreds of users that are using this regularly, and it actually allows and it reflects actually all the learnings and all the theory that is being explained in this course. You, in fact, have a model that you can prompt, which has its own knowledge coming from us. Who has its own data points also coming from us and from the data brokers we work with. And today, so we are June 2025, where I'm re recording this intro lecture. It covers 58 stock markets across the world and more than 35,000 public equity companies. So that's really something that I mean, we have built it for us. The product has been launched in May 2024. Our intention is to make you win time because initially, when I started this Corsi Alvali investing in August 2020, I was providing an L file, but I saw that students were making mistakes on the units, for example, and it took more or less the process. You had to go into the financial statements and extract around 12 variables to be able to calculate the intrinsic value. So 2 hours was still okay. But it was a cumbersome process. And what we have done, in fact, and thanks to the Open AI engine that we will leverage the attention mechanism of the Open AI engine. We, in fact, have built this GBT. So inch stands for value investing next generation GBT. We have created it, in fact, to go down to just a couple of prompts to be able to do the fundamental analysis. What I will be sharing with you on Lecture one, be able to calculate the intrinsic value. And playing with the assumptions. I will explain all this in the course, but I already wanted to share this with you that, in fact, now we have increased also the productivity of our own investment process because I continue to be a value investor, my co founder, as well. But we have built this specifically also for us to make our investment process faster and spend more time on the analysis, in fact. That's something that I wanted to share with you already in advance. And you have here also, if you want to go to the website, you can go to the website that is referred here below. Right. So that's all for the instru lecture. I hope that you will enjoy this course. Do not hesitate to reach out to me either through the Q&A forum or to direct message me, or maybe you will join the discord community or one of our webinars, I hope to be able to exchange with you as well, but do not hesitate to raise questions or if you have doubts or if you want to have things improved in the course, feel free to do so. So with that, thanks for your attention and thank you for the next lecture. 2. The origins of value investing: I connect value investors. So we're still in the introduction chapter. And as part of the introduction, I think it's important as potentially future, very invested that you understand what are the origins of value investing? So I set up here question with three gentlemen and I could ask you, Who are those regions and maybe you know one or the other. I mean, if you know one, at least probably the one in the middle, which is Warren Buffett. But let me walk you through who those three persons are, in fact, on how they are linked to the origins of value investing. So the first person on the left hand side, and maybe you know, the person is Benjamin Graham. He has that in 1976 and he's the father of value investing and he has been writing to founding texts, rounds, what it was at that time called neoclassical investing, which was the first book, security analysis, the db dot, the Intelligent Investor that I've been reading as well a couple of times where you have some very important chapters that still apply today. Nearly, let's say 70, 80 years after Benjamin Graham has been writing those chapters and this book and those principles that come with, so what are the principles, but what are the fundamental principles that come with value investing? The first one, which is not the most important one is really not having too much leverage, so not raising too much debt when you invest into the stock market. The second one, that is a fundamental one is really having a buy-and-hold strategy. Really buying a company, buying an asset. I mean, thinking like a business owner and keeping it for a long period of time. The third one is understanding what an asset is worth, what he was calling are referring to as fundamental analysis, also concentrated diversification. So there are a lot of conversation about alpha betas, et cetera, and how what is the right portion of a diversification in a portfolio? I can tell you I'm in my diversification is very simple. I never own more than ten to 12 companies in my portfolio. Why? Because as a human I don't have time to a every quarter read more than, let's say spend enough time reading the financial statements, the quarterly financial statements of the companies that I'm an owner, and more than 1012, that will just make it too much time that I would have to invest into. So that's why I am diversified. I think currently I am. I have a diversification of eight companies. But yeah, I never go beyond ten to 12 necessarily bit also what I learned from Benjamin Graham is really what he was calling being concentrated but a little bit diversified. Otherwise, I mean, if you want to be, let's say, perfectly diversified, you can just buy an index like the S&P 500 index that reflects the top 500 companies In the US buying with a margin of safety already introduced this in the previous lecture, really knowing what an asset is worth, but then also buying the asset. If we're speaking about publicly listed companies when the asset is something like 25 to 30% below its intrinsic value, and hoping and waiting until the market comes back. And then the market will in fact correctly value the asset that you have bought and through that you can. And that's one of the ways, one of the leavers how to make money, then potentially to sell when the market is overvaluing that asset, that you would then potentially sell the asset. And of course, if you want to be doing things differently and maybe being better in terms of performance versus, and we will be discussing investment styles. Let Ron like growth startup investors. Technical traders need to have a contrarian mindset. And I can tell you, I mean, I'm doing this for more than 2020 plus years and nearly 25 years. And it does work. So I mean, I always say the following. I'm always happy when the stocks and stock markets go down because I will be able to buy companies that I love at cheaper prices. And obviously when there are crisis situation or that we're gonna be discussing market timing, market predictability are going to have your listening into a video of Peter Lynch as well, which was also very famous investor. And you're going to have every two to four years it's gonna be Christ on the market. Markets are going down, markets are going up. So this is where in fact there's gonna be opportunities. And I mean, I've been writing this course initially, I started writing this code in 2019, published it the first time, August 2020. Since August 20, they have the not least two major crisis. Oh, there where you could buy great assets at cheaper prices. And that's basically having a contrarian mindset when everybody is selling, you in fact, have great buying opportunities. But of course, you need to follow certain principles that you need to buy sound companies, whether financials are really sound. What can also be said about Benjamin Graham, he has been, has been demands of Warren Buffett. Warren Buffett has been studying with him at Columbia University and often it's Warren Buffett has actually been working for Benjamin Graham in the company that was called Graham human cooperation on Telegram, retired. One of the things I mean, now switching gears and moving to Warren Buffett that I feel with all due respect for Benjamin Graham that I didn't not feel came across as strong as with Warren Buffett. Warren Buffett is calling the mode and I have a specific lecture and specific tests on how to quantify modes. And also being able to make most tangible, but really the strategic unique differentiation, unique positioning of those companies that have modes is something that I feel that Benjamin Graham was not strongly, let's say defending as e.g. Warren Buffett has been defending. So let's go to Warren Buffett. Warren Buffett, I mean, if you know him, I mean, he has upon it's called Charlie Munger, who will come, will discuss about China among the next slide. But basically, Warren Buffett has started at the age of 11 already by investing to the first equity. And since then has been building up well, then he's one of the top ten wealthiest persons on Earth with around, I think 2023. His net worth was more than $100 billion. And he bought initially he bought a company, it was called Berkshire Hathaway, which is still the name today of this multinational conglomerates, which shows a lot of companies. I mean, some companies are fully owned, like Geico, the insurance company, Duracell, which is about batteries, began as F, which is Railway, Fruit of the Loom. So those are very well-known companies. And then they have significant portion. So they are Material shareholders of big brands like e.g. Apple. Apple is still today the biggest portion of the holdings at Berkshire Hathaway has, but also Coca-Cola think for Coca Cola since many, many years, if not decades, Berkshire owns around 400 million of shares of Coca-Cola Company. So the main van investments principles that were in buffered it has been defending since many, many years. In fact, the same like Benjamin Graham. And as I said, with one major difference, which is that company is not any company is a good company in the sense not all companies have this defendable modes. This unique differentiation that allows, that allow those companies to charge premium prices and through that being highly profitable in a consistent way for many, many, many years. So we will be discussing that later on as well, because I think I fully agree with Warren Buffett on that. So it hasn't been complementing Benjamin, Benjamin Graham's principles with this modes definition. The third picture on the right-hand side was in fact a picture of Charlie Munger, who is a partner to Warren Buffett's company, Berkshire Hathaway. And they're going to introduce you also when necessary to external sources, information source. And then here I'm referring you to a YouTube video, which was an interview by the BBC of Charlie Munger 2012. So already more than a decade ago, where I feel as introduction to the principles of value investing, it's important that you understand what are the four main characteristics that Charlie Munger looks into when investing into businesses. The first one, and we will be discussing this in Chapter three, and we'll be discussing the mindset, which is being attentive to dealing with things that you are capable of understanding. I e.g. I. Do not invest into banking industry, I do not invest into insurance, I do not invest into biotech because it's not my my my competence. I don't understand those businesses and maybe I mean, maybe you are very fluent in that area. Maybe you're able to easily estimate what a bank is worth. But it's not my investment universe and that's basically already something here that I can share with you. It's one of the mindset principles of really investing into things that you understand. And that's basically what Charlie Munger is saying here. You need to deal with things that you're capable of understanding. The second one is that the company has a competitive advantage. That's basically what we were discussing couple of seconds ago. The modes. So being able to have to charge premium prices to your customers, to consumers, what are nearly whatever the price you charge customers will not go away because the brand is sticky. So customers, they like the brand and they're willing to pay more to keep up with the brands. So that's really the competitive advantage, the mode as Warren Buffett calls it. So that's something that Charlie Munger in that interview has already been addressing. Then of course, and this is one of the most complex ones because I believe that CEOs are very good, in my opinion to deceive people so that you really do not know if they act with a lot of integrity and talent. And for me, that's something that I've been discussing as well in the last level three tells about the modes. How we as external investors, who are we to try to talk to those CEOs. And even if you would talk to those CEOs, if they are not, if they do not follow fundamental values like integrity, and we will never know if they're talented or not. So there are ways, in my opinion to try to find out. If management and has a lot of integrity and talent, and I'm gonna give you some elements and hard to try to make this tangible without having you to make the effort of talking to those executive of companies that you win in any case, in any case, be able to talk to those people. But this one is really the most complex one. Then the fourth one is really, and you remember in the closing slides of the very first lecture in this training, I was showing you this graph and I was introducing the concept of margin of safety. And this is what Charlie Munger is already seeing here. That no matter how wonderful a business, it's not worth an infinite price. So you need to know what is a fair price of the company that you want to invest into. And hopefully that you can buy the company because maybe the market is depressed and that you can buy the company may be at 25 to 30%, if not more, margin of safety. When Charlie Munger mentioned the natural vicissitudes of life, he means by that really that markets are going up and down and we're going to be depressed and then super excited, super hard. You're going to see fluctuations happening in the market. And that's natural. And that's something we will discuss later on when we will be discussing timing of markets, predictability of markets. Since I started writing this course, does 19. The cause has been published for the first time in 2020. So August 2020, they have been crisis out there, so there have been opportunities to buy. Great companies are very cheap prices. We can speak about the COVID crisis. We can speak about the latest banking crisis with SBB. So the Silicon Valley Bank, Credit Suisse, there have been situations in 2022 now a little bit more than a year. This Ukraine and Russia. Let's say crisis situation between those two countries. I mean, this is giving opportunities with all due respect. I mean, I'm not I'm just looking here at it from an investment perspective. Of course, there are human elements that are linked to that, that are really out of this course conversation. And I do respect them nonetheless lot. But here we just discussing the investment perspective on those, let's say events. It gives opportunities to buy great companies as really cheaper prices are cheap prices and that's what I'm trying to teach you through this course. So if you look at those form and characteristics, I mean, people have been asking Charlie Munger, Warren Buffett, I mean, this, those four elements are very simple set of ideas. Why are not more people doing this? And it's true. I mean, I don't have a precise statistic, but through my readings are understood that not more than ten per cent of the investors in the stock market or value investments have been many, many extremely successful value investors out there. I mean, the most known are Warren Buffett, Peter Lynch, Charlie Munger, Benjamin Graham. But there are many other ones out there. But the ideas appear of fields so simple that I mean, Warren Buffett and Charlie Munger has been challenged by a lot more people speaking about this, why have those ideas not spread faster? And one of the answers, the answers that Charlie Munger, Warren Buffet as saying is that, I mean, professional classes, if it is the academics, if it is Wall Street traders, I mean, it's true that value investing to some extent appears so simple that those people, those professional classes, could not justify their existence through value investing. So there is tendency to make things appear more complex. Speak about alphas and betas and gammas. And zero m1, m2 on money supply. So, but you don't necessarily need those kind of things. So very investing, it's not about adding complexity is about trying to make things simple, understandable. Of course, you need to have a minimum foundation of accounting. Being able to understand from the financial reports of the company and be able to calculate what is the company worth? And that's what I'm trying to teach you here. I'm sharing my knowledge since more than 20 years that I've been doing for myself and today I can live from it. And I mean, through passive income, through dividends. I mean, it pays the bills. And I was able to retire at the age of 50. And that's the kind of thing that I want to share with you as well. Because I hope that you can also become intellectually and financially independent as I was able to do with my family. When Warren Buffett speaks, when he summarizes this professional classes that are trying to make things more complex. He speaks about the priesthoods and he really doesn't like it to be verified. I also don't like it. There are too many Masters in Finance out there that are tending to make things more complex just to justify the, if it is a tuition fees or the existence of academic people out there. You have this as well for media, like there is a tendency since many years that I mean media and with all the respective, it is like companies like Bloomberg. Their core business is really selling news. What would you expect? How would they feel their daily programs if they would not invite people and have people come up with opinions and counter opinions, et cetera. And with massive amounts of data. I mean, they announced, I think was two weeks ago, Bloomberg GPT. So I do agree with Warren Buffett and even myself. I could not keep up the speed of, I mean, I would have to read in the sense of listening to Bloomberg TV 24 h a day. That's just not possible. So I prefer to have the perspective of value investing, trading less, really thinking about what's the asset's worth. And then from there, not necessarily hearing other people's opinions, but really looking into facts. And that's basically what I'm trying to share with you through this training. And thanks to the learning that I had through Benjamin Graham, Warren Buffett and Charlie Munger and also people like Peter Lynch. So with that to wrapping up the introduction here, and in the next chapter we will introduce and I'll try to introduce as best as I can to fundamental concepts. And the first one will be about understanding money, how money works, and also the value creation cycle in companies and also the cash circulatory system. So talk to you in the next lecture. Thank you. 3. Money & cash circulatory system: Welcome back investors. We have finished introduction and we're going now into Chapter number one, which is really discussing and trying to define main fundamental concept that you have to know as an investor in order to become, let's say, a series of value investor. So the first concept or concepts that we will be discussing are in fact, money and the security system of cash in companies. So when we speak about money, I mean, the primary function of money has been, I would say to remove bartering because I mean, thousands of years ago, there was no money, so people had to barter exchange rate, e.g. 12 eggs for I have no clue, a chicken, e.g. so the intention of money was really to facilitate the exchange of goods and services. What you need to understand on top of this, moving away from bartering, That's why in fact, money has been created, is that the value of money changes over time. I'm going to give you a very concrete example. You have the visual here, which is the visual that is available on Investopedia. So when you look e.g. what you would be able in 1970s to buy for $0.25, that same asset you would bind 2019, how the cost, how much money would be required to buy the same assets? Let's say rough cuts 50 years, 49 years later on. And let's take the example of a cup of coffee and will not, will not discuss the Starbucks coffee, latte, macchiato, etc. Just a regular generic cup of coffee in 1970. So little bit more than 50 years ago, you would have to spend like $0.25 US dollar, euro. Let's imagine the currency is not important here. To buy that cup of coffee. Today, you will probably spend something close to $1, $601.07 for generic cup of coffee. And of course it depends on each country and let's say the purchasing power of the people in that country. So what you can see in fact, is that the, the value of money has evolved over time. So you need today much more money equivalent to buy a cup of coffee as you had in 1970. And this is what is called inflation. And we are in 2023, we are able to 102031 re-recording this training that has been published for the first time, August 2020. And we are in a very high inflation environment and they will not discuss politics, etc. But what would you expect when during COVID time and with situation about commodity prices that have gone through the roof. And there are difficulties to ship things throughout the world because of whatever geopolitical tensions that you are in high-inflation environment. I mean, we didn't not have an high-inflation environment. I mean, I was ten years old in 1970s when we had like inflation, high-inflation with like above 678 per cent of inflation on, let's say, in the society on the market. So I think that people are not used to that and do not really understand what's the reason for that. But I think one of the fundamental things that you have to understand is why is inflation in fact happening? And again, without going into now a political conversation. But if you look at, let's say, important regulators, which is the US Federal Reserve, but also the European Central Bank. I mean, part of their monetary policy are part of the governance is really trying to have inflation at a certain level. So I would say that inflation is okay to have always a little bit of inflation, but not too much. And that's basically what those central banks are saying. And their policy target is really to have inflation at an average of two per cent. And we are far beyond that 2%. That's why they are tightening monetary policy. They are increasing the interest rates really to cool down the economy because money was just too cheap Also during COVID times, if I look back a couple of years. But inflation is also happening because companies feel that they can pass. Their costs are higher cost to the end consumers. And so it becomes a self-fulfilling prophecy. If you're interested. I mean, I've been, it's not part of this course, it's a public video I've been publishing about, I've been analyzing consumer, this defensive companies that are, let's say inflation resistant, like the Unilever's, the Danone is a Procter and Gamble's, et cetera, on my YouTube channel. And you can see in fact, even during the year 2020, 2023, that in fact they're good financial performance, in fact comes because they are parsing costs, higher cost to the end consumers because they have modes, they have, let's say, pricing power. They. I mean, if you are used of shaving with Gillette's, if you're used to having a shampoo, head and shoulders, if you are used to by the known yogurt or milk or water like AVR. If the price goes from $1 or one year or something, is increased by 7%. You are going to continue by that water, you're going to continue to shave. With that. You will probably not go away from that brands and maybe put other things aside. That's what consumer defensive brands that are inflation resistant actually do. And that's why also inflation is happening. Because those, Let's say, normal daily goods are increasing in terms of pricing. And this is actually what central banks, and let's say the statistical offices that are looking into that then say and they claim be attentive because Gillette Shave has increased by this amount of present the Avion water bottle has increased by this amount of percentage. So basically people are losing, let's say purchasing power. So that's what inflation is about. And one of the tools that central banks have available is really reducing the amount of money and tightening monetary policy by e.g. increasing interest rates. That's why inflation is happening. When you think about, and I want you to understand compounding effects that are inflation and not inflation adjusted. And I think it's important when we are speaking about the building up wealth. Because today, I mean, the, if you would leave your money, your cash in a bank savings account. I've taken here the example that the banks have encounters giving you an annual compound rate of zero dot five per cent. So if you are having this, of course, the amount of, if you're in year zero, you having $1, the dollar becomes one.01, and then it stagnates. And after ten years, basically you're going to have increase your wealth by five per cent so that $1 has become $1.00 five. And you can do the math with three per cent compounded rate, 5%, 7% compound rate. And I give you here the example of seven per cent compounded. If you're having a seven per cent compounded year over year. So that $1 after one year turns to $1, 07 the after to $1.14 than 23, etcetera. And interesting, after ten years with the 7% annual compound growth rate, in fact, your dollar or ten years ago, has become a one dot 97. That's great. You have just multiplied your wealth by two. And that's in fido Canada, Russia here. That's my target. I want to double my wealth every ten years. So it's interesting to see, I mean, if you put it visually, how those returns, if it is a bank savings account at zero dot five per cent evasive three per cent, five per cent, seven per cent return before inflation and taxes. You see how the curves in fact go. So obviously, that's normal. It feels simplistic to say, but obviously the seven per cent is the one that is growing exponentially. Yes, that's really the intention. It's really having this compounding effect, the snowball effect that increases your wealth in an exponential way. And of course, I mean having a mean when we speak about this, we are assuming a buy and hold strategy. And then if you're getting a seven per cent of three per cent return, you take that money and you're reinvesting it into the asset at the same price. That's, let's say the assumption that we're having here. But what we need to be attentive is that what happens if there is inflation out there? And what I'm trying to share here with you, and this is how I became financially independent after many years, is that I've always been thinking that you need to grow, your wealth needs to grow beyond inflation. Otherwise you will be destroying wealth. And that's what I'm showing you here when you look at the red frame. And let's take the example of zero dot five per cent bank savings account. You would leave your cash the zero dot 5% compounding. Bank savings account. And GDP inflation would be at one that five per cent, which by the way, today, I mean, we are far beyond one, not five per cent. We are maybe add 567 per cent depending on the country that you're in. You see with the one that 5% GDP inflation that you'd have lost 11% purchasing power because of inflation. If you would have left your money in the zero dot 5% bank savings accounts, because that $1 will turn into one dollars 05 after ten years in the bank savings account because of the compounding of the interests. But inflation that is growing at one, not 5% in average. You will, in fact that $1, you will need ten years later, one dollars 16, to buy the same asset that you bought ten years ago. And that's why you, in that scenario, you have been reducing your purchasing power by 11%. That's basically destruction of wealth. If you do the same for three per cent, you see in fact that $1 becomes one dot 34 after ten years. And with a one dot five per cent GDP inflation assumption, you would have added 18% purchasing power to you, to your wealth or your family with a five per cent compounded rate with one node, five per cent GDP inflation you, whether you would have added 47 per cent. Purchasing power and with a seven per cent compounded with an average one at five per cent GDP over those ten years, you would have added 81% of purchasing power or you would have added 81% after inflation or inflation adjusted to your wealth. I think it's important to understand that leaving your money in a bank savings accounts, except if you are waiting to buy an investment and I'm doing this, I typically have five to 10% of my money, which is unemployed, which is an unemployed because I'm waiting for markets to go down to buy companies, great companies at cheap prices. But otherwise 90 to 95% of my, let's say of our family money is invested into the stock market and only into, we will discuss later on blue-chip companies, so strong brands or companies that have modes and trying to get at least six to 7% after taxes every year. And I will explain to you how I'm doing this and I will show my portfolio looks like and how I'm able to achieve this without selling those assets. So that's a very important message. Think about inflation. And if you're unable to get a return that is higher than inflation, you're actually destroying wealth. And that's, I think the first preliminary conclusion that we can already have here in the very, I mean, it's the third lesson of this training that increasing your wealth means that first of all, you need to avoid destroying your wealth. So you need to use, so you require a return on your money that is above inflation and concern, I mean, I've been discussing this in webinars as well controller that you need to look at inflation and average way. So of course, if you are having an investment horizon of six months, you need to have like 910 per cent of return to be above inflation 2020, 2023. But if you consider that through monetary policy tightening that central banks wouldn't be able to bring down inflation, which is kind of what we start to see now as interest rates are so high, we see the real estate market that is stagnating. We're seeing people consuming less. So we see that in fact we have the first indications that inflation is in fact retracting. So if you have an investment horizon of ten years, you need to think about what is my average rate and I need to have above my average inflation over this ten year investment horizon in order to build up wealth, not to destroy wealth. So I believe that, I believe that, I mean, I'm an investor and I will share this with you when I'm valuing companies, strong brands, I'm doing this on a 30-year horizon. I do believe that the company will still be around in 30 years and I'm calculating what's the company worth over the next 30 years. And I'm, one of the assumptions, I'm expecting average inflation over those three years be somewhere 2-3% because that's the target of the monetary policy of the US Federal Reserve or the European Central Bank. So assets first preliminary, a very important conclusion that you need to understand when dealing with money is that money needs to give you a written that is above inflation. Otherwise you are destroying your purchasing power and you're destroying wealth. And the first definition that we can bring in already here is that that reads and then it has to be inflation can also be called the cost of capital. Your cost of capital. And we will be discussing and discussing electron because it's extremely, extremely important to understand concept of cost of capital. So that's the first thing really trying to understand money and how inflation can destroy in fact, you're well, and also how it can throw compounding, how you can become richer and having more purchasing power as the economy is set up today by having a return, having a cost of capital that is in fact above inflation on an average. But again, it depends on investment horizon that you have. The second element I want to share here with you is this circulatory system of value creation and of money and of capital in companies. Because when you speak about the other value investing, I mean it's an art because it requires human judgment. And I mean, I coined the term of investing. What does invest in means so I'm limiting the definition of investing to non-speculative and so assets and also tangible companies with all respect for my cryptocurrency friends out there. I do believe that investing into cryptocurrency is speculation. It's not something where you have tangible underlying assets like an economy when you would be e.g. buying US dollar currency or Euro currency. There are real economies behind this. But again, it's, I mean, I know that some crypto friends will disagree with this, but that's really my opinion about in investing into cryptocurrency. I believe that speculation. So when I define investing here is really investing into companies that have real assets and that is not considered an act of speculation. That's really my definition of investing. So when you think about investing, and I mean, when you look at the right-hand side and left-hand side of this, I'm basically structuring a balance sheet of a company here. To make it simple and we will be discussing this later on. I will introduce you to balance sheets, so to the financial statements, income statement and cashflow statement. But basically, that was even something that myself I was missing When I was doing when I was taking financial courses at high school, at university, I was missing my teachers tell me in a very simple way, why is the balance sheet structure like this? So to make it simple, on the right-hand side, you have the capital. Bring us the sources of capital for a company because we are speaking here about investing into equity assets, into companies, into real companies that are having real businesses, real employees, and real customers, and real suppliers. There are two ways of having capital brought in into company. You have what I call the internal capital. Those are the shareholders. Shareholder is bringing company, is bringing money to the company, is maybe the founder of the company. And he's bringing in money. Or it also works with tangible assets, bringing in a car, a laptop, as part of the starting capital of the company. But the founders of the company can also go to a bank and raise a bank loan. So lend money from the bank. So burrows or borrow money from the bank. So that would be a bank loan, e.g. so landers to company also considered capital bring ours. But it's very important and we'll see this later on in the balance sheet that you have. In fact, the debt holders and the equity holders of the company, but both are in fact sources of capital. And what is the expectation is basically, the expectation is to take that capital. Typically it will be cached at the very beginning, at the inception of the company and use that cash and transform that cash into assets, into buying a car or supply chain, offices, retail shop, e.g. goods, those kind of things relate to start creating value for the shareholders, but also just for the capital bring us. I mean, of course that told us will have just the expectation that the depth is paid off over a certain period of time. But equity holders, shareholders, are having the expectation that their wealth will increase at a higher pace and inflation. And they will be happy how management runs the company. But I think that's very important to understand. That's the purpose of investing. And let me try to depict this and to really split into two steps. So again, having on the right-hand side of the sources of capital, the capital bring us if it is debt holders, they're also called credit or loss. On the bottom shareholders, equity holders and on the left-hand side you have the assets of the company. That's basically what a balance sheet is about. The intention is investors are lambdas are giving cash to the company. Let's keep the asset, bringing in assets into the company if they're tangible or intangible. Let's leave that aside for one seconds, but the intention is bringing in cash. So they are giving cash to the company, to the company management that is reflected in the middle by the board of directors, senior management, CEO. And the intention is really that the cash that has been brought in by the capital bring else if it is depths creditor loss and or shareholders, is that that cash is invested into real assets. As I said, buying a retail shop, buying a truck, buying a car? No. I mean, depending on the kind of services during buying supply chain, buying offices, buying laptops. If you're soft engineered company, investing in that cash into real assets. But as I said, for the, let's say just for the shareholders or the credit toddlers, that investment is carrying implicitly a certain cost of capital, certain return expectations. And the hope is that that's the process, the cycle, the step number three is that the operations of the company with those assets, which came from the cash that was brought in by the capital sources, depth dollars, credit told us and all shareholders that those assets will generate a profit. That's really the, let's say the circulatory system of money in accompany. He's also called the, let's say the value creation cycle in a company. Capitalists brought in the capsule carries some, let's say, written expectations because of capital expectations that have to be above inflation. We're not speaking philanthropy here rarely speaking about zeros and vessels at one-and-a-half higher returns. That cash is taken by managing transformed into real assets, into tangible or intangible assets. And then with the hope that during the first quarter, the first month, the first week, the first year, that those assets will generate profits. What happens then? Well, the company has in fact been company management, depending on what management is allowed to do with or without the consent of the board of directors and the shareholders. The company has in fact three options. So if the company is generating a profit from those assets, the company has the option to extend and expand. Its acid-base may be going into new markets, developing new products. Acquiring a competitor, e.g. I. Will be the flow number four. So the company keeps the money and reinvest the money into assets. That's what typically startups too. In fact. If the company is very much mature, because reinvesting the money, the profits into the operating cycle also carries some cause of capitalists unwritten expectations. And of course, if they cannot be met, well, maybe the company has better ways of instead of destroying value by reinvesting into things that do not make sense. Well, maybe they have an option of paying off debts. So doing, let's say a cash return to the credit tell us e.g. can be accelerating paying off the debt. The bank. It can also be providing a cash return to shareholders. And it can be combination of the three. And this is what you're going to see and you're going to see, they're going to be very concrete examples. We're going to speak about a lot of companies. In this course. We're gonna speak about Amazon, Coca-Cola, Microsoft, Mercedes, Kellogg's, etc. So you're going to see that mature companies that are already there since many, many years, they in fact very probably there's gonna be a combination of 45.6. So they are profitable. They reinvest part of the profits that they have generated into the company. Part of the money will be, in case the company has adapt will be used to pay off debt or even to accelerate paying off debt. And then also they want to have company managing oneself. Happy shareholders are going to provide a return, eight, a cash return or share buyback return to the shareholders. And that's what we'll be discussing 45.6 and how to analyze this because this will be in fact impacting the way also how you value the company. But we will be discussing that later on. But I think this is important that you understand why inflation can have an impact on your purchasing power and how money works, and why the value of money changes over time because of inflation. And why inflation is happening. But also how real investors are investing into companies. And what is the circa, this value creation cycle that a company is typically half so from the sources of capital, capital being invested into real assets, and then hopefully those assets are generating a profit. Then the company has to take a decision between the flows. 45.6. I think that's fundamental, also has an investor that you understand those principles and I will be kind of forcing if you allow me to say, to practice your eye to be able to look into how much money is accompany re-investing, how much money the company is carrying in depth and paying off debt and also how much money the company is getting back to shareholders through various vehicles like cash dividends and share buybacks. But we will be speaking about that, of course later on for the time being, we are really focusing on that you understand those fundamental principles that thanks for listening into the first lecture of this chapter number one, which is money and cash circulatory system. And in the next one we will be discussing about risk versus written or risk versus reward. And continue hopefully making you aware of fundamental concepts and principles that you need to have as a value investor, talk to you in the next lecture. Thank you. 4. Risk vs Return: Welcome back value investors. So in this second lesson of Chapter number one, after having discussed fundamental concepts like money inflation, and also the circulatory system of value creation in companies. We will be discussing risk versus return and risk versus reward. So maybe just to come back 1 s. So one of the first preliminary conclusions that we had in the previous lesson is that indeed, in order to increase your wealth, you need to avoid destroying your wealth. And I brought in the concept of returns that have to be at least at the level, at the speed of average inflation depending on the investment horizon that you're having. And typically for value investors, We are looking at investment horizons of 2030 years when we're valuing a company because we expect in the company is still to be around in the next 20 to 30 years. And I brought in the fact that if the preliminary conclusion is that our return expectations have to be above average inflation depending on our investment horizon timeline. I also mentioned that we can then call those returns also our cost of capital. And one thing that is also fundamental for value investors to understand is that those returns, that cost of capital has to be risk-adjusted. And what is the reason why those returns have to be risk-adjusted? Because basically investors, they have a dilemma. And I'm really speaking here about investors. I'm not speaking about here money lenders like banks to provide loans to companies. I really mean here, people who invest into assets. So the investor has in fact, many possibilities to invest his or her money. And this is where the risk versus reward comes into play. On the right-hand side on this slide you see, this is just examples where the investor has various investment vehicles, investment classes that he or she can invest into e.g. corporate obligation. In that sense, he would be more like a loan provider. He or she would be more like loan provider where the yield, potential yield is of eight dot 5% and the risk, and let's just take the assumption that the risk is 25% of losing the money bank savings account, that the potential yield is maybe zero that five per cent on a bank savings account. And the risk of the bank going bankrupt is maybe 1%. I will not go into the conversation of Silicon Valley Bank. Company a. The investor has the possibility, maybe the founders of company a have reached out to these investors saying, well, we will provide you a 5% annual return. And the investor like is estimating that the risk is that 30 per cent real estate. You have a lot of people who invest into real estate, which is less liquid than equity investments. But I mean, it's not my investment universe, but there are many successful people in real estate. Imagine that the potential yield would be 6% on a yearly basis with a risk of 35 per cent, just as a theoretical model, then you may have one of the lowest risk vehicles, which would be e.g. a. Us 30-year Treasury note with the potential yield at 4% and the risk of the US government going bankrupt. Let's take the assumption that would be three per cent. So now the investor has money. The investor knows that very probably a bank savings account will not be able to yield percentage that is above inflation. So the investor has then to think, okay, what is my risk versus return balanced? I mean, if I invest into a startup and well, probably my yields will be much, much higher, but my risk will also be higher. So the decision that the investor has to take real depends on the risk appetite of the investor, the expected return of investors. So the expected cost of capital, how liquid are illiquid, those assets are, as I said, real estate. If you invest into real estate, I mean, those assets, you cannot sell them tomorrow. You will not immediately find a buyer. You will have one broker probably, and then a potential buyer. And maybe the whole cycle will require six months. While if you are investing into a blue-chip company that we will be discussing later on. Imagine you investing into Kelloggs, Coca Cola on the stock market where basically you will find in the next second, in the next minutes when the markets are open, you're going to find as well buyers and sellers of those stocks. So it depends, as I said, on liquidity as well. It depends on the competence. As I said, I'm not a real estate investor. I said previously I'm not investing into financial services industry. I'm not investing into insurance industry, I'm not investing into biotech pharma because I don't understand those businesses. Then the timing of written what we were discussing, the investment horizon. Typically, I mean, you may have investors that are looking at a very short investment horizon of maybe a month, three months, a year. I'm more as very invest and I consider that value investors, we have more a time horizon of multiple years because we are having this buy and hold and reinvest strategy. So as I was discussing market and I will bring this back to the risk versus return function. I'm just introducing you also concept that is important to understand that there are primary and secondary market. The primary market is basically a market where we are speaking about venture capitalists, private equity, even startups, where also you have investment banks that are providing underwriting services to companies that are going public. So what is called an initial public offering when it is with an underwriter. You have seen over the last couple of years companies that went from private to public through direct public offerings. So DPOs as is it called. So that's, that's a primary market. It's of course less liquid than the secondary market. The secondary market is basically those stock exchanges that most of the people know, like the New York Stock Exchange, London Stock Exchange, the Frankfurt Stock Exchange in Paris, the Nikkei in Japan. So those are in fact called secondary markets where in fact, stocks that were held in private hands have become public and are considered a secondary market, listed stocks. So that's important to understand why, because those secondary market is much more liquid than the primary market. Because the primary market is a private market, while the secondary market is a public market. This, when I bring this back to the risk versus reward function. In fact, you can see that I tried to split the graph into two. You have on the upper right-hand side, the primary market where it starts with business angels. So those people or friends or family, or even foods that invest into startups. So the risk that is extremely high, I mean, we, I mean, if you have looked into survivability percentages of startups, you may have read that the survivability of 5-years is five per cent of startups. But then when they pass those, let's say those milestones, well then typically it goes into venture capital, you're going to have a series a series B round of funding. And then when the company is still private but becomes a mature, we are in the space of private equity. But in private equity the risk is still high, not as high as venture capital business angel, but those are still investments that are pretty illiquid. So if you want to sell your investment, you have to find a buyer. And that's something that goes, I mean, it's less obvious. You may have to contract the service with an investment bank. And the bank please find me a buyer for the company I own from a private equity perspective. But you'll see that the risk is decreasing. And of course, because of that, the returns, you have to risk adjust your returns as well. Then we go into the secondary market. One companies have IPOs, are DPO, it's when you have companies that are around for 30 years and that are profitable. I mean, the expected returns are decreasing as well. Why? Because the risk is decreasing as well. I mean, if you take a company like Coca-Cola as an example, or maybe Microsoft, those companies normally should not and shall not go bankrupt tomorrow. So this is where also those companies will adjust the returns they're providing to their shareholders. Because the risk is lower, you have the same if I'm taking a US, treasury bonds, mean the probability that the US government goes bankrupt is extremely low. It's not zero, but it is low. Hence, if they're raising money from lenders, obviously, they're written that they're gonna provide will be as close as possible to inflation in fact. And you have, let's say in the same area of corporate obligations that companies can raise capital. If you remember, companies can raise capital either through debt or through equity. If the company goes to the public market and raises money through a corporate, corporate obligation. Depending on we will be discussing that it's wrong on the rating of the company, on the solvency attributes of the company. Well, maybe if Coca-Cola is raising or Nestle or Danone or Procter and Gamble, or raising money through adapt. I mean, the reason that they have to guarantee to the people that they get money from, that they borrow the money from will be very low because they can actually negotiate that we will not be bankrupt in the next ten to 20 years. So the money that you are lending us is pretty secure, so we will not give you the return expectation that you have e.g. in the primary market area. So keep this in mind that there is always a function between the investment vehicle that you investing into its risk and through that also, the return that you can expect in a reasonable way. And I was, as I was reading yesterday evening, actually, I'm reading a book about, let's say investment and what we should teach people how to invest. Also, the private money I was reading, in fact, that if you get a return that is guaranteed 80% every year for decades. The guy was telling in the book that may sound like a Ponzi scheme. So you maybe take your money and run because that does not exist. And this is where basically I want to bring you is what can you, as a value investor, realistically expect on the long-term in terms of average returns, I believe, and I'm going to show you statistics. I believe that having a six to 7% over 30 years as average is something, I would say that it's okay and it's realistic having more than that. And I was giving the example not later than yesterday evening. I was reading this person that was mentioning, if you are having somebody who's promising you 18% year over year for the next three years. I mean, that does not exist. If you look at various statistics, I mean, the market. If you are investing into a market index, you're going to see that over the last 100 years that the market has been around seven to eight per cent are six to 8% in average, you're going to have years that will be bad, but you're going to have other years that will be higher than this average. But in average, if you consistently invest your money, you have to expect the six or seven per cent on the long run. And otherwise, as I said, I mean, if you're having a company that grows 30% every year for the next three years? Well, the probability is very high that this company will outgrow the economy, so that does not work. And this is where people, and we will be discussing Amazon later on. People who have not being, didn't want to believe this when they were investing into Amazon thinking that's the company will grow at a rate of 30% or more for the next 30 years. That doesn't work. And it has shown over the last year is that indeed there was a correction on the stock price of Amazon, but we will discuss those things later on. Warren Buffet said the same. So he says basically that the economy as measured by GDP, so gross domestic product, can be expected to grow at an annual rate of about three per cent over the long term. That's of course, if the inflation is realistic at an average of two per cent, which is what basically the central banks are trying to achieve. And of course, if you add to that some kind of dividend payment, you may expect her to returns six to seven per cent. But let's go a little bit deeper where warren Buffett is, how he's making this assumption. So basically if you depict what he was just quoting, there are three variables in it. So you're saying that basically the, the, the average written that you can expect is you take, Let's take the example of the US economy, the US gross GDP. You subtract from the US growth gdp, the inflation rate, and then you add to an average dividend yields if you do this. And those are really the latest figures that I, I, I took in fact to make the calculation the latest you as gross GDP. You see it here on bullet point number one. You see that obviously there was a high hyperinflation environment. It is coming back now. The latest figure is seven no 35% with an inflation rate of 6.04. And if you add to that, an average of the S&P 500 dividend yield of 167%. And you have the URL where you can look up those figures. Well, basically you have for 2023 and average rate and expectations of around three per cent basically. So this is basically what you could expect, an average, of course, when the GDP is growing at, I have no clue, three-and-a-half percent and inflation rate as is that e.g. 1%. And you add to that the average dividend yield, your average return expectations will be in fact higher. Now of course, this return, in my opinion, has to be risk-adjusted in the sense that depending on what kind of investments that you are investing into, you will add what is called the risk premium to it. So here, before we having this conversation about risk premiums, I'm showing you, in fact, what are the approximate excess returns versus the S&P 500 index? That's very famous investors like Warren Buffet, Peter Lynch, Charlie Munger hat, those are the bullet points, 12.3. So what you see here in the slides, you have the approximate excess returns versus the S&P 500 index. And you see that for Warren Buffett, his average return for the last 50 plus years has been around 12 to 13%, which is extremely goods. Peter Lynch, he was able to compound at a rate of around 13% for something like 13 years in a row. And then you have people like Charlie Munger as well, who was able for all surround 13 years to compound at a rate of 17 per cent. So those are, I would say, very high performance, very high returns that those people were able to achieve. But you see that in average, it's not possible and you're going to see that it's not possible to outperform the SAP for very, very long periods. And some people say, Well, I'm not a stock picker. I don't want to select the company I'm investing into. I just want to buy an S&P 500 index. But consider that a realistic return is six to 7%, at least on a yearly basis on a long-term investment horizon with dividends re-invest it. Another source just to make those returns. What is really realistic returns and not crazy returns. Barclays, you have the URL here is in fact also bringing out statistics about a very high diversification, which is basically investing into funds of funds. And you see that they are providing a statistic that over the last 20 years the average return was around 5% when investing into funds of funds. And do not forget that investing in investing into funds carries a cost as well, because you're going to have some fees that you have to pay to the broker as well or to the asset manager. Here. It was very, it was a coincidence a couple of weeks ago, visual capitalist came out with and visual and I've put you here again, the URL where you have the best, worst, and average investment returns for the last century. And I think what is important is what you see here in the right, on the right-hand side with the red arrow is that they are stating that while stocks are more volatile than bonds, they have averaged roughly 7% in inflation adjusted returns. Let's say this is the last, nearly 94 years. So over the last 100 years, the last century. So that's the kind of return that realistically you can expect. Of course, you will have to risk adjusted depending on the type of company that you investing into. The more riskier the investment, the higher the written expectations that you have to have if you're investing into equity and we are in a long time horizon or the average inflation. I believe that achieving or your cost of capital should be at least a rough cut, six to seven to eight per cent maximum. If you're able to do above that, that's great. You're actually accelerating the creation of wealth. And do not forget that. I've been discussing this in the previous lesson, what is called the power of compounding. So imagine that you are able to generate 7%, and let's imagine that those 7% are above average inflation for the next even ten years, not even thinking are calculating thirty-years. Remember that having a OneNote, 5% on ten years, we just add 16% to your purchasing power, to your wealth. If you are able to compound at an annual rate of 7% over ten years. You see here in fact that you have doubled your wealth. Here we can have the conversation, I need potentially to remove inflation from it. Let's imagine average inflation is 2%. And as I was showing in the previous lesson, while still you will be above 80 per cent of value creation. And that's what I'm really trying to teach you here. But I think the fundamental message and this lesson is what are, I mean, I understand that there is relation between the investment vehicle and the risk that investment vehicle carries versus the returns that you can expect. That realistic returns on a very long-term horizon are around 7%. And that's really something that is very important, do not be because you will have to come up with a figure when we will be doing the intrinsic valuation of companies. But what is your cost of capital? And depending on the type of companies that you're investing like Procter and Gamble, Unilever, e.g. Kellogg's. Well, there, bringing in a cost of capital of 25 per cent would be foolish, that will not work, not for mature company. So keep this in mind and keep in mind that the market yields in average every year on the long-term horizon, around 7%. And when I speak about the market, I'm really speaking here about equity investments. So when you are a shareholder, you are buying stocks of companies. So that's wrapping up here at this second lesson of Chapter number one. And in the next one we will be discussing also various investment styles and vehicles and also classes of shares. So talk to you in the next lesson. Thank you. 5. Investment styles & classes of shares: Alright, but investors moving forward, next lesson in chapter number one where I will be sharing with you and discussing investment styles, vehicles, and also something that you need to be attentive as value investor, which are the various classes of shares that you may have to deal with when investing into company that has more than one type of share. So the first thing, let's go into investment stars, investment techniques. So typically, and I've tried to make it simple here you have in fact, two big categories of investment techniques. One being what is called the fundamental analysis. And this is where typically It's us in fact as value investors who are part of fundamental analysis. So the intention is really to determine the value of the asset that we are buying it as a business or portion of the business. And the intention is really to keep having this buy-and-hold and reinvest strategy. That's really about fundamental analysis, really understanding being able to calculate a value and comparing that value, there's intrinsic value versus what the seller or the market, if it is secondary market is giving you. The second one is what is called more technical analysis, is looking at past performance and trying to determine what will be the future price movements, volume movements. You're looking at moving averages, statistics. It's really, I mean, it's, it's called technical or it's looking at graphs and looking at what the curves that come with a specific stock and really trying to predict or to determine, being able to look at patterns and believing that from past patterns, you can in fact determine what the future price movements will be in fact. And this is really about probabilities and statistics. And this is really not what we as investors do. We are really the ones that are looking at fundamental analysis and trying to understand what is the real value of the asset that we're trying to buy? An investment styles you have as well, active or passive management. So active management is like what I tend to do is select companies. I have my investment universe. I select companies that appear cheap where the fundamentals are fine, what I liked the business and potentially the management as well, and the products and services that they're setting. Passive management would be more something like you are not active, you are not, you're potentially even buying an index and you're just expecting things to happen, but you're not actively involved in managing your money. Another big differentiations between growth and value. So remember in the previous lecture where I was also showing you the difference between primary and secondary markets. And typically in the secondary market, you will also have, let's say, companies that are more considered growth companies that do not pay out dividends, e.g. to their customers. You may have tech companies like I will take the example of Spotify. Tech companies are very often considered growth companies or growth investments, salary related companies. While e.g. and we will discuss later on blue-chip companies, but not only blue-chip companies, but companies or the armature that are providing a recurring written to their shareholders and more considered kind of value investing style versus growth, where also the growth assumptions will be much closer, let's say to the GDP and to the growth of the economy. In fact, then you have asthma l, small Kevin large-cap companies. I mean, me as a value investor, I do like to invest into omega kappa large-cap companies. Why I'm able to assess the intrinsic value and get also passive income, but you have also even valid invested. I have been very successful in investing into small cabin. We will be discussing in the next slide what differentiates a conflict between small-cap, mid-cap, large cap and mega cap in terms of investment v, because I was already kind of elaborating about this on the active or passive management. So you may have people that invest into stocks. Other people that like to invest into indexes are tracker. So ETF, funds like vanguards, Blackrock, etc. Other people are in fact Landers. They lend money to companies, so they invested into corporate bonds, e.g. or even into their lending money to governments. So the investing into governmental bonds, remember the risk versus reward conversation. You have other investment vehicles like foreign exchange where you are kind of speculating about the movements between e.g. US. Dollar and Euro e.g. you have penny stocks, that's also kind of an investment vehicles are really sucks that appear super, super, super cheap. But again, I mean, for me, like penny stocks is not really an investment. Vehicle, It's more just that the price of a share is extremely low, but potentially big movements can have, can generate big capital gains. But for me, I mean, I, I think that people who invest into penny stocks, they do not understand why they're investing into penny stocks and what those penny stocks actually represent and why the price of a share is so low, then you have options and futures, which is absolutely not my style. This is more like again, for me, speculative investment vehicles and another set of infamy as a value investor. And it may sound weird, but as I said that I have my investment universe that we will discuss later on in the mindset where I do not invest into financial services, do not invest into insurance, I do not invest into biotech, I do not invest into farmer. I do only invest into stocks and large cap to mega cap stocks that have strong brands. Where I'm doing the fundamental analysis. So this is, you see, if I combine those attributes, that's kind of the, let's say define me or what I might attributes in terms of my investment style is really a fundamental active management value investing, large cap and mega cap companies or mega cap companies and only stocks and nothing else. That's my way of investing. And this is typically also what Warren Buffett's tends to do, is sometimes buys companies that are more considered mid-cap, small-cap. Because he's actually buying the whole company because Berkshire Hathaway has a firepower to do so. For me, I do not have the firepower to buy a full companies. So I will be really focusing on large cap, mega cap companies with the attributes I just mentioned. So again, on value investing, as I said, this is a graph that already brought in the introduction. So remember that the typical value investor tries to buy companies when they are typically 25 to 30%, at least below its intrinsic value. And you are able to calculate the intrinsic value. And you have also repeatable investment process. And you will have to wait because the market will maybe not turn around in a couple of days and a couple of weeks and couple of months because maybe you're buying opportunity is in the middle of a crisis and maybe it will take a year, 18 months until the economy of the country or the companies out of the crisis. Until then potentially the market gets over valid, which is an awesome opportunity for you to say to make lot of money to monetize by then selling maybe your assets if they're overvalued by the market. So in the risk versus reward function, my typical, or let's say the typical value investing universe goes from those small cap, large cap public stocks. This is where you will find the value investing universe. My investment universe is actually not small cap public stocks, but really large cap, omega cap public stocks. And to understand, and again, not coming back to the risk versus reward. So you see already by having that my investment decisions are going to large cap public stocks. You see that I'm kind of de-risking my, my money that is being invested. But at the same time, I need to have reasonable return expectations on when I'd put my money into large and mega cap market cap company is in fact. So just make it clear as well When we speak in terms of vocabulary. If it is mega cap, large-cap, mid-cap, small-cap of micro cap. So typically today I've put you the URL of the FINRA in the US. So omega CAB is typically companies with a market value is above 200 billion. Large-cap companies where the market value is 10 billion to 200 billion. Mid-cap is to bid into 10 billion and small cap is between $250 million or euros and 2 billion of market capitalization or market valuation micro cap is below 250. How do you calculate the market cap? Actually, it's very easy to take the current share price and you multiply it by the number of outstanding shares. So it's as easy as that you see. In fact, I mean, there's not necessarily the latest because they are market fluctuations. But when I prepared this training, you can see on the right-hand side that when you look at who are the mega cap companies, they are not 1,000 mega cap companies. They're like, like 30 mega cap companies. There may be 1,000 large-cap companies. They are like 2,500 mid-cap companies and small cap, they are much, much more so let's say something above 6,000 small cap companies. So of course, becoming a mega cap is not something that happens overnight. So this takes a lot of time, a lot of profits, a lot of, let's say, public attention as well. You typically will find in those mega cap companies, the Amazons, you will find the Microsofts, the Googles or alphabet, as we should call them meat as the former Facebook. Those are the apple as well. Those are the companies that you will find in the mega cap. And large cap. Of course you will find other companies like, I don't know, like Kellogg's, e.g. if I remember, well, not considered the mega cap, but more a large cap company, Unilever, Procter and Gamble, I would need to calculate the latest market capitalisation. Most probably they are somewhere between large cap and mega cap companies as well. So something I said in the introduction that is important. So you see where at least what I'm trying to share with you that where I fit in the risk versus return function is like investing into large and mega cap companies. So I have a, let's say I have some expectations that are risk-adjusted. I'm doing fundamental analysis and ammonia investing into stocks. So how can I earn money? How can I monetize and my investments? And I have two ways and I want to share with you. The first one, which is the most common one, is that people buy companies hopefully at a cheap price and they will be re-selling their shares, their stocks when the market has gone up. This is what is called capital gains. It's actually the second bullet point here, and that's something that is common in growth stocks in startups, in private equity, you buy something and you hope and you expect that the price will grow a lot. And then I sort my time, you will have to take the decision of selling the stock. Otherwise you will not be able to make money out of it. Otherwise, it will remain potential monetization. But it will only materialized only happen when you sell the stocks. The second one, which I believe is extremely powerful and has helped me become financially and intellectually independent, is really earning returns, passive income, earning dividends on the company profits. And I was giving the example, I think also in the very introduction that two ways for me of making money. The first one is, of course, buying a company at a cheap price because the market is depressed. Maybe the analysts are depressed about the company, but the company has solid financial fundamentals. And I'm hoping to buy the company with a margin of safety, maybe 25 to 30% below its intrinsic value. And then I will have to be patient. I will have maybe a year or two years, maybe three years. I have currently one holding which is Telefonica that I'm having for more than six years where I'm still below my purchase price and that happens. But how can I cover those risks and those potential losses as well? And how Will I be rewarded for my patients? In fact, is by earning dividends on it. And e.g. Telefonica is giving me every year around, at the moment I bought around 7% of cash dividends. So I'm actually compounding and I do not need to sell my stocks of Telefonica because I'm getting these 7% remuneration every year. And this consider being passive income. And of course, this is protecting me if you're having 7% every year and you're compounding this, having this buy and hold and reinvest strategy and you're doing this now. I think my holding periods for telephonic has more than six years. And I'm still like, I think 12, 13% below what the market is telling versus intrinsic value. I need to be patient and let's say the share price has gone up. But while I have to be patient, I want the company that I've put my money into to reward me for my patients. And this is where I want to have as a second return, passive income, as long as the market is not overvaluing the stocks that I bought. That's an example for Telefonica. And this is a very strong fundamental different versus growth investors and growth stocks because when you are investing into Spotify, spotify is not paying out cash dividends today. They may in the future. Apple, I think they pay out a very small dividends. But still a lot of people consider Apple being a growth stock. And the dividend is actually below inflation. So you're actually destroying, well, if you remember what I told you, but growths that do not even pay out dividends. Well, the only way for you to grow your wealth is selling of the stock. So having this capital gain when you sell the stock, otherwise, you will not grow your wealth. It will remain theoretical because until you haven't sold your stocks, you will not see your bank account growing. In fact, you will not cash in, in fact that capital gains. So that's really something that really makes a difference between a growth investor and a value investor. Typically value investors, warren Buffett is doing this. I mean, he has found with million, if I take the example of Coca-Cola, he has founded million of shares of Coca-Cola and Coca-Cola is paying out very nice dividend every year. And I even think that they are growing the dividend and we will discuss dividend aristocrats, dividend Kings later on. So think about the two levers, how to make money as a value investor, it's about the capital gain. So you're buying the company cheap 25 to 30%, and you hope that the market will add a certain amount of time, overvalue the company maybe 15, 20, 50% over its intrinsic value. Then maybe you will say the market is so crazy I going to sell now and I will wait until the market is correcting back to the intrinsic value of the company. But the second way of making money is really earning that passive income that really makes a difference with growth investors to people that invest into growth stocks that do not provide a recurring returned to shareholders, right? So when we speak about stocks, I think there is something fundamental that also that you need to know in the fundamental concepts and principles for you as a value investor, which are the companies have various types of stocks. And I'm going to show this to you. Sorry, I'm going to show this to you in the next slides. We're going to speak about Rushmore, Google and Alphabet. And I will show you an BMW as well that those companies need to have various types of stocks. So the most common way of buying stock or buying into a company is that the company has only one class of stock, which will be called the common stock. This is the case for, let's say, 80% of the companies, but you have companies that have two or three types of stocks. And I'm going to show this to you in the upcoming minutes with some concrete examples. What happens very often is that companies have two types of stocks, common stock and preferred stock, or class a and class B stock. Why are they making a difference? Because maybe the owners of common stock are having voting rights. They gain share of the profits of the company. But maybe the company says Yeah, but I mean, if they're telling me, I mean candy young minority shareholder mean you own zero.000, 1% of my company. Let's imagine it's BMW or Mercedes. I mean, I'm willing to give you a little bit more dividends on it, but I'm removing from you the voting rights. And in case we don't have enough money and in case there are, nonetheless dividends paid out. Preferred stock owners will get dividend before common stock owners. Or how do you feel about that? And I may say, Well, in any case, I will not vote and I'm willing to give away my voting rights in order to get a preferential priority on dividend payouts versus common stock owners. So yeah, I'll buy a preferred stock because you're offering me the opportunity. But not all companies have those two types, are two classes of stocks. And I will give you a concrete examples in the upcoming minutes. I think it's already in the next slide. Then also a concept that you need to understand when we speak about the number of outstanding shares. So that's the number of shares that you can actually, that have been printed by the company. This is not just for common stock, but you may have companies that have two or three classes of stocks and they do have a certain amount of shares outstanding in common stock and preferred stock and even another type of stock, e.g. which would be called maybe management stock. So you need to understand the difference between basic number of shares outstanding in diluted number of shares outstanding. Why is this important? Because you will see later on when we're going to be practicing the calculation of the intrinsic value of the company. We will need this number to estimate a share price, intrinsic value per share. Which finger will take? I will take the biggest one which is diluted one why they dilute it? Because the diluted ads, e.g. warrants options that are given away, e.g. as employee remuneration to the employees of the company. So imagine very simple example that the company has 100,000 shares of common stock, but has promised to print 10,000 shares through stock options that will vest over, let's say five years. While here, in fact, when you need to calculate the intrinsic value, need to take into account that the total amount of shares is maybe today 100, thousands. But as you're making a projection, your investment horizon may be 2030 years in the future. You need, you need to take into account those dilution effects. So you're going to then divide, in fact, the valuation of the company by the 110,000 shares and neutrons, the 100,000 chests you're going to take, let's say, a bigger number that you will divide, which then actually brings down the intrinsic value. Of course, it's a little bit more defensive approach to it because those shares will be printed. It's true that in growth companies, a big portion of employee remuneration for growth companies comes from those warrants and options. Because the company has maybe less money. They want to preserve the cash to grow them markets, grow their customer base. So they, they are promising to the employees the printing of new shares. So you need to take this dilution into effect as well, right? Last but not least, and I've seen this I mean, the webinars that I was holding, but I was talking to a lot of people. One thing that you need to be attentive is that when you buy a company, you are saying, I want to buy a share of Procter and Gamble. Not only do you need to understand, if the company has one class of many class of shares, we're going to see this in a couple of seconds. But also every share has a unique identifier. Outside of the US, it's called the icing is the international securities identification number. So if you are buying a common stock, let's imagine a common stock of Kellogg's. That common stock of Kellogg's has an eyes in number and that number, you can find it on the website of Kellogg's and you can find it also with your broker. But you need to be attentive if a company has two or three types of stocks. Let's imagine that the company will discuss Google. Google has three types of classes, two of classes of shares. Two of them are listed that you want to buy the right one, the one that you have picked. So they need to be attentive to choose the right ice in number. Google will have QCIF numbers. So because they are listed in the US, so QCIF number is in fact the Committee on uniform security identification procedures. So in the US, the icing is called QC. They're not called ice in, in the US, just, just something that you need to know and that's something that is linked to, let's say, every country has their specific numbering system. At an international level, most of the companies that are listed on the stock X, on the secondary market, on public stock markets, they have an IC number. It shows them to you as it's called the Q SIP number just in case you are looking at the broker and the you will, you will find the term QC bar eyes and let you know what it means. So concrete examples, BMW, BMW has in fact two types of shares. They have ordinary share and they have a preferred share. And you see that both shares have different numbers. So DE is for Dodge Neon, That's what Germany. Then you see in fact that the ordinary share has. I mean it's ending with 03 and the preferred term is ending with 37. You see this here on the slides. And why? What is the difference between the two? Well, basically, the preferred share has a higher dividends versus the ordinary share. Why? Because BMW is removing the voting rights on the preferred Shad owners. That's the reason so they're giving a small incentive to say, I mean, I understand that you want to be shelled of BMW, but you will probably not exercise you're voting rights. That's why we have created this preferred share or type of class, or type of shares or class of shares. So preferred shared, class of BMW. And with that, we're giving you a little bit higher dividends versus the ordinary shares. So that's basically you could quantify That's the right to vote, that they're giving us an incentive to the preferred shareholders where they are in fact removing the voting rights. They are not the only ones. Let's look at Alphabet, US company you probably know, was always called Google, but now they have, let's say, a, re-branded themselves into alphabets in the couple of years because they having those beyond the typical traditional core business of Google, they have other, what they call also moonshot projects. And in fact, alphabets. When I will share with you where to find that information, where will it be discussing? Ten K, ten q reports. But in the quarterly report, in the first page of alphabets, you in fact see that the company has to, let's say, classes of shares that are traded. One which is called a Class, a bullet point number one class a common stock, where the ticker, so the trading symbol is Google without an e at the ends. And then they have a class C, which is called capital stock, where the trading symbol is Google. So in fact, you can buy both stocks on the New York Stock Exchange, e.g. what are the differences between the two? And this of course, requires a little bit more practice, is going into the financial statements, are going into the investor relations site of Google or Alphabet and then fake, you would figure out that the company has, I mean, when I was preparing this, this is probably the end of 2022, latest quarterly reports to remember, but just to give you a sense, when I extracted this. So at that time, alpha-beta heads around 5 billion of shares, nearly 6 billion of Class a shares, 884 Class B shares that are not freely tradable. Those are shares that are for the founders, for senior managers. And Class C shares they had also around 6 billion. So if you look at the proportion of both, you see that there are around, let's say 13 billion of shares out there. What is interesting is that the Class C capital stock share with the trading symbol or the ticker GOOG. Has in fact zero voting rights. And this is explains when you read even proxy statements you read, you go into the investor relations site and you read what the class C stock is about. You're going to see in fact that alphabet class each has, don't have voting rights. They have, they do have voting rights and one share is equivalent to one vote, if I remember well, but what is interesting is that the Class B shares that you and I cannot buy because they are not publicly traded and not publicly listed. They have in fact, one class B share has, if I remember, well, ten voting rights. So the proportion or the power of votes is ten times higher between the class B that you cannot buy an icon on by vs class Asia as well. Class each has have zero voting rights. So this is where you, first of all need to know this. I think it's interesting to know that Google has three types of shares. And what kind of share would you like to buy clubs? Misha is not an option for you. Class C may be an option for you that could be considered like a preferred stock. And class a could also be an option for you. But if you want to buy class a, you need to buy the right ticker and the right Q SIP number, while Class C has different ticker has different QCIF numbers. Why? Because the US listed one thing and that's not now unnecessary part of the conversation. But when we look also at why they did this, you see from the percentage of voting rights and on Google. In fact, Management and the founders have more than 50 per cent voting rights. So even if you would be owning all the Class a shares, you will still be considered a minority shareholders. That tells you something about how the founders and the people who own the Class B shares that you cannot buy, that I cannot buy. How they think about strategic matters where the votes, the majority vote of the shareholders is required. Where clause a shareholders are in fact told you own 40% of the voting rights, but you don't own more than 50%. So just think about what that means when you are on alphabets. Class a shallow e.g. last example is Rushmore. I hadn't reached my invading my portfolio couple of years ago. I think I bought it like 57 and solid 93 or 95 plus dividends. Today even think it was at 100, 20:00 A.M. I unhappy about it. I'm not unhappy about it. I multiplied within I think around 12, 18 months, I multiply it, my investment enrichment by two plus they added dividends to it. So I was very happy about the performance of it. And really small has in fact, two classes of shares. They have Class a shares, which represent more than 90% of the equity. They have Class B shares. And the Class B shares are in fact the ones that are owned by the family. So Rushmore is the remember the name of the family if it is Murdoch. I may be wrong about it, but there is in fact a root port families are not, Murdoch is robot family. It's a South African family, if I'm not mistaken, and they do own 50% of the voting rights, and they own less than 10% of the shares of the class. That represents the Class B shares in fact, and that's those Class B shares are not listed. You cannot buy them. They're only how health by the robot family. In fact, while Class a, they are freely tradable, but they only represent 50% of the voting rights. So again, you see here concrete example. More has two types of classes. You will only find one icing ticker or eyes in number re to the class Asia's because the Class B shares you cannot buy them. So just be attentive wrapping up here this third lesson in chapter number one. So just be attentive that not only you have different investment styles. And as I told you, what were my, what are my investment attributes? So it's fundamental analysis, it's not technical. It's large mega cap companies with strong brands only buying stocks. So that's really my investment universe. And with that, I am active manager and I do value investing as why? As I said, I tried to determine and calculate the intrinsic value of a company through others methods that we will share with you through this training. And, and of course, I need also to be attentive when I decide to bind to a company is I want to know if the company has only one class of shares that I buy the right class of shares and not the wrong one. And that's really a mistake that people when they have never invested into the stock market, they tend to do so. That's why I'm sharing this with you. Be, be curious about if the company has only one class of shares or more. And what are the attributes of each class of share in terms of specifically speaking about dividends. I think that voting rights for all of us probably, I mean, we're small investors. The voting rights are probably less important matter, but very probably what is more important is really which class of shares carries dividends if the company has more than one class of Shabbat. Remember like 80% of the company's only have one class of shares, which would be called the common stock in fact. Alright, let's wrap up here this lesson and in the next one we will go into now what Warren Buffett said. You need to understand a little bit of accounting to be good value investors. So we will walk you through the main things to know as a value investor related to financial reports and financial statements. So talk to you in the next lecture. Thank you. 6. Balance sheet, income statement & cash flow statement: Alright, welcome back. In this lecture is still in Chapter number one. So I'm doing my best to share with you a fundamental concepts that you need to know as a value investor. The one on the fundamental concepts, the concepts that you need to know as Warren Buffet wants it is you need to understand a minimum of accounting and I will call it go even a little bit beyond is like corporate finance. And in that context, and you will see, I mean, at the very end of this training, we're going to do valuations based on an actual file that comes as a companion sheet with this course. There are a couple of, let's say, financial reports that you need to be able to navigate through. And I believe that not enough people do look into financial reports of the companies that they investing into. And I believe that's really what makes up the system. Anytime the difference between people who speculate and people who are serious investors, they read the financial reports of the company, at least they extract the most important elements of those financial reports. So in this lecture, we will be discussing in value three main financial reports, which are the balance sheet, the income statement, the cashflow statement. So first things first, let's come back to something that we discuss a couple of lectures ago, which is this value creation cycle. So from the moment you have on the right-hand side, which is basically like a balance sheet, the sources of capital which either the depth total loss or the equity holders. They bring in cash, they bring in capital that capitalists transformed by Management, by the Board of Directors into assets, and those assets hopefully generate a profit. Then if there are profits generated by the company, by the operational assets of the company, the management, and the board of directors and the shareholders, depending on the type of decision and the type of, let's say, events are decisions that have to be taken depending on how strategic they are. It's the management who is allowed to do this, is potentially the board of directors is allowed to do it, or potentially it requires a shareholder majority vote to take maybe very important decisions. So, but if profits are generated, the company has three options. So let's say company management has typically three options. The first option is reinvesting the profits into the company to grow the customer base, develop new products, new services. Let's say attach new markets. New segments, potentially increase the salaries of the people as well. So that's basically cash reinvest into the company. The flow number five is, as re-discuss is cash that is written to the credit TO loss of the company handled bank loan, maybe they start to accelerate paying off that dept. And the six flow that you see here, what we already discussed is in fact that cash is returned to the shareholders, maybe another form of cash, dividends or share buybacks, what we will discuss later on. So if profits are generated, the company has in fact three options to do reinvesting, paying off debts. And it's giving a return to shareholders. But in order to do that anymore, when I was introducing this, I just told you I going to tell you and teach you hopefully how to find out how much is going into the flow. Number four, how much is going to for number five and how much is going to flow number six, in order to do that, you don't have the choice. And sorry for that if you hate financial reports, but you will have to have a look at the financial report of the company. And most specifically at one, or let's say the three main financial statement types. That's any company or any company in the world carry, which are the balance sheet, the income statement, and the cash flow statement. So the purpose of this course is really not, not to go deep into reading financial statements. I have another course that is called the other reading financial statements. For the time being, the level one is out, which is a practitioner level. But here's really giving you the minimum thing that you need to know about accounting and understanding financial reports that you can extract. The elements, the figures that you will use in fact, and that you will use afters when you become independent from me on doing the intrinsic valuation or the intrinsic value calculation of the company that you're thinking about to invest into the first and that's the most important on, and by the way, in the other training, the other reading financial statements, I mentioned that most of the people who when they are interested in the company financials, they start by reading the income statement and I don't do that. I start actually by reading the balance sheet. Why? Because the balance sheet, what is specific to the balance sheet. It shows in fact, the accumulation of wealth of the company since inception. So on the right-hand side, on the balance sheet is what is called the liabilities. You're going to see all the sources of capital if it is adept toddlers or equity holders. And on the left-hand side, how money, how the captain has been employed. So on the left-hand side you will see all the assets of the company. And when you look at the balance sheet at any moment in time, if I look at the balance sheet of Kellogg's from yesterday, it's valid because it's telling me what were the sources of capital since day one and what are the assets that the company owns since day one as well? That's why I always start reading the balance sheet when I have to analyze companies. By the way, I will not go into the details of IFRS versus US GAAP, but there are various at same standards on how to do financial reports. We're going to practice your eye on IFRS and US GAAP. Us GAAP is the US generate accounting, accepted accounting principles and IFRS, international Financial Reporting Standards. So nearly all the countries in the world do use IFRS. But you ask gap is of course used in the US, they do not follow IFRS even though now there is a tendency to converge between the two standards. But you only have like ten countries in the world that do not use IFRS and US is one of those. So you need to know the difference between US, GAAP and IFRS at least have heard what? That both, let's say standards exist in IFRS. You will see in the financial reports, you're going to see this in the Mercedes example. I'm going to show you in a couple of slides. That's, the balance sheet is not called balance sheet. It's called the statement of financial position. That's IFRS terminology, right? Then you have two other very important financial statement types, which is, which are the income or earnings statements and also the cashflow statements. What is really important here to understand is the following. Is that an income statement and cashflow statement you are looking in fact at it is the earnings or the cash flows over a period of time and it can be three days, eight days a month. Typically it will be a quarter or a semester, so six months or it will be annual income statement, annual cashflow statement. That's something that a lot of people who do not understand. That's the main difference between the balance sheet and the income and cash flow statement is that you're looking for the income and cash received and the reporting period can be the last quarter and you're comparing the last quarter, let's imagine it's 12023, you're comparing it with Q1, 2022. The balance sheet, you don't have that comparison. The balance sheet shows at any moment in time, the stock of words, the accumulation of wealth since day one. In fact, there are differences between income and cash flow is that in income, you may have e.g. invoices are sent out to cosmos but are not paid yet. So the income statement can show things that have not been converted into cash yet. It's the same in terms of expenses. Maybe the company is already, let's say declaring the tax expense that tax authorities will come in the future, but the cash out of the tech expense has not happened yet. Let me stop here for 1 s The conversation or the differences between income and cash flow statements. But it's important here to understand is the difference between the balance sheet and the other two 1's balance sheet is you always look at the accumulation of wealth since day one. That's why I always start reading the situation of companies by analyzing the balance sheet and not the income, say what most of the people are in fact doing. So here you have the example of Mercedes. So I've extracted from the report, I think was it 2000, 20,020 reports? It was published thousand 21. Why you see the three main, let's say financial statement reports we have on the left-hand side on the bullet point number one, that's the balance sheet. It's called consolidated similar financial position, bullet point number two. It's the income statement consolidated to include all the subsidiaries that are Owens majority owned by Mercedes. Then you have on the right-hand side on the bullet point number three, you have the consolidated statement of cashflows. So it's basically the cashflow statements. This one is an IFRS company. Germany follows IFRS standards. So that's why you don't see the balance sheet appearing on the button. Instead you see the statement of financial position appearing. Kellogg's, they do follow US GAAP, it's a US listed company. So here you see Bullet point number one, the consolidated balance sheet, bullet point number two, the consolidated statement of income, that's income statement. Then on the right-hand side, bullet point number three, the consolidated statement of cashflows. And you see, I mean, it may appear complex, but there are many lines in there. And I will try to really, in this training, the other value investing related to, let say, point you to the most important elements that you need to know. Alright? One of the most important elements that you need to know in order to do the valuation of a company, the intrinsic valuation of a company is really, if you remember, what I was showing here already a couple of times, is understanding first of all, what is the amount of profits that the company is doing? So that's the famous flow number three out of the assets of the company. And then indeed, understanding how much is flowing back into the company. That's flow number four, how much is flowing back to pay off debt? That's for number five. And how much is flowing back to the shareholders. That's flown number six. So those are four extremely important elements that not a lot of people practice enough on going into financial reports, taking those three financial statements, the balance sheet, the income statement, the cashflow statement, and try to understand how much profit the company has generated, how much cash is reinvested into the company, how much cash is returned to creditors, and how much cash is returned to shareholders. This is what I'm showing below. The bullet point or the flow number three. There are two ways of looking at it. You can look at cash elements that will be called the operating cash flow. How much cash has been generated from the operational assets of the company. We can also look at it from an income perspective now, and I will explain this in the upcoming slides why there's different sometimes between income and the cashflow. For the flows 45.6, that will be number four will be called. And you're going to see this when I will walk you through the cashflow statement because you're going to see at the cashflow statement has three chapters. The three sections will be the operating section, the investing section, and the financing section. So basically number three, that's the operating section in the cashflow statement. Hello, number four, That's the investing section in the cashflow flows 5.6, that will be the financing cashflow or the financing section in the cashflow statement. And again, I really want you to practice your, I take maybe companies that you like, go into those companies and really try to see if you see this in the cashflow statement. Alright, so when we speak about profitability, there are two ways of looking at profitability. I mean, the typical one is looking, well, first of all, is understanding how much revenue, how much economic activity the company has generated. We are not speaking yet about profitability. I want to speak about economic activity is really how much business the company has generated from its assets. It's also sometimes called the top line because it's the first line in the income statement. And sometimes you hear so the vocabulary or the lingo of operating income, That's the activity that is generated by the operating assets of a business. Very often you will see also when you look at the financial statements of the company, specifically the income statement, you're going to see that there are some notes that come with the income statement where in fact the company is getting more information about e.g. customer segments. Customer segments sometimes can also be called consumer direct e-commerce. You will see as well sometimes the terms appearing like geographies. So the revenues will be splitted by North America, Latin America, Asia, Pacific, Europe, Africa, e.g. sometimes also, the revenues in the income statement will be splitted by big product, family or product category. Can we e.g. devices, mobile phone services, subscriptions, e.g. so again, I mean, if you have a company that you like, please download one of the latest reports of the company that you like and try to get yourself knowledgeable and get yourself fluent on how to understand and how to read already the revenues from where are the revenues in fact, coming from? Here, I'm giving you two concrete examples with Mercedes and Kellogg's. So you see here, I'm just looking at the income statement here. So we see that for the year 2020. So this is a full year report for both companies and Mercedes follows IFRS Accounting Reporting Standards and Kellogg's follows US GAAP accounting and reporting standards. So you see that on a bullet point, number one, Mercedes in 2020 has generated €154 billion of revenues, while Kellogg's has generated a 13, a $7 billion of revenues. You see that indeed, just from an economic activity perspective, Mercedes is ten times, a little bit more than ten, but let's consider it as like 1011 times the size of Kellogg's. Here I just speaking about revenue, gross income as it is called, as well as just the business activity. Of course, what we're interested in is the profitability of the company. And this will be essential as well afterwards to be able to understand and to calculate the intrinsic value of a company. So here, extending and look now at the bullet points number two from our citizen for Kellogg's, you see that on €154 billion of revenue, Mercedes has generated rough cut 4 billion of profits. And in fact, if I would need to be precise, it's 36. I don't want to go into now accounting details. That's not the purpose. But normally you should hear there's one thing that is very specific. Mercedes, you see below the 4 billion 00.9, you'll see 382 million of profits that are attributable to non-controlling interests. This happens for some companies and I will just quickly elaborate what non-controlling interests are. Those are shareholders that own a portion of Mercedes. Imagine that Mercedes has a subsidiary and I don't know, in Eastern Europe, but they'd only own 8080, 85% of that subsidiary. The 15% are called non-controlling interests. But if Mercedes is consolidating that subsidiary into the income statement. We'll consolidate it 100%. That's accounting rules will not go into the details of how consolidation works for that, if you're really interested, go into the art of reading financial statements course. But the profits that, that Eastern Europe subsidiary of Mercedes wouldn't have generated 15% of those profits. They do not belong to Mercedes and this is what is called non-controlling interests. Hence, here you see that out of the 4 billion zero-zero €9 of profits, in fact, nearly ten per cent go to non Mercedes shareholder. So they give, they need to give this money back to those non merciless shareholders. It means that here, the real profit of Mercedes for the remaining shareholders is 3,000,000,627 of euros. For Kellogg's is easier. Well, they have a very small portion you see above the bullet point number two. So in fact, they say that the net income is $1,000,264,000. They have 13 million of, let's say, profits that go to non Kellogg's shareholders because they potentially owned subsidiaries that they do not own 100%. So the correct figure for you as a shadow that you need to take is 1,000,000,251, which is the smaller number. In fact, you will, you will see this in big multinationals. This will happen a lot that you will have this non-controlling interests line that appears so always take the number after the non-controlling interests line. So the smaller 11 important thing. I mean, I was when we were discussing the flows 345.6, if you remember, was mentioning that the flow number three in fact, can be either the net income attributable to the shareholders of the company. And sometimes it can be interpreted as what remains in terms of cashflow, of profitability. And this is where we need to understand the differences between income and cash flow without going to the detail set. It's not an accounting course. But in fact, there are two different accounting concepts, as I was saying earlier on as good. Now I will explain this through the following example. When imagine that you are a services company that you have, let's say provided your services, imagine it's consulting to your customer. The customer agrees to the final delivery of a report, e.g. you will be sending out an invoice to that customer. So that's income, that's revenue From the moment on that to generate the invoice you can actually record will not go into the details, but I'll make it simple here. From the moment that you have delivered your final report, you can record that's the amount of services as revenue in your income statements. But what happens is that the customer has maybe 30 days or 60 days to pay that invoice. So there is a timing difference between the moment that you sent out the invoice where you are allowed by accounting rules to records and to show that you have generated this economic activity. But in the cashflow statement, the customer will not appear in fact, in terms of a cash inflow because the customer has not paid, maybe let's say 47 days later on the customer pays the initial invoice. They are in fact income and cash flow they reconciled, they correlate together and the amount of income is the same as the amount of cash inflows from customers, right? So at the very end of the day, except if the company is trying to manipulate the earnings, cash flow or cash inflows related to revenue and earnings that have been recorded always converge. Otherwise somebody is manipulating the figures, right? I think that's a very, very important statements. And by the way, having looked at big differences between income and cash flow, that potentially is a red flag for me. I'm trying to understand why is there so much income? And at the very end of the day, net income profitability while the cashflow is crap, specifically the operating cash flow. And again, we'll come back to that later on. I'm only saying that comparing the income, the net income, with the operating cashflow is giving you some kind of sense. If the company is how the company manages the money and what I call the CEO and board stewardship. Of course, remember, we will discuss that later on, that in the income statement you will have non-cash items like depreciation and then we'll explain this in the upcoming slides. But at the very end of the day, cash flows if the outflows and inflows have to converge with the income statement. Otherwise, somebody is manipulating the figures. Alright, give a concrete example also where depreciation plays an important role. And I take the following example. Let's imagine that. Your company? Our company is limousine service, right? So the the core activity of the company is taking a customer from point a to point B with a luxury limousine. I've taken here the example of a Mercedes limousines, I think it's an S class, doesn't matter. So the company has, I mean, let's imagine that I have received cash from the shareholders. The company has options. First of all, they can decide to rent the car. Renting the car means that the car is not owned by the company. It's in reality, not an asset of the company. And we'll be paying on a monthly basis, a rental fee to their renting company. And in the hope that that asset that is not owned by the company is generating, in fact, revenues with a margin with profits on it. That's basically what you see on the top visual, which is a car renting thing. You see in fact, the blue, Let's say the blue color histograms, That's really the revenue part that may fluctuate depending on how often the car is servicing customers during the month. Let's imagine this was during the year. Let's take this as an assumption. And then the other one will be the cost in the cash flow statement and the income statement. If you are renting the car, you will not see any difference because you will be paying out every month an invoice, you will be cashing out an amount of money to the rental company and then income statement, you will see an operational expense as well. So there will be no difference between the moments that there is an let's say that you are recording an expense in the income statement versus the moment that you are paying the invoice of the rental company. And here we're looking at five years. Let's take this as a time horizon on the example I'm showing you here. Now the company has also the option with the capital received by the shareholders and maybe buy through a bank loan, purchase the asset, which is basically purchasing the asset class of Mercedes. This is important to understand that there's gonna be a timing difference between what you will see in the cashflow statement versus the income statements. Let me explain it. This is what you see on the bottom part and the bottom visual that is called car purchase. So if the company decides to buy the assets and you're buying the asset from a car dealer, you will have to pay the car dealer immediately. Let's imagine it's $100,000 to be, to become owner of this asset class. This cash out is happening in year one, actually the beginning of year one. But how is this reflected in the income statement? The income statement you have for what is called fixed assets or long-term tangible assets. You have also, for tax reasons, the possibility to do a depreciation mechanisms. So depreciation mechanism is that in order to reflect more accurately the economic activity, which is what the income statement is showing to reflect it in a more accurate way versus the cashflow statement. Accounting standards allow you to show the cost of depreciation of the asset class over its five-year periods. And let me explain. So if you have a car that had a cost of $100,000 and you believe that you will be able to use that car for five years. You will, in fact, through accounting mechanisms, reduce the value of the remaining value of that asset by a fifth every year. So after you won your car, your assets has a value. Knew it was 100 thousands after one year, it's 80,000 after year two, it's 60,000 after four. It's after year three. Yeah. It's 60,000.40020 thousand and then after five years it's actually zero. Why is this important? Because this is what you're going to see in terms of difference between the cashflow and the income statement. In the cashflow statement, you will have had to do the cash outflow, cash out of $100,000 to the car dealer except if you financed it. And let's leave that 1 s aside. But in income certainly will only incur the depreciation cost of 20,000 for the upcoming five years. And here you see, and what you see on the bottom of this chart, you see that the cashflow statement, obviously the red part, that's the big cash out of 100,000. And you see how the income statement of a five-years just reflects this -20,000 depreciation cost. And this is why you have differences between the cashflow statement and the income sin. And this is very important to understand that at a certain moment in time, if you make the sum of the total cash outflows for that car between year one and year five, when in fact there was only a year one cash flow, 100,000. And you make the sum of the 20,000 yearly expenses in the income statement. After five years, we have spent as much cash as you incurred expenses in the income same. So you see that Cash and income or cash outflows and income expenses, they correlate over time. It has to otherwise, somebody is manipulating the financials of the company. And I'm trying to explain this and easy way to you. Alright? So another sets, and this is one of the reasons why a lot of people prefer to look at cashflows versus income. Same because income statement carry what is called non-cash items. A cost of depreciation or depreciation expense as when I was showing you here. That's a non-cash item. This is where you will see in fact, in most financial reports where when they look at the cash flow statement, they reconcile the income with the cash-flow and they add to it the non-cash items to make sure that both elements correlated together because financial statements have to correlate together. So when we look at the cashflow statements, so the cashflow statement has already said a couple of minutes ago, there are three main sections. The cashflow from operating activities, the cash flow from investing, and the cash flow from financing. The first, the very first thing to look into is the cash flow from operating activity because that's the operating cycle That's a core business of the company, is really how much cash has been generated on potentially lost through the operating cycle of the company, through the orbiting assets. This is what will come out in terms of cashflow from operating activity. Then you're going to have the investment cycle that's infected the flow number for how much are we in fact reinvesting into the business. But important here as well to say, in the investing activity, you may have as well, the company getting RID. So let's say selling off long term fixed assets, e.g. the company has ten manufacturing plants and decides to sell one of those ten manufacturing plants to a competitor, e.g. because they are going away from a certain market, That's something that is not part of the operating activity of the operating cashflow. That's something that would be part of the investing cycle and that's a divestments. So in the investing cash flow, you will see reinvesting into the business, expanding the amount of fixed assets, but also potentially divesting a long-term assets. That's something that you will see as well in the investing activity, cashflow, in the cash flow from financing, if you remember the froze 5.6. So how much is going back to the Dr. is and how much is going back to the shareholders here again, very important. It's not just an outflow that can happen. You may also have inflows of adapts and you may have inflows of fresh capital. When do we have inflows of depth? When the company during the operating or let's say during the reporting period that you're analyzing, went to the bank and ask for a new loan or the company raised money through a new corporate dept instruments. This is where the money, there will be an inflow of money. That's something that you will see in the financing activity as well. With shareholders the same, maybe the company management because they are preparing a big acquisition is going to the shareholders and not to the bank. He's saying, I need supplemental capital to acquire this competitor. Are you willing to sell us to give me more capital? This is where in the financing activity casual you're going to see an inflow potentially as well, not just outflows, but also inflows of capital. That's something that you will also see in the financing activity. Let me give you a very concrete example. Here you have the Mercedes cashflow statements. So you have on the upper, on the upper part, you see that the company in 2020 has generated a profit before income taxes of 6,000,000,339. There you see the precision that is added back because that's a non-cash item. Then there are, let's say, changes in working capital that are also, they are to correlate, let's say, the movements between income and cash flow. And then you see in fact that the cash provided by operating activities has been 22 dots, 332 billion from our citizen 2020. That's action. That's the operating you see it says cash provided by operating activities. Then you see in section number two, the cash used for investing activities. You see e.g. that they have added property, plant and equipment, so they have probably added a the officers are manufacturing plants. They have added intangible assets. So probably they have a board, trademarks, patents, competitors, those kind of things. So you see that the cash used for investing activities in the case of Mercedes is a negative number of six minus six dots for €21 billion. So they have in fact spent, that's the flow number four. They have spent six dot for €21 billion in flow number four. Now how does it work with the financing cashflow? So you see in fact that they have in fact spent. 10,000,000,747. That's the last line in the frame number three on the right-hand side. And in fact, there is something very specific for Mercedes. They are also playing the role of a bank for in order to finance the purchase of cars to their customers. So that's why you're going to see a lot of movements in terms of financing activities. You will see as well, dividends have been paid out to the shareholders and to non-controlling interests. You see here it's 963 negative so -963 million of share of dividends that have been paid to the shareholders, and €282 million of dividends that have been paid to non-controlling interests. So net-net the company. So Mercedes has spent standard 7 billion in terms of financing activity. So they have in fact spend more than, they did not have a positive number. If the number would have been positive or they would have an inflow of cash coming from financing sources. What is interesting as well to know we're going to look into Kellogg's later on, is that you will see that in IFRS and US GAAP and I will explain this in a couple of slides. The order of the balance sheet is in fact reverse. It's flipped. While on the cashflows dividend income seminary, you're looking in IFRS report or US GAAP. It's the same order. It's operating cashflow, it's investing cashflow and its financing cashflow. Alright, and on thing also as well that you need to know is that the three statements are linked together. So remember the balance sheet is showing the accumulation of wealth since inception. So since they won of the company and the income and cash flow statement are showing the results of performance of the company. That is in terms of cash collection or cash in and outflows versus economic activity. That's the income statement over a period of time. Week, a month, a quarter, or a semester, or a year typically. I mean, when I read the financial reports, it's typically quarterly and annual. Mean. You don't see reporting periods of a month or 27 days. I know it's interesting in here, I'm trying to make it simple for you through these color codes is that I mean, at the very end of the day, the balance of the cashflow statement is reflected in the balance sheets as cash and cash equivalents. So you see in fact that the 23 billion, €48 million of cash, which is the final position 2020 of the cashflow statement is reflected in the balance sheet in terms of cash and cash equivalents, that's the flow number one. If you look at the earnings, the earnings that's a little bit more complex. If the company has generated if this photo zeros 09000000000 or more. I mean, if you remove the non-controlling interests, three dots 627, I'm speaking about flow number two. You will not see that number, the three dots 627 in the balance sheet. Why? Just think about it. What I said about the balance sheet. The balance sheet is the accumulation of wealth since day one. The income statement here is showing you the profit that the company generates in the year 2020. This will ads in fact to what is called the retained earnings and the balance sheet. And here you see when you follow number, when you follow the flow number two to the left, the company has 47 billion, €111 million of retained earnings. So the retained earnings, if the company is making profit year over year, it will adds up to those retained earnings. So the company is what is called the book value or the equity value of the company will grow because the company is in fact adding profits year over year to the retained earnings. And if the company is writing a loss, maybe in 2021, e.g. you will have a negative figure on the income statement and the balance sheet. The retained earnings, it will be 47 billion, €111 million, minus then the result of 2021 21 figure would have been negative. So then in the cashflow statement as well as said earlier, we need to reconcile the cash items within non-cash items. So incomes in and cashflow have to be reconciled together. And this one I'm showing you here in flow number three, where you see the profit before income taxes, which is 6,000,000,239, appears as the first line in the cashflow. Same on the right-hand side, if you look at bullet point number three on the right-hand side, you see that it starts from there. And then the first thing that is done in order to calculate the operating cash flow. And Mercedes and any company is adding, reconciling the non-cash items with the profit that is coming from the income statement in order then to show a cash position. And the first cash position being shown is the balance of the operating activities, which is a cash flow from operating activities. For Kellogg's, is the same, same logic. So the cash and cash equivalents, it's the end position at the end of the last period that I'm looking here, it's 135 million out of 135. They are shown in the balance sheet. You see that in bullet point number two, we have, in fact, the company has been writing a profit of $1,264,000,000 in the year 2020. This adds up to the retained earnings. So it adds up to now the company has 8,000,000,326 of retained earnings. And you see as well that, that profit is actually the starting line of the cashflow. And then you see that the first line after that or adjustments to reconcile net income to operating cashflows. So those are the non-cash items that have b have to be reconciled, e.g. the non-cash expense of the Mercedes car where we are incurring a €20,000, $20,000. 7. Investor relations & annual reports: Alright, in Leicester as last lecture in the chapter number one about understanding the key concepts. And in this last lecture I will just very small one, explain to you where to find the financial reports of the company that you're interested in. So the first thing, I mean, coming back and we will be discussing this again in the mindset. But remember what Charlie Munger was also saying is that it's also very investors. You need to act as business owners even though you only own, even though you only own zero.00 00, 1% of the total amount of shares. What I want you is that you really think as being a shell of that company that you like the business. And in order to act as a business owner, you would need in fact to review and you should use shell review on a quarterly basis, the latest financial reports of your company. How can you do that? Well, you can reduce it to the investor relations website. I mean, we are speaking about publicly listed companies. They all have Investor Relations website where you can register as a shareholder or not. You will get automatic notifications in your inbox when the latest financial report is out, e.g. so that's the first thing I recommend you to do in a very concrete way. The second thing is you need also to understand what type of notifications of events can happen in the company. And if they have to be, let's say, transmitted, communicated to the shareholders. So the first thing is, of course, depending on the country that you're in. But I will start with US regulations. So the US companies that are publicly listed are in fact regulated by the Securities and Exchange Commission is called the SEC. The Securities and Exchange Commission mandates and makes it mandatory for publicly listed companies that in specific events, they have to do reports. The first thing is at quarterly closing, US companies are obliged to publish what is called Ten Q report. It's a report that shows the financial performance of the last quarter and it includes the balance sheet, the income statement, the cash flow statement, and the nodes that explain the various positions in the financial statements. What you need to know as well is that a ten Q2 report, quarterly report is unaudited, so there will not be an axon statutory auditor that will confirm the figures. It's purely based on management's signing off and the board of directors signing of those figures. And then once per year, at least in the US, the company has to file what is called a ten K report. That's the annual report. And that report is also in this time is audited by the external statutory auditors. So you're going to have typically like KPMG, Price Water House, Ernst and Young, Deloitte, et cetera. Those big companies video that will in fact will certify the numbers that the company is providing in the report with some reserves, of course, because they are having a limited amount of time to certify the numbers, but there was always an amount of risk. We will be discussing fraud later on. It may happen as well that the company has unscheduled, substantial, and very important, whereas caught material events there, e.g. the company has to provide an eight K report. They cannot wait for the next quarter to disclose it. They have a certain delay in terms of timing to do that. So for me, in the attitude of a value investor is the minimum I'm expecting from you is that you, if it is a US company, that you read those quarterly reports and the annual report, of course, the most important one unreliable one would be the one that will be audited. But it's important that you build up this discipline of going every quarter into the financial reports and just getting yourself knowledgeable of what has happened. Quarter over quarter. If you are having, if you're investing into other countries like Europe, there's a little bit different. So the company is obliged, if I look at German and French markets on a semester basis to provide a full report on an annual, Of course, an auditor's reports and for the quarters in-between. So the first quartile and the third quarter in Europe, at least if I take the example of France and Germany, I'm unsure about Spain. That's the company has to provide a sales update, but it will not be as in-depth like a ten q report in the US. But again, I mean, I've also invested our family money into European company. So I go into those even sales updates and get myself a little bit knowledgeable, but you will not have the income cashflow statement and balance sheet. So you will have to wait every six months to see this. Alright, so if you're interested in going deeper, I mean, I was speaking about the eight k forms which are really linked to special events that cannot wait the next quarterly report that have to be disclosed. I mean, there are different type of events like changes in the board of directors. You may have e.g. changes in ownership of the company, big shareholder selling steak and a new big shallow coming in. So there are some elements and you can look this up for yourself. Where or what kind of events in fact trigger those intermediate reports that cannot wait for the quarterly reports. I think what is important and I was showing you this this first page. You see it's here. It's an eight K reports to eight K. It's a special events that cannot wait the next quarterly, let's say disclosure. So here it was departure of directors, e.g. that happens for McDonald's. On the ten q, ten k. You're going to see the first page that will be pretty similar. But then the content of course, will be not linked to specific events, but it will billing e.g. with the financial reports either unaudited, are audited, but really practice your eye, just read those forms at 10:10 k8k reports for the companies that you like. I mean, it's not rocket science. You don't need a PhD for doing this. But I think it will ease the way and it will make you become a better investor or by practicing your eye at least on the companies that you're interested in by reading those financial reports, then as well as something that you need to know. And I'm just adding this as the last example in terms of reports, at least for the US, because this is also something that is often discussed. I'm always interested and a lot of people are always interested to know what are the movements of Warren Buffett because Warren Buffett's company, Berkshire Hathaway. They, I mean, a lot of the money that they manage is money that is coming from external investors. And the rule in fighting the US is that institutional investment managers, so companies are asset managers that own more than 100 million. They are obliged by the SEC, the Securities and Exchange Commission, to report their holdings at least 45 days after the closing of the previous quarter. So Warren Buffett in fact, has to disclose a Berkshire Hathaway has to disclose 45 days after the closing of the last quarter. So typically, it would be like if the quarter ends March 31st on May 15th, they are obliged latest to publish the movements between what happened between Q4 of the year before and now one of the after that's monitor. And you can, and that's very interesting to see what the movements in fact are. You not only have this for Berkshire Hathaway, you have this for other companies are big investors that have more than 100 million of assets under management. Alright? So wrapping up here, the first chapter, I mean, we, I hope that you understood the reasoning behind making you knowledgeable and aware about those fundamental concepts. It is the change of value of money over time. This value creation cycle that we have between the sources of capital can be debt and equity versus the trends transforming that capital into assets. The risk adjusted return or reward that you can expect depending on the type of vehicle investment closet you investing into. Also the different types of investment styles and exists as I said. So I hope that you understand what is now a value invest and what my style of investing is. Also the different types of shares that we have been discussing that you get no self knowledge. But then at the very end, I had to go into showing you how those cycles, 345.6, how are they do appear in the balance sheet, income statement and cashflow statement. I think that's really the minimum that you need to know in terms of financial report to be able to extract. And we will be practicing this a lot in order to extract a couple of figures of those financial reports because we will need them to calculate the intrinsic value of a company. And the last lecture was indeed about telling you where to find the reports of the company. And yeah, do go on the investor relations site, google it up or bring it up and maybe subscribe to the automatic newsletter of the companies that you're interested in. If the company has an investor relations website and newsletter. Alright, closing chapter number one here. And in the next chapter we will be discussing about the mindset. Before then we really go into the technical details of the level 12.3 tests. Thanks for tuning in. Oh. 8. Circle of competence & investment universe: All right, welcome back investors. So we have finished Chapter number one where I tried to share the main fundamentals to be able to think as a value investor. And specifically more let's say technical terms of financial related terms. As we have been discussing, Chapter number one. Alright, chapter number two, and I know that you are keen to go into Chapter number three to do the level one tears and understand how to select, let's say companies that you, first of all, that you like, but secondly that you try to calculate its intrinsic value and hopefully find out that the company is cheap. In fact, while at the same time having solid fundamentals. But before doing that, please be a little bit patient. Chapter number two will be a quick one, but I think it's really essential that you go through Chapter number two. And the reason for that is I want really to teach you if you allow me to say with lot of humility. Also the mindset that value investors need to have is not just about technicalities. Understanding how money works on listening, how inflation works, understanding how the value creation cycle of a company works, on knowing which test to do and which methods to use to do the intrinsic value calculation. There's something more. It's really how you behave as a value investor. When you are thinking about putting your money, your husband's money, your wives money, your family's money, your kids money into the stock market. And for me, it's really essential, I'm sharing this with you. So the first thing in the mindset that we're gonna be discussing, and in fact, if you have listening correctly, you already have heard that I was speaking about the circle of competence or the end or the investment universe when I was speaking about the different investment styles. But let me just repeat what I was saying there. So the circle of competence is something that I learned from Warren Buffett's, where I'm, let's say, stating that you cannot be good at everything. If it is, I mean, in your business life, in your professional life, maybe you're having some hobbies, some spores, you cannot be good at everything. One thing that I've learned from Warren Buffett is really to stay away and to refrain from investing into if it is companies, industries, geographies that I do not understand. So if you recall a couple of lessons ago, I was mentioning that well, first of all, I'm a value investor. I only invest into stocks. I only invest into large cap, omega cap companies. And so you hear through that there are already some kind of segmentation attributes. I'm not a growth stock investor. That would be one of the segmentation attributes. So not later than a couple of weeks ago, I was asked for an American platform to do a podcast on how to value Spotify as a growth stock. But I mean, even though I love the brand Spotify, we use Spotify at home. It's a growth, so it's not a value stock for me at least today. So I would refrain from investing into Spotify the capitalization size. We already discussed it. So I personally only invest into large-cap, mid-cap companies. You have very successful value investors that invest into smaller cap companies as well. But again, that's something that you have to decide for yourself. What are the type of stocks that you invest into? What is the capitalization size that you invest into? Because small cap. And why is this important? If you take the example of the capitalization size attribute small-cap companies, they have maybe one analyst, if any analysts that is covering them from a reporting perspective, analyzing the financials, etc. When you look at large-cap, mid-cap companies, you're going to have at least 40, 50 financial analysts that we'll be looking at that company. The companies have a lot of exposure. So the pressure also on management is in fact different. For me. I mean, I like large cap and mega cap companies because of the strength of the brand. Or we will be discussing that later on and I think I will already be introducing it in a couple of minutes. Then the industry vertical or sub vertical. So what do we mean by industry is really, let's say a segment of, let's say business activities. That in my opinion, you need to understand. I mean, I I think I like cars. So since many, many years, I have invested into automotive industry. I have Mercedes, I have currently still entities as well in my portfolio. I had forwarded my portfolio couple of years ago. I do not invest into farmer, I do not invest into biotech, I do not invest into banking, and I do not invest into insurance. I do not understand those businesses. I've never worked in those businesses. So I tend not to. I mean, I really refrained from investing. I never invested into any of those companies. Telecommunications. I'm initially many, many, many years ago. I mean, I have a tech background. So if it is IT telecommunications? Technology in journal I breathe at something. I do understand. It doesn't mean that because I understand it. As I spent, let's say two decades in that business area that I would predict that invest into it. But nonetheless, that would be at least not something I would exclude if there would be a good value large cabinet. I kept opportunity in tech industry that are potentially would invest in June. There are many other industries. Mining, you have no chemical industry, those kind of things. And of course sometimes the industry is reflected as well through some indexes. So if you take e.g. the Dow Jones, I mean, that's more, let's say a traditional kind of business activities. The companies that are part of the Dow Jones, we look at the S&P 500, that's more, let's say a more tech focused industry makes it you will find also in, through an index as a PDF download. And if you're interested, you're going to find in fact, a lot of indexes like BlackRock has in excess or trackers or ETF, whatever you call them, that some value focus, other ones, attack focus, other ones are pharma focused. So you're going to find also indexes where in fact those brokers are making you are asset managers are making you those kind of indexes available. Specifically. I mean, they, they tried to, let's say, personalize it closest to your investment style in fact, but do not forget that indexes, they will never outperform the S&P 500 overall market index. And if you wanna be better, if you have higher returns than average, you need to do something as and that's why I'm sharing with you how to do value investing in fact, and this is basically what Warren Buffett has been doing. Remember his track record or trolley Mongo, Peter Lynch, also one of the segmentation attributes that you can have a geographical markets. So e.g. for me personally, I only invest in US, in Europe. I looked at three companies on the Japanese market but decided not to invest into. There was a telecommunication company called NTT. I even think I have a YouTube video about NTT, Nintendo and Sony. Those were the three that I looked into, but at the very end of the day, I did not decide to invest. Japan would be a market that I would feel comfortable in the sense that I don't think that the government would, let's say, do stupid things towards investors. So I could imagine if there would be another opportunity that I would invest into Japan. And I do monitor as part of my portfolio of my investment universe. I have some **** Japanese brands that are part of my investment universe that I've monitor. Of course, timing has to be right, that I get those companies that are very cheap price. China is also, of course, a very interesting market. And you have other emerging markets like India, et cetera. I mean, maybe you are knowledgeable about these markets. I'm not to be very honest. And so with all due respect for the Chinese government, I think they have made a lot of, let's say, improvements to satisfy as well foreign investors. I nonetheless believe with all due respect for them, that what they did for a grand day when there was a real estate bubble going on in China a couple of years ago. And then that company decided in fact, only to reimburse local depth total of Chinese dept herbals and that foreign debt holders would not be reimbursed at least not immediately. That's the kind of thing that I believe does not create trust. But there are very interesting companies in China like Alibaba, tense and etc. Baidu. So I mean, you have some interesting companies in China as well. But again, I do not feel comfortable today to invest into China, but it may change in the future. But for the time being, my three geographical markets, I would potentially consider investing is Europe, US. So I have a mix between the two and then Japan. In terms of instruments, as already said, I only invest into stocks. I don't trade. I mean, I don't not invest into derivatives even though I believe that doing derivatives, trading, nothing on commodities, nothing on foreign exchange, those kind of things. So it's purely stocks that I invest into. So I think what is important is that you need to make yourself comfortable with what are your attributes, what is your investment style? Here I'm sharing with you how I have defined my investment universe and we will discuss later on, I think it's when we will be discussing level of three tasks, but also in level one when we will be discussing about the financial powerhouse, I will introduce the concept as well of the modes and already in fact introduced it a couple of lessons ago. So I only invest into large brands. Of course, it's not just about investing into large brands. The fundamentals of financial fundamentals that I will be sharing with you in this training have to be, of course. Okay. And I, the market has to give me the company at 25 to 30% below safety margin, below its current intrinsic values. So with a safety margin of 25 to 30%, and I want to have a passive income dividend yield of something 5-7%. Of course that my timing has to be right. I will share with you later on how my portfolio looks like and also you can monitor the kind of investments that I'm doing because I have seen a lot of people that are speaking about value investing and they always make like a mystery of what they invest into. So I also, when I wanted to share this with you and with all the people that are interested in value investing. And I started doing this like four years ago. I mean, I consider that I need to be transparent about what do I invest into solar cell is around how to be able to monitor as well, even though I'm not obliged to follow the three-and-a-half reporting principles as I don't have 100 million of assets under management. But, um, I wanted to be transparent about that. So going back to my investment universe is what is those 200 mega and large cap companies that you will find through, Let's say, marketing agencies that are specialized in doing the evaluation of those brands. And we're going to be reusing this later on when we will be speaking about adjusted book value. So adjusting the book value of the company when we will be looking at the brand value of the company, which is an intangible asset sitting in the balance sheet of the company. So that's my investment universe. So I mean, I love the entire brands marketing agency. They are specialized in brand valuation and every year they come up with a top 100 brands in the world and the movements, and they also provide the valuation of the brand. So that's really something I like. And again, when I speak about investment universe, it's my first filter. It's the companies that potentially I could consider investing into if the financials are okay. And of course, then I have other attributes, the geography, the industry. So in the top 100 you're going to see very probably some banks you're going to see like Visa, American Express. I would not invest into those companies and maybe those companies are great. I do know that Warren Buffett has been very successful, I think wasn't with American Express MasterCard, If I'm not mistaken. So again, it does not mean because this is my investment universe. That's per default. I would invest into all of those companies. So the first thing is, This is like the scope that I monitor. And there's gonna be a lecture in, I think it's in the appendix where I'm showing you how I do this, narrowing down this filtering from a very broad investment universe monitoring of, let's say, 200 large brands in the world, which is more or less the kind of companies I'm looking into. Then I filter on industries that I understand. So you have understood that pharma, biotech, banking, insurance or excluded per default for me, at least maybe for you, you're going to be very successful in it. Then I look into the fundamentals and then I narrow down and maybe the moment I have cash available, there are only two or three companies that match all the criteria that will teach you later on in the upcoming chapters with a level 12.3 tests. But this is again, this is not rocket science. I mean, this information is publicly available. I like Interbrand, but you have other ones like brand z or this kind of, let's say marketing agencies that provide, you can just Google up or being like, who are the top 100 brands in the world and you will find those kind of things as well. But for me, into brands, I mean, since many, many, many years, I really like what they do and it is very precise. I like the quality of how they do the valuation of those companies. Alright? So, which means that if I'm coming back to this risk reward charts or function that we were discussing a little bit earlier, a couple of lessons ago. So you now understand that my investment, let's say universe is only Europe and US for the time being, maybe a couple of brands in Japan, but I did not have the opportunity so far to invest money into Japan. And you see that it's only large cap public stocks. So I'm not investing too small cap but assets, you have some value investors have been extremely successful at investing into small cap companies. It's not my thing I really like to have for the reasons of profitability, pricing, power modes, switching costs. I really liked invest into those very, very strong brands. Alright, so that's about the investment universe. And in the next lecture we'll be discussing about the five core habits. Thank you. 9. The 5 core habits: Writing that's there as we continue in Chapter number two in the mindset. It's a quick chapter before we go into the technical tests in the next one. So after having shared with you the how to define your investment universe with the various attributes that are linked to you invest in universal circle of competence. I want to share with you the five core habits that van and vessels need to have. But then on finalizing before then finalizing the chapter with the sixth habit, which is Warren Buffett in fact, specific habits. So what I tried to summarize here is really the, the mindset, the attributes, even the values that you have to follow as a value investor. And of course, the link to your personality, how you are. And I'm showing you with you more than 20 years of experience where I have invested myself more than €1 million. I have attended university courses on value investing, also, talking to other value investors, participate in conferences, exchange also with other professional investors. And I was able to observe different behaviors and also people that came to me asking for financial valuation of a company or people that came to me to get one-on-one trainings on value investing because they lost their shirt. So I try really to summarize what I believe. And it's also around Buffalo and Chennai manga share rather the traits, personality traits that you need to have to be good or to become a good value investor. The first one is courage. And it's not necessarily something that's Warren Buffett has spoken about, but something that I have, I have very clear opinion about it because I am very beginning in fact, when I was teaching value investing, I had people that told me, Yeah, but you know, candy, I also do this and have virtual portfolio and execute virtual, virtual purchases. Now I believe that that's not the right attitude to have. Of course, putting your money into, let's say a stock investment, it requires courage. I mean, you have probably spent a lot of time earning that money. Maybe it's as I said, your partners money, your kids money, your family's money. But I believe it's really important that you do not play with virtual portfolios, but you really execute real transactions on the stock markets. Of course, maybe start small, get yourself, let's say knowledgeable. Get yourself comfortable about doing this. I mean, I have my salad. I've been teaching this now for many, many years. If I look at one of my best friends, he started with, let's say $5,000. I think it was for his first investment because he was really, really, really afraid and freaking out about losing that money. And what would his wife say if something happened? And today, in fact, after a couple of years, he recognized that it works and he really feels much more comfortable investing into the stock market because he follows a certain set of rules for the time being has not been wiped out because he's not speculating, but it requires courage. I mean, I fully understand that I fully get it. But I really recommend you to start small if you are afraid. I was afraid when I started more than 20 years ago because it's real money. It's, you're not playing with virtual money, but you need to push the button and you're going to feel the pressure of pushing the button. It is on your bank broker and really becoming a shareholder even though a very small shareholder by shareholder of a e.g. big company, if I look at the companies that I invest into. So that's the first cohabit that you need to develop as a value investor. The second one is being humble. I mean, an even think that men tend to brag much more than women. Generally speaking, if you allow me to say like this, and it's of course, easy to brag when your financial performance goes through the roof. I mean, sometimes it's just pure luck. And I like, I took care of statements from Jeff Bezos, the former CEO of Amazon. And he was giving a speech at the Economic Club in Washington DC where he said, in fact, quotes, when the stock is up 30% in a month, don't feel 30% smarter because when the stock is down 30% in mind, it's not going to feel so good to fill 30% Dumber. So I mean, I mean, if you understand what he means by that is, I mean, value investors should be humbled. And you should absolutely also feel fine if other people are apparent apparently making more money than you, they brag about it. That's okay. I can live with it. It's not a competition against other investors because that would create risk. Just making sure that the money that we have earned as a family is creating this compounding effect as I've been teaching you a couple of lessons ago already. So that's the second trait or the second habits to develop is really being humble about the investments that you're doing. The third one is zero leverage. I mean, I had myself I think it was like 23 years ago, three years ago it was it was pre-COVID periods. I hadn't invested from the US. It came to me and he said, Listen, Kenny, I mean, I want you to teach me one-on-one value investment because I, in fact, I did stupid mistakes putting our family money into the stock markets. And in fact, I lost my shirts, so he was not totally wiped out, but he lost big amounts of money. And he said, I mean, I need to do something else. I have to stop looking at those, let's say technical grubs and trying to predict from the technical graph what is going on, et cetera. That was the reason he came to me and said, okay, I mean, I'm of course I'm fine to teach you at least or to share is how I do it. I'm not sure if that's something that's at the very end he has continued, but he wanted for sure to have a different perspective on investing. And I'm saying on investing and not speculating on the stock market. So zero leverage is something where it's extremely risky because if you're losing money and on top of that, it's not your money. I mean, somebody will come like typically a bank and we'll claim, of course, that you have to reimburse that money. And you have people and even for myself and I've been discussing this with my wife a lot. It would feel easy after more than 20 years and I think we are, I mean, not too bad in terms of performance after 20 years and money is still around and we are living today from the money that we have earned. And we are living today from the passive income of all our investments. And I believe that of course the thoughts is when you are, okay in terms of performance is you want to accelerate, you want to always have more. There is the risk that you become over comfortable and you would start borrowing money from the bank to invest into the stock market. It's definitely something I do not do and it's very clearly something I do not recommend because that really increases the amount of risks that you're taking. So for me is you should only invest money into the stock market that you really own, period. That's it for stop. I think it's very clear and I don't want you to be wiped out because they have been borrowing too much money, hoping that the stock market would go up and the market goes down, so you cannot sell those assets. But in the meantime, you need to reimburse the money that you have borrowed from the bank. Be attentive on. For me, it's very clear, no depth and zero leverage discipline. I mean, that's also very important. I mean, we've been discussing about the investment universe that's already developing this investment universe. It's a discipline knowing which geographies you're not investing into its discipline, knowing which industries you are investing, respectively, not investing into it, That's discipline as well and sticking to that, of course, you can learn new, let's say industries, but it takes some time, it will not come tomorrow, e.g. so really having this characteristic of being disciplined in the way how you invest and this is what I will try to share with you through the level one, level two, level three tasks is explicitly doing those tasks. And if the test or not are the results of the test or not, okay, do not invest. Or if you really invest, then you really have to have a good argument why you have decided to invest. But really for me and you're going to see this in the upcoming chapter as well. We will develop the level one, level two, level three tasks that aren't really tried to stick extremely. I mean, with a lot of strengths to the test that I have developed and making sure that if I, if one of the companies I'm investing into hands e.g. too much in depth or is not paying me out enough. Let's say passive income are the company. I don't know. It's just having no margin of safety on the current price I'm getting from the market, I'm staying away from it. So really develop this mindset of being disciplines. I will give you a set of rules and of course you can adapt those rules according how you feel comfortable. But again, for me, it's important that if you have defined this set of rules and investment universe is one of them, but the technical tells that we will develop in the upcoming chapters. Upcoming chapters will be also part of that set of rules. Please stick to those rules. And of course you can make them evolve those rules, but it requires learning and we will be discussing this as the sixth Habit. Patients. That's a very specifically for value investors. I think that's one of the most important attributes that you need to have, is really having the capacity to buy companies when the market is depressed in fact, and sticking to those companies and even potentially buying more of those companies when the market is really getting very, very depressed, it happens. And I will share with you in the upcoming minutes, that's a bear markets and market corrections. They happen all the time. They happen every two years you're going to have a market correction. So that's minus ten per cent. And every four years in average since the last century, you're going to have a bad market that's at least a correction of -20%. So of course, I mean, if you don't have the discipline and you don't have a set of rules and you do not know why you have put your money into a company. Of course, you will become, you will develop very strong fear because you have been speculating. But if you have a set of rules and the company financials are sounds, and you have followed that set of rules. Of course it will take some time, maybe that the market comes back, but the market will eventually come back. So they're really patients is really, really required. And it may happen that your portfolio goes down by 50 per cent, e.g. so that's happens. But at the same time, and we will discuss that later on. If you have been compounding dividends on those investments because the company, even though the market is going down, the company is able to continue paying out dividends. Those dividends, cumulative dividends are also protecting you from those markets are corrections as well on your portfolio. But we will discuss about passive income and dividends later on. So here mean when you look at the five attributes or courage, humility, zero leverage, discipline, and patience. I mean, in the element of patients, there is one external factor that you cannot control, which is something that Benjamin Graham calls Mr. Market and Warren Buffett also calls. That's, let's say persona could have been Mrs. market, but it's Mr. Market. So it's like an, an allegory that has been created by Benjamin Graham. And of the '40s in his book, Intelligent Investor. When in fact he tries to make the market fluctuations, let's say correlates with human behavior. And he's actually saying that Mr. Market is often identified as having human behaviour of a manic depressive or manic depressive characteristics are sometimes Mr. Market is super-excited and sometimes miss the market is really, really, really depressed. So Benjamin Graham, already before Warren Buffett, has been describing this a market. With that Mr. Market has irrational traits of personality. And this then of course, applies to stock market fluctuations. And also people then have some kind of group thinking about when the market gets depressed, the first wave of people start to sell that, and the second wave of people that were about to sell see the first people, the first wave of people selling, they do the same. And if everybody has his group thinking, that's potentially a fantastic opportunity for you to buy chip companies because everybody is selling. And I'm going to explain to you how to monitor this because it is happening every two years, at least since the last century, you have those corrections. So assets, the Benjamin Graham was explained that Mr. Market is emotional, is euphoric, sometime is very moody, is often irrational. I mean, you, you will read a lot about academics who believe they speak about the theoretical models of market efficiency. That markets everybody has the same level of inflammation and that markets are efficient. So there is no opportunity to buy, in fact, companies below the intrinsic value. And I promise you with all due respect, that's ********. So it's not true. I mean, just look at history, just look at, and I will share with you some graphs. Just look at what happens during the COVID, just look at what happened since last year. Of course, those are unfortunate events between them. What is going on between Ukraine and Russia without going into the politics between those two countries here. But just from an investment perspective, sorry, but the market became irrational and that's great opportunities for you to buy fantastic companies at cheaper prices. And I promise you, I have been doing this. Just go on my website and you're going to see how I've been investing as well through those downturns of the market. So a disciplined investor understands this and is able to just follow his or her rules about how to do the intrinsic valuing, evaluation or calculation of a company. And then sees that the market is potentially giving the company Y at 25 to 30%. And they're really patient, is one of the most important virtues and attributes that you have to have when dealing with Mr. markets. It is like this. You cannot change it. And I think it's very important that you understand and with all due respect for all the economic people that are coming up with very complicated theory is about market efficiency. Markets are not efficient. You're gonna have those external shocks. As e.g. it wasn't an interview from a US Federal Reserve person three months, four months ago. That actually was saying, we have a lot of compute power to try to mobilize the market movements, macroeconomic movements, etc. But there is one thing, and the guy was stating that there is one thing that we cannot model or the external shocks. And those shocks cannot be predicted. And this is what I will try to share with you as well through another video, which is a video of Peter Lynch and what is very interesting, and it's a video, I mean, I've put the URL on YouTube here, but I really want you to listen into it. It's a lecture that he gave 1994, so that's 30 years ago and he has been a very successful investor where already then he was explaining or sharing his perspective about a market predictability. So please listen into the video of Peter Lynch. So the portion that is interesting is between the minutes. So starting after 15 min 4 s up to 18, 50. So listening and then I'll come back. People get too carried away. First of all, they try to predict the stock market. That is a total waste of time. No one to predict the stock market. They try to predict the interest rates. I mean, this is it. If any real interest rates, right, three times in a row, that'd be a billionaire. It's saying there's not that many billionaires on the planet. It's very logic site a syllogism in the study of these one as a Boston College. They can't be that many people to convict interest rates because it'd be lots of billionaires. And no one can predict the economy. I love you in this room were around in 1980, 1.82 when we get to 20% prime rate with double-digit inflation, double-digit unemployment. I don't remember anybody telling me in 1981 about it. I didn't read I started all this up. I don't remember anybody tell me the worst recession since the depression. So what I'm trying to tell you, it'd be very useful to know what the sarcomere is gonna do. It'd be terrific to know that the Dow Jones average year from now would be x. We're going to have a full-scale recession or interest rate is going to be 12%. That's useful stuff. You'd never know it though. You just don't get to learn it. So I've always said if you spend 14 min a year and economics, you've wasted 12 min. And I, I really believe that now I have to be IP fair. I'm talking about economics and the broad scale predicting the downturn for next year or the upturn or M1 and M2, C3b and all these, all these M's. I'm talking about economics to me is when you talk about scrap prices. When I own a lot of stocks, I want to know what's happening. Used car prices. When used car prices going up, it's a very good indicator. When I want hotel stocks, I went to a hotel occupancy. Chemical stocks, I know it's half the price of ethylene. These are facts. If alumina inventories go down five straight months, that's relevant. I can deal with that home affordability. I want to know about my own Fannie Mae, where I own housing stock. These are facts, their economic facts in this economic predictions, and economic predictions are a total waste and interest rates. Alan Greenspan is a very honest guy. He would tell you that he can't predict interest rates. He could take with short rates are gonna do the next six months. Try and stick them on what the long-term rate of B3 years now, they'll say, I don't have any idea. How are you the investors supposed to take interest rates if they had a Federal Reserve can't do it. So I think that's what you should study history and histories. The important thing you learned from what you learned in history as the market goes down. It goes down a lot. The math is simple. It has been 93 years is century. This is easy to do. The markets had 50 declines of 10% ammonia. So 50 declines in 93 years. But once every two years the market falls 10%. We call that a correction. That means that's a euphemism for losing a lot of money rapidly. Correction and 50 declines in 93 years, about once every two years the market falls 10%. Of those 50 declines. 15, had been 25% or more. That's known as a bear market. We've had 15 declines in 93 years. So every six years the markets can have a 25% decline. That's all you need to know. You need to know the markets can go down sometimes. If you're not ready for that, you should own stocks. And it's good when it happens. If you'd like a socket 14, it goes to six. That's great. You understand the company, you look at the balance sheet and are doing fine. You're hoping to get to 22 with it. 14 to 22 is terrific. 6%, 22 is exceptional. You take advantage of these declines. They're going to happen. No one knows when they're going to happen. It'll be very people tell you about it after the fact that they predicted it, but they predicted at 53 times. And so you can take advantage of the volatile than the market if you understand what your own. Okay. So I mean, if you have listening to Peter Lynch and again, I mean, he was stating in 1994 and so you can look into I mean, he has retired in the meantime. I'm not even sure if he's still alive or not. But Simon, he has written a fantastic book about how to beat the market. But if you look at history, I mean, there are statistics out there for more than 100 years and we are now nearly at one-and-a-half centuries of statistics about market fluctuations and market movements. And I've put you the URL on multiple.com for the SAP 500s. When you look, I find this very interesting that the market has ups and downs all the time. I mean, if you look at 1920s, 1930s, you had a world war situations. The Great Depression that you had. You had the Cuban Missile Crisis, you had the oil price shocks. Or remember, I was very young kid where we had hyperinflation, e.g. and the bank savings account was giving you a like 12 per cent return. I mean, we had e.g. the year 2000s related tech bubble that burst. We had the Great Recession, subprime crisis. So if you're listening to Peter Lynch's saying that every two years is gonna be market correction. So that's 10% down on, let's say if you take an average index as a P5 hundred and every four years, there's gonna be a bear market in average. I mean, nobody can predict really be six years, but it'd be seven, will it be three? But those situations happen all the time. And what is interesting, and this is another grant that I took from Bloomberg in 2019, where in fact, when you buy it, some people are calling these buying the dip. Even though I always say, you cannot be perfect in terms of timing, because you cannot predict the markets. You cannot always buy really the bottom of the dip. But if you are buying in the dip and you're following your set of rules to do an intrinsic value calculation and you have a margin of safety, you will have maybe great passive income through dividends. The chances are high that at a certain moment in time, it will come back very strong and you're gonna be earning a lot of money. This is how it works, this is how it worked for our family as well. So this is really what I'm sharing with you here. And if we go beyond those grounds, I mean, the, the Schiller graphs that I have pure stopped thousand and ten. The Bloomberg chart stopped in 2019. What happened in, in after? And that's interesting because history has, the Peter Lynch story has repeated again, 2020 COVID crisis. Just look at the drops on the Dow Jones 30 and the SAP 500s, tremendous drops. But did I do? I followed my rules. I calculated the intrinsic value of this company and I bought a lot of those companies are really had cash available. So I bought lot of these companies for the companies I had invested into. Well, I have to be patient. Then what happened 2020 to just look at the curve. The curve came back from the COVID, It went actually pretty high. And then 2022, Ukraine, Russia, crisis situation, commodity problem, supply chain models. And so after a very euphoric, let's say post-COVID period, the market went down. We have now hyperinflation of very high inflation, at least in developed countries that do not know for emerging countries. The story again has repeated itself, again, a bear market. So Peter Lynch is absolutely right or he has been absolutely right. It's mentioning that every two years is going to be a market correction and referring there's gonna be a bear market. And the story continues. And there is no reason why the story shall not continue in the future. Alright, so let's wrap up here for the five core habits. I hope that you understood also, amongst those 45 cohabited, why? The fifth one, which is patients, is important that you understand how the market works. So let's now wrap up chapter number two and talk about the sixth habit. Thank you. 10. The 6th habit: Alright, value investors last lecture in chapter number two, which is after having discussed the investment universe and the five, Kochab is a value investors and also Mr. Market is the sixth habit and it's something that I learned from Warren Buffett in fact. So it's true that I like to read a lot, but what I did not realize many, many years ago is this compounding effect on, let's say, the learnings, the readings that you will have. Something that I learned by listening to into what Warren Buffett and Charlie Munger we're saying is that warren Buffett in fact spends a lot of time, around 80 per cent of his time. In fact, on an average day reading. So he just sits in his office and reads all day long. And he mentioned that he's reading a couple of hours, he reads corporate reports, he reads couple of newspapers as well. So he once said that it's around 500 pages per day that he reads. And this is how knowledge works. And it builds up like what he's quoting like compound interests. And I found this very interesting. And in fact, throughout the years I've been developing this trade as well are following what Warren Buffett was saying. I promised you indeed it works a lot. And I take those one very easy example just by regulatory reading corporate reports. I mean, the kind of thing that I do, I do get individual investors that reach out to me to do, I'll call it a financial analysis of financial assessment based on corporate reports. And not later than the last couple of months, I had companies that I've never heard about where investors were asking me, can you make a financial analysis of that company? I mean, the last example I had was a football club in the UK, which was a private equity investment. It was not even publicly listed where the financial reports were available. And the person asked me, can you tell me what the company is worth? And it's true that by having the opportunity to read a lot of corporate reports every year with all humility. I'm saying this it appears easy to meet to navigate through those corporate reports, but it's just the compounding effects. That's your brain actually develops. So I think it's, I'm fully with Warren Buffett's and until we are not substituted by artificial intelligence. I'm absolutely believe and support of what Warren Buffett has been defining and that's what I defined as the sixth habit, is really the continuous education and learning and reading and never stop reading, never stop learning. That's really, really something very important. When I look at myself, I've been reading more than 50 books on accounting, investing. I mean, I'm continuing to read a lot of books. I listen to all the Berkshire Hathaway annual shareholder podcast and that's I mean, that's a lot of time to do this because just one annual shareholder meetings like at least 3 h. And so that takes time. And what I said as well, I read every quarter the companies that have invested into at least I do read there ten q and then the annual ten K reports. And I always try to think, what can I do better in terms of methodology and e.g. here and this value investing calls as currently, I'm re-recording this course. We are in 2023 and the first version of the course came out August 2020. I've added e.g. when we speak about depth and solvency of the company, I've added, or let's say I have deepened one elements on that part of tasks, which is the interest coverage ratio. But we will discuss that later on in the level one test. So I'm always thinking about how can I improve things as well and of course, sharing it with you as well. So asset remember that the sixth cohabit is really continuous education, reading and learning. And a lot of people have also asked me, what are the type of books from the 50 plus books just on corporate finance and value, company valuation, value investing that I have read, which are the best ones, kind of. So I've put here a list of the six that I believe have, at least for me, a very important impact. So the order is not necessarily important here. So the first one was as what the modal run book on security analysis. I mean, he is greeted consider the Dean of valuation. He's teaching at Stern Business School at New York University. And he is for me one of my sources of inspiration how to do valuation of companies, e.g. I. Learned a lot through him about how to calculate the free cash flow to the firms, those kind of things. Peter Lynch, I mean, you already have listening to the video one Up on Wall Street. I think it's a great book, easy to read. I mean, again, it's not rocket science. It's such simple. Let's say methods are examples that he's speaking about. But it doesn't make so much sense when you're a value investor. Of course, the books from Benjamin Graham, I mean, I cannot repeat enough, wreath Intelligent Investor. It's true, maybe not all chapters are great to read. I'm not sure which which are the chapters, but do remember that two chapters, it's maybe 8.13 under a member, which are the ones that really are for me, the essential ones. But you're going to read the book, it's worth the investment. And I've been reading it a couple of times. Even sometimes just go back and reread the fundamentals from the Intelligent Investor security analysis, the gram dot book as well. University of Berkshire, Hathaway, Daniel pico and query ran and Warren Buffett and interpretation of financial statements from Mary buffet and David Clark. I actually have it here. I can show it to you. It's this one, Warren Buffett and interpretation of financial statements. And in fact, it's a book that I use a lot. You can see there are a lot of annotations in it. I use it lot to extract some tests that I found. And I'm speaking here about many, many years ago that I found interesting that allow me to go a little bit beyond how to mobilize a little bit those level one, level two tasks on top of the knowledge that I had already, let's say, taken in. And I felt that this book was pretty interesting on how to interpret financial statements as well. Because value investing is about understanding the fundamentals of a company and being able to value the assets that you are potentially willing to buy. So in terms of, let's say walkways, and while concluding this chapter, I think that the initial attitude that you need to have as a value investor is really that value investors have to think that they are owners of the companies. So they own a part of the company they have invested into, act as a business owner. I mean, if you would have unlimited firepower, if you would have unlimited resources, would you buy the whole company and not just putting in maybe 5,000, 50,000, 500,000, $5 million. Also, do not forget that investing into the stock market is always a zero. It's a net-net game. So if you earn $100 or somebody else has lost $100 and vice versa. And I'm always saying that Mr. markets, while Mr. Market has his traits of personality, Mr. Market is there to serve you. I mean, after many decades now of investing into the stock market, I of course, it's always, still scares me a little bit when I see like the market is going down by 30, 40 per cent, it's like, oh my god. But nonetheless, I've developed the attitude of, oh, that's a great opportunity. I'm happy when markets go down as well. Because I can, if I have cash available, I can buy those great companies at cheaper prices. So keep this in mind and try to develop this initial attitude as a value investor. What Warren Buffett's advice, this is the following. Rule number one, never lose money and rule number two, never forget rule number one. So he also said that if you cannot accept, your position is going down by 50 per cent during a bear market. And if you don't have the stomach to stick to your position, then potentially just stay away from investing. And if you still want to invest, invest into an S&P 500 index. But if you really, if those kind of situations stress, you really keep away from really pushing the button. Maybe then you better have, your will be better around playing with virtual portfolios, Even though you will not become wealthy with that. But really that's the kind of thing. And here again, I mean, through this sentence what Warren Buffett is saying, if you have strict rules and I will try to give you already the first set of rules. If you have, if you are following strictly those set of rules, you will see that you will not lose your shirt. Of course, if you become a little bit more flexible on those rules while you're taking more risks. And this is where potentially you will get wiped out. So even Warren Buffett has been hit by unexpected events, I think was the Kraft Heinz cooperation that he had invested heavily into. And, and even though it was a good investments, it they had to restate the area of financial three years of financial statements because I will not say that there was fraud, but the financial statements were a little bit over estimated. So they had really to restate the financial reports. We can imagine what then happens is drop in the stock market and even think that management has to be replaced because trust was lost at that moment in time and the share price dropped from 48.5 to 27, 40, and it's slashed like more than 40% of the company's market capitalization. So that may happen. But of course, I mean you rely on external and we rely as when investors as well on Excel and statutory auditors for those companies, that this kind of situation does not happen. Even Warren Buffett was not aware that the financial statements were inaccurate. So if I summarize before we go into the next chapter, as is really with the right attitude, value investing appears very simple and easy to do, but you need to have a set of rules. You need to define what is your competence circle, what is the investment universe, but by following those rules and maybe adapting them with time in the sense that you become better and maybe you do slight modifications to the rules because if you're not comfortable, while you will see it appears pretty simple. In fact, that's what I'm really trying to share with you. So just to wrap up again, so act as a business owner thing about those habits, reread them from time-to-time. Do not try to predict the market because it will not work. Just keep in mind. I mean, even the Federal Reserve does not know how interest rates will be in 12 months. They may know in three months or six months they have a good guess, but not beyond that. So don't try to predict the market. Just keep in mind that every two years -10% in average and in average every four years is gonna be a bear market. And of course, you need to have the stomach to stick to your positions if you have followed a strict set of rules. And again, I'm hoping this why I'm sharing this with you. I really hope that you become super wealthy. And hopefully after a couple of years also financially and intellectual independence as my family was able to be in fact. So I think that's really what I want to share here with you. So in the next chapter, in fact, we are switching chapter as we go into the fundamental screen. So then it will become a little bit more technical. We are going to be speaking about ratios, those kind of things. So talk to you in the next chapter. Thank you. 11. Blue chips: All right, Vania Lasso, welcome back. In this lecture, we are starting Chapter number three, and we're discussing, in fact, the first fundamental screen that is about Blue Chip companies. So what is Blue Chip company? So the term actually Blue Chip comes from the card game of Poker. You probably, I mean, I'm expecting that you know the poker game. And in that context, blue chips are, in fact, the chips that have the highest, let's say, monetary value. We bring this term to the investing landscape, you may have heard about the term Blue Chip companies. We are looking actually at companies that are very strong, that are financially sound, that have strong brands, also companies that weather downturns and adverse economic situations in a much easier way than companies that are less solid, in fact. So that's really something that defines Blue Chip companies, even though the term may appear a little bit abroad, but I will share to you how I look at Blue Chip companies and give you also a tool on how to know what are the latest and strongest brands currently in the world. So why are value investors interested in investing into Bluchp companies? Well, there are a couple of things here. I mean, when I look at Bluchp companies, what is very interesting is that people have the tendency of willing to buy the cheapest product. But for some products and or some services, they are willing to stick with the company that they love and they don't care about the price. They're not willing to switch from the brand they are used to, and I'm always taking an example of I shave with Gillette since I mean, I'm now 50 plus years old. I've always shaved with Gillette. I once tried Wilkinson Swartz and shaving with brown. But today, I continue to shave with Gillette, so I never switched. And actually, when I go to the grocery store, I don't care about the price of my Gillette shave. So even if they increase the price by 10%, I gonna be paying because I want my Gillette because I like the quality of Gillette. So that's something that is very typical for Bluehip companies. It's very easy to observe the strength of those companies. I just took now my personal example of looking at Gillette. But just look at, for example, I mean, if you're flying with your family or with your friends, what are the drinks that people typically order on an airplane, Coca Cola, for example. And now, of course, some people will say, Yeah, but, you know, candy Coca Cola with sugar, I mean, they have been switching and investing into new brands. They have been also making sure that now Coca Cola is sugar free and caffeine free. So they are listening to and they're making sure that people continue buying Coca Cola and that people consider Coca Cola to actually be a more healthy product as it was maybe, I don't know, ten years ago with caffeine and a lot of sugar in it. So that's an example on drinks. What are the typ drinks that your friends and family buy, and they will not change the brand there? What smartphones and tablets do you use at home and that you are willing to buy and pay a premium price and next Black Friday or Saba Monday, for example, or next holiday season for Christmas. Of course, there, I mean, we will speak about modes as well. But Apple, for example, I mean, if you look at the iPhone, the iPhone is very strong because it has created a mechanism where it has locked in its customers and customers I'm an iPhone user. Would not switch for Google Android. I have everything on iPhone, and I have a mac book. I have an iPad. I have a mini Mac, as well at home. So, I mean, I have a consistent experience there. I mean, and you would need really to pay me a very, very high price that I would switch away from Apple to Samsung. So in terms of fashion, it's the same. What I mean, I don't know if you're a man or woman, but what is your partner typically willing to buy? What are the brands, the fashion brands that your partner or your friends they speak about they love, C be Zara, could be Louis Guitan, could be Gucci. I have no clue. What type of pasta? Do you buy, or do your friends or your family always buy? What other type of airline that you typically fly, even though there may be the switching costs are not as high as for other products I was just mentioning? What type of mineral water do you prefer to buy? Because you will probably, I mean, if I take my example, we have always been drinking von when we were in Luxembourg, now we have moved since two years to Spain, and we buy fondva and we have tried other brands. We don't like the taste of the water. And so we stick to fondla. We don't even look at the price of fondla. So that's the type of thing that makes brands strong. And because a brand is strong, well, very typically, they are able to charge the prices they want, of course, up to a certain limits. Otherwise, people would really switch away from the brand. And by that they are typically. So Bluehip companies are typically more profitable, and we will speak later on about return on invested capital, but Bluehip companies and strong brands have higher profitability versus, I would say Lambda brands, so brands that actually you don't care about the brand, and if you have a cheaper option, you would actually switch away from that brand. So so here I'm taking the example of a Japanese castle and to speak about moats, the term moat is a term that I've learned from Warren Buffet. So basically, a moat is the water that surrounds a castle. And as Warren Buffett and Chari Monga has always been saying, we want to have a lot that runs the castle and that tries to build a moat. So the water surrounding the castle that becomes broader and broader so that it becomes more and more difficult for competitors to attack that castle. That's really the intention of having a wide moat, in fact. So that's the water distance between we say the competitor and the castle, in fact, so the water in between. So, I mean, run I mean, the typical question that you could run with your family and friends to test if a company has a mode is just ask them, how much would it take for you to change from brand A to brand B? And would you be willing to test a generic brand? Just observe their emotional reaction that is sometimes not very factual. It's the same for me for Glatt, you could try to convince me that Wilkinson Sword has now a fantastic shave. I'm going to say I tried it once. I will not give it a second try. That's it. Full stop. I mean, I stick to Gillette, full stop. So I remember, for example, when I bought Richemon I will speak about my portfolio in a couple of minutes. So when I bought Richeu, which is Swiss luxury conglomerate, and they have amongst others, the very expensive diamond brands like Karti and Van Cleve and Arbelt knew Cartier, and I didn't know Van Cleve and Apples, and I just went to my wife and then asked her, Do you know those brands? And I saw just her eyes like, Wow, yeah, of course, those are fantastic brands. So this is the typical, let's say, emotional reaction that people have with strong brands. So very often, when you have that type of emotional reaction, do you love the iPhone? Oh, yeah. Do you love Louis Vuitan? Oh, it's fantastic brand. Do you love Ferrari? Yeah. People porsche people don't care about the if they have the purchasing power, they don't care about the amount of money that they're going to spend on those brands. And a porsche driver will not buy a Ferrari very probably. So just think about, so that's the concept of mode. So the wider the mode, the stronger the brand, the more difficult it is actually for competitors to attack the castle and take over the market share of the company that is running those brands. So actually, when I look at Blue Chip companies because I'm trying to be precise here, how do I define a company to be a Bluehip company? Basically, I use and you see this on the slide here, and I've been updating, of course, the slides. So this is the 2023 Interbrand top 100, and I use them just to have a look at what are the top 100 brands that are, let's say, active in that specific g. And you see here, I mean, in the top 25, you see Apple, Microsoft, Amazon, Google, et cetera. And I'm not only investing, and I will repeat this during the course. I'm not only investing into companies because they are Blue Chip companies. There is a set of tasks that I have to do, as we have seen in the very beginning. Charlie Mong and Warren Buffett say, you may love the company. The company may be financially very sound, but maybe today you would be paying a very high share price for that company. Again, as value investors, what we try to do is buy fantastic companies at cheap, undervalued prices. Okay? So remember that you should not invest into a company because it's a Blue Chip company because it's part of the top 100. That's not good enough. Now we'll repeat this all along the course. So here, so I using Interbrand. And actually, what we have been doing since November 2023, we are now May 2024. People have been asking me about Kenny, how do you automate your process for looking at brands and looking if they are undervalued and those kind of things. So we have created and there is a specific course, so it's not the intention of the Ader Van investing to speak about this, but there is a specific course that is a specific tool that we have created that is powered by open eye. That is called inch for an investing next generation. Actually, we have so it's a custom GPT built on top of HTGBT plus today, where, in fact, we have, let's say, fine tuned HAGPT. So that's the purpose of Vinch. So we have fine tunes, Ving, and Vinch knows the top 100 brands in the world. And Winch has information for the last ten years. So you could actually ask Vinch and you see here some screenshots. Many top brands do you know? You see that Vin is answering that it knows 100 largest brands in the world. Can you provide me the brand value for the top five brands, and it shows you the top five brands, for example, for the 2023, which is the latest one, but you could also prompt the model. Can you tell me how has the brand value of Apple evolved over the last ten years and Wing will give you an answer? We really try to do with this project, which is a new project that we launched on May 1, 2024, and I'm bringing this now also into the course Auto value investing is really helping and supporting investors in their value investing process, in their value investing journey because before you had to work with Excel files and have maybe a Morningstar subscription here, download a PDF file. So we have brought everything together to make it much more easier for you. There is a tool which actually carries all the information that you will need coming out of the Auto value investing training, so you're going to see level one, level two, level three steps and actually, you can do this just by using VNC as a tool instead of using an Excel file or trying to download files and you're on your chore. So that's really the purpose of this project. So putting that aside, there is a training on Eudami as you can see on the left, which is called VNC, the next generation of Vali invesing. So you can actually take that course if you want to know and learn how to use the model in fact. And so it's a mold that uses artificial intelligence, in fact, just to be precise. So putting that aside, okay? So, coming back to Blue chip companies, something that I really care about as well is being transparent. And I update my portfolio. We are now May 2024. So I'm updating my 2024, let's say, portfolio in the Auto Val investing. And you can see actually the type of companies that I do have in my portfolio. So normally, I have 8-12 companies more as in my portfolio. I never have more because it takes time to read those financial reports, et cetera. So when you look at the current split and you have the pie chart on the right hand side, you see actually that I do have, I would say, a fair amount of companies. They don't have the same equivalent, let's say, size of wallet in my investment portfolio of 36 square capital. And actually, if you would if I try to summarize, how is my portfolio structured? I mean, there are six what I really consider Blue Chip companies. So Mercedes, the German car manufacturer, Carrying, which is a luxury group. So Caring owns the brands like Gucci, Balenciaga, and those type of brands. Porsche, again, the car manufacturer, Christian Dior, which is the holding company of Louis Vuitton, MoteGendo and Hennessy, they also bought, I think Tiffany's, I one, two years ago. I'm owning the so I'm michel of Christian Du International, which owns actually LVMH. I have invested into Nike and also into Nesli. I mean, Nasal, it was in my portfolio. It went out because I made a profit on it, and I've put it back now actually into the portfolio since just a couple of days, actually, as we are speaking. So those are for me, clearly Bluehip companies, and I will show you how that reflects in top 100 of the brands in the world. And then have I mean, I do have three strong brands that I believe have, I mean, if you're interested in competition, market structures that are having very strong market positions in their specific industries. One, which is BASF. So BASF is a German company. It's the largest chemical group in the world. The competitor to them would be Dow in the US. Ridea it's a Spanish company, so they own actually the infrastructure of electricity in Spain and in other countries. Fn case is the same. It's the incumbent telco operator in Spain and in other countries, they have operation in the UK in Germany, et cetera. So there, I mean, I need to be fair, those companies do not appear in the top 100 of the brands, for example, Interbrand, but they have very strong modes, according to me, and I have them. I will show you later on the performance that I have in those companies. Also, I have two dividend king companies that I have for a certain period of time, like three M and Rio Tinto. So three M is what it is called mint mining and manufacturing, I think, a very well known company in the US, and they pay dividends since I don't know, 50 years. And Rio Tinto, which is an Australian company, they are, I think, the second largest company in the world, about mining and extraction of resources. And so you see that they have, I mean, very sound financials. I mean, again, here, I'm just explaining to you very briefly, what I have in my portfolio. But I'm applying to myself everything that you will learn in this course. That's the intention I'm sharing with you in full transparency, what I'm doing a level one, level two, level three. And then I do have two companies that are outside of the top 100 brands. One, which was Vanity Fair Corporation that owns the brands, Northface Vans, Supreme and the US. I think Dickys as well. The Stellantis, which is a merger of PejoFat Dodge Maserati. So they do have so it's again, a car manufacturer, and I I mean, they were very undervalued, you're gonna sees in the performance. So that was like an opportunity that I had on them, in fact. So if I and you see here what I did, I took the 2023 top 100 brands in the world, and everywhere where there is a red dot, it means that I'm shareholder of that brand, which is part of a company. Mercedes is number seven. Nike is number nine, is 14, Chanel, which is part of Lita is 22, Gucci is part of Karring number 34, Porsche is number 47, Nescafe, which is part of Nestle is 52 and 67. You see this Cartier. I had Richmon three M as well. Dire 76, Tiffany's is part of is Sephora is part of it and Espresso, which is part of Nestle, actually. So you see, actually, that I do have a I think a pretty decent coverage. I had other companies in the past, like Danna, for example, in position 78, Kellogg's in position 79. For the time being, I was unable to buy Glatt, for example, and Colgate Palmolive. So I would love to buy. So that's Proced and Gamble amongst others, and Colgate Palmolive is CP, if I remember wild the Ticker. I'd love to buy those companies, but they are too expensive. The same with Hermes. I like to invest into luxury groups, so they are in position 23. The company is just too expensive. So it does not make sense for me to put now money into that. I have to wait probably for a financial crisis where the stock market gets really crazy to be able to buy those companies at a fair price. Remember, that's something we learned in the introduction as well. So also being very transparent about the performance of my portfolio, so you see on the left hand side, the companies and the percentage of the total portfolio, and of course, this changes over time. So currently, I do have and we will speak about passive income as well. But the way how I make money for family holding is I want to have at least a little bit more than inflation covered by passive income, which is dividends. We will cover that later on when we speak about, I think it's in 23 lectures when we speak about return to shareholders because too many people, they only can make money when they sell the assets. And I think that's not a good strategy. And that's something I will repeat later on the way how I make money, have two levers, two ways of making money. I have a passive thing, and today I earn rough cut 5% after taxes every year on my portfolio, and I don't need actually to sell my assets. Of course, under the condition that those companies continue paying out the dividends that they have been paying out. And, of course, if the dividends are growing, I will earn more, of course, over time, without doing anything. That's the beauty of passive income. That's part of the snowball effect. And the second way of making money is actually when the company when the share price gets overvalued, we will speak again about the process. And typically, I throw companies out when they are 15 to 20% overvalued. So when they're above their intrinsic value, we speak about what intrinsic valuation means in the level two test. When I'm above that threshold, then I tend to sell it out. So, you see, also, so what this portfolio does not show is when, for example, I sold Richeu. I think I bought Richemu 57 and six months later on, I sold it like 93 or 95 plus dividends. So, of course, this portfolio does not reflect past performance, and I know that some people have been asking me, What is your overall performance? Again, I try to have a overall performance, 7% per year. If I can have 7% per year, remember the compounding effect, I will be able to double the wealth of our family every ten years. That's the compound effect of 7% of annual return. And I'm happy with those 7%. If I do more, it happens that I do more, so that's it. So you see that the holding periods for those companies, I mean, the longest holding period that I currently have is Tlefnica, which I have nearly for eight years, and it has generated 17% of dividends since I have it. So purely on capital gains. So the share price currently is still below my average purchase price. But I don't sell because I earn rough cut 5% after taxes every year. So, I mean, I mean, I know that today we are in a high inflation environment, but when interest really come back at a certain aunt in time, and inflation is at maybe 1% and interest rates are also at 1%, 5% creates 4% four points of growth of wealth creation above inflation. So you know that I'm looking at a 30 year period when I look at average inflation. Oh. And you see, in fact, that I do have other companies, for example, like Stelents. I have Salentis since a little bit more than one year, and I've bought it like 1066, and the market price on May 6, 2024 was 2033. And even it went up to 23 24 euros per share, but I did not sell it because the intrinsic value of the company, according to my calculations, is higher. So even though I do have a 27% performance after one year on dividends since I started buying it. And I do have more than 90% on capital gains. Even though this means that I multiplied by two my investment, I'm not selling the company because it's still below its intrinsic value. That's my choice. And I do have you can see it here as well. I do have, for example, one that is for the time being a, my worst performer is Vanity Fair Corporation. They went through some trouble, so my average purchase price is for the time being 36. So I tend from time to time to continue buying into the company, but it's not my focus now, but you see that I'm currently on capital gains at -65%, which is really not great. So I'm not very happy about that investment. At the same time. Part of that, if I would sell those assets, which I'm not doing today because I don't believe that the Northface vans and Supreme will go bankrupt. So those brands, I think I have people who like those brands. And I have generated since I have them, which is a little bit more than a year. So a year and a half, I have generated 10% of dividend returns. So as long as I do not sell, I will not realize those losses. So this is little bit what I did with Telefonica, as well. So even though the share price is still below the current, so the current market price is still below my purchase price, it generates nice returns every year, so I don't need actually to sell those assets, in fact, because they generate passive income. So I just want to share this with you. I'll let you I mean, you can see that I have Mercedes, as well, where I have 102%. I have them since five years in my portfolio. I've bought them 45 euros a share, and they were even yesterday, I think they were at 73 euros a share. Again, I believe that they are generating eight dot 50%. So they generate, if I'm not mistaken, five dot two or five dot three euros per share pre tax. So I've bought them at 45. I mean, we will speak about this in the level one test, but they are generating 10% pretax return on dividends every year as long as they're able to pay out those dividends. But we will speak about that later on, showing you already bring you a little bit of those notions here into the context. So, yeah, that's what I wanted to share with you about what a Blue Chip company is and also bringing in the term of mode, or white mode. And I will make actually later on those white modes tangible. So in the level one test that you're going to see, I will speak about return on invested capital. Companies So Bluehip companies tend to have high return on invested capital. But be with me, we will speak about this in, I think, two, three lectures. And when I will introduce you to the level three test, which is intangible, let's say, elements, metrics about how customers and employees feel about the company. Typically white mode or Blue Chip companies, they have high marketing scores. So customers love the brands, and people, the employees like working for those companies as well. I will give you that's really what I've allowed me to say what I tried to add on top of Warren Buffett's method, and I'm very thankful Warren Buffett or Warren Buffet and Choli Mongo, what I learned from them and Austin Benjamin Graham. But I really try to make those modes a little bit more tangible than just looking at RIC, for example. But I will extensively discuss you throughout the whole training, the AutiVal investing. So with that, thanks for your attention and talk to you in the next lecture. Oh 12. 5-10 years earnings consistency: Alright, next lesson in chapter number three will be discussing the next level one test. Remember that level of one tests are in fact very easy to understand. Tests that do not require a huge amount of calculation. That would be more the case for the level to test. The next level one test after having discussed blue chips is in fact earnings consistency. So what is the earnings consistent? It's very easy. The main question that you have to ask yourself is the company being profitable during the last ten years? And if not ten, at least five years, consecutive, a profits of the company without a single loss. And I really mean here, yearly profits. So for me it's acceptable. The company may have a quarterly lost. That can happen because of seasonality, those kind of things. But really here the intention is that you only invest, or at least I only invest into companies that have been printing out positive results at least five years in a row, if not even ten. So how can you see this? There is, I mean, I'm showing you an extract from a company on Morningstar. The test is very unsophisticated, um, but you would be surprised, in fact, how many companies do fail on this test and the strong companies, and it's true, it's a little bit also the case for blue-chip companies. And very often those companies, whatever happens in terms of economy, even during COVID, they in fact continue having do certain extent, more or less the same amount of economic activity. So in terms of top-line revenue, and they're able to have that cost on a control in order at the end to still be able to generate profits from their operations and even in general, to generate the profit from the overall economic activity. So as some people say, these tests may be very unsophisticated, but it really spreads the cone from the crop. So what I really recommend you is that, I mean, here I give you the example of morningstar.com extractive accompany. You can do it also, I think on Yahoo financials is really if you're interested in a company first test is the company blue-chip. Second test. Does that company that you potentially want to invest into have a track record in terms of positive profits. So in terms of positive results in fact, and not having written a lot over the last at least five years, if not ten. In fact, what happens if there is a yearly loss? Remember we speaking about annual losses are annual profits. Well, for me the rule is very clear. One single annual loss over the last five years, if not even ten years, will automatically exclude the company from the selection process. It may sound extremely harsh, but that's really the case. And I'm very strict about this. As I said, I do accept temporary losses on the quarter. I'll give you a very concrete example. I currently have in 2023 events, Vanity Fair cooperation. So VFC, which is the holder of North Face vans, D keys, etc, premiums. Well, they had because of a change in inventory management, they had a quarterly loss, I think two quarters ago, if I'm not mistaken, and that's really acceptable for me. But I want the company to be able to print out money from their operations every single year for many years consecutively. That's really a very strict test that apply to the investments that I do. Here. I mean, let's, let's practice a little bit. So here you have an example of a company. I don't remember which company it was with a certain business revenue. What I want you to comment here is the revenue evolution versus the net income available to common shareholders evolution. And do you see any kind of risks? So I will just very rapidly walk you through the numbers. So you see that 2014-2020. So the company had like 2,789 billion, 28 dot 1,000,000,027, 25, that's 72825, that's 7.25 or three. So that's the business revenue for the last, let's say 20142000-20. And you see at the bottom, in fact, you can use a pre-tax income if you want. You see it here in the red frame. You can see that the pre-tax income has been to 29 to 3916 to 809-51-5011, 42.0 73. So what I want you to do is to comment, to think about how do you compare the evolution of business revenue with a pre-tax income? So when you have done that, some maybe pause the video here and then resume. And when you resume, you will hear me in fact give the explanation how I would look into this. Alright, so if you have looked into and you have competitive business revenue versus the pre-tax income. As an example, you could have also used. The net income from continuing operations and net income available to common stockholders. What you see in fact is that the business revenue has decreased more or less. There is a tendency to decrease by around 10%. So rough cut from 28 billion to around 25. So they lost like 2 billion of revenues. It's like seven to ten per cent reduction in business revenue. Does that mean something? Well, it depends. I mean, it could be that the company has sold off part of its business to a competitor, e.g. so it's normal in such situation of the business revenue would go down. What is more interesting is when you look at the net income available to common stockholders or even the pre-tax income, the tenancy is the same. You see in fact that there there is an issue on the cost side of the company from what it looks like. You see in fact that the proportion, so let's say the minus seven to ten per cent decrease in business revenue is in fact stronger on the net income or the pre-tax income. The company. To make it simpler in 2000, 14,015, making a 28 billion of revenues was printing more or less. The net income to common stockholders, 1409153, so one-and-a-half billion. And you see now in fact that the revenue tendency going down, but the profitability, in fact, it's decreasing at a faster pace from compared to the business revenue. So that's the kind of thing that you need to understand in such situation where you need to be careful. We will discuss value traps later on. But it could be, That's one of the signals that it could be a valued traps. So the profits are still there, but the business revenue is decreasing and the net income is decreasing as well. If there is no good explanation of the company has sold part of its assets and it does not have, or at least not reducing, optimizing its cost. This could be potentially a value trap because there are certain point in time the company will no longer be able to remain profitable if the business revenue continues to go down in fact, so be attentive to those kind of things. Alright, that was already everything for the earnings consistency, pretty short lesson. But remember, as I mean, in a nutshell, their earnings consistent is really about the test set you have to do is the company I want to invest into hasn't been making profits over the last ten years consecutively, or at least the last five years. If that is not the case, I would read a refrain from investing into it, right? Our next lesson will be about price to earnings ratio, which is a very common ratio that a lot of even traders actually use. But as we will see, it's not just about, you should not use shall nots in fact, make one single investment decision just based on one single ratio. So it's a combination of a lot of things and that's why I'm showing you here with level one, level two, level three tests. So level one other fundamental tasks. Level two is more like calibrating the intrinsic value, knowing your margin of safety. And level three will be about the modes and how to make them mowed more tangible. So, talk to you in the next lecture about the price to earnings ratio. Thank you. 13. Low Price to Earnings ratio (P/E): Alright, so we're still in Chapter number three. We are. And I'm walking you through the level one fundamental test or screens that you have to do. At least I'm showing you how I look at those tasks and various ratios attributes of the companies I want to invest into. So just as a quick rehearsal, the first test in level number one fundamental screens is the company blue-chip. The second one is the company making profits for five consecutive years, if not ten, at least. The third test that we will be discussing now is very common in fact, ratio that is being used overuse in fact, which is a price to earnings. And I promise you, a lot of people put huge amounts of money just because the price earnings ratio appears very good, very, let's say cheap. In fact, the price to earnings ratio will give you, let's say a signal. It's one of the many signals, will give you a signal if the share price of a company versus its earnings is cheap or not. But you need to pay attention. It's as, and I will repeat this all the time. It's not because one ratio appears very green, very good. And this one is one where too many people, just by having a very low price to earnings ratio, put a lot of money into investment. It has to be combination of multiple things. So let's go into the price to earnings. So abbreviated as you have understood, it's called the PE ratio, price to earnings ratio. And it's a measure in fact, that calculates the share price relative to the annual net income that is earned by the company. And this on a per-share perspective. So the formula, in fact, it's pretty straightforward. The price to earnings ratio is calculated. You take the current share price and you divide it by the earnings per share. If you don't know the earnings per share, this may happen. You can also calculate the price to earnings ratio by taking the share price, dividing it by the total earnings divided by the total amount of, remember, use the diluted amount of shares, which is the higher number nominee. Because if you remember, diluted amount of shares, outstanding, shares includes all potential stock options that will be printed in the future. So this is how you calculate actually the PE, you're going to see a lot of websites, financial websites, they present this, they precalculate this for you. If you go in Yahoo and Morningstar, etc. On Phineas, you will find those ratios. But if you do not know, and if you want to calculate it yourself, you will see, of course, in the actual file that of course I'm calculating this as well. But you need to put in the share price and then the earnings per share or the share price divided by the total earnings divided by the total amount of diluted outstanding shares, right? One of the things that a lot of people actually do not realize is how to interpret the price to earnings ratio. So in fact, you have to think that we are dividing annual earnings. So let's use the latest annual earnings. So it is giving us a ratio based and we're dividing by an annual numbers. So the current share price divided by an annual number, e.g. the annual earnings per share. So actually, what does it mean? How shall you interpret the PE? In fact, as an investor, you are buying. So this ratio There's multiple, is telling you how many years of earnings that you are buying in fact. So I'll make it simple. If you have a price to earnings ratio of ten, it means that the current share price is in fact ten times higher than the latest annual earnings. So you are buying the company with a multiple of ten times its current earnings. Alright? So P examples could be, I've taken the exams like Amazon P. I don't know exactly where it stands now, but it has always been extremely high at something around 80 e.g. very probably towns come down now since 2020, 1022. So maybe we are here at the price earnings of 60. We will discuss Amazon electron rich small when I bought it was at the PE of around ten. So I was buying in fact, I think it was at the stock price of CHf57. I was buying a really small conglomerates at ten times its annual earnings. So let's continue the interpretation and what does that mean? It means that if I'm buying a company, adds ten times its earnings. If I keep the company and if the earnings remain constant and I keep the company more than ten years, having bought at a price to earnings of ten years. In fact, after 11 years, I've seen the whole amount of investments back. In fact, that's basically what it means. So my personal investment style and I'm going to put here rule into place is I tend not to buy companies that have price to earnings ratio above 15. And I like to buy companies that have even price to earnings ratios below ten. In fact. So of course you need to be aware of value traps because just looking at one single ratio, it may be at the price. Earnings is extremely low because the market has already reflected a low price on current earnings, but the market is seeing a decrease, e.g. that will happen in the future. So that's the kind of thing that of course, that's why we're investing isn't odd because there is judgment required. But if the company revenues are growing, if profitability remain sounds and you have a price to earnings ratio that is below 15. Their chances in fact that the market is the present about the company. And potentially it's a, it's a bargain, so it's nice opportunity to buy. So that's the kind of thing that you have to think about. So again, the formulas price to earnings is share price divided by earnings per share. But if you don't know the earnings per share, EPS is just called. You can, for the price to earnings, you can take the share price divided by the total earnings. And the total earnings in probably billion US dollars, million US dollars or euros or whatever the currency is, divided by the total amount of outstanding shares. Remember to take the diluted one which is the bigger one. So if e.g. the share price is at $100 and the earnings per share are at $10. You will have a PE of ten. You're going to be buying $100 per share. If you would buy today, you wouldn't be buying ten times the latest annual earnings of ten years dollar per share. This is what it means. Okay? So of course, the conversation is how predictable is the amount of years of earnings that you are buying. And of course, this is something that you have to take into account depending on your investment horizon. So of course, if you're buying a company and we're going to go into the example of Amazon as well. If you're buying a number, just putting a theoretical example, if you're buying a company with the price earnings ratio of 100, means that the company you are buying today, 100 years of earnings of that company. Of course, some growth investors will say, Yeah, but you know Canny, now this earnings are small. You're going to see that the company will really grow at an exponential rate. So the current earnings have to be corrected back. So maybe you are buying, I don't know, 50 years, maybe 35 years. But I simply that buying a price earnings of 100 and that even growth investors would tell me, yeah, I have a crystal ball and you're going to see the earnings grow a lot. That's what a lot of people have been thinking about. Amazon with all due respect for Amazon, we are going to be discussing this in a couple of slides. In fact, That's a risk. In fact, that's speculation. So that's the kind of thing where you need to be attentive, is like, do you really feel comfortable buying so many years of current earnings, even if you would add growth assumptions to those earnings. But again, for me, having a growth assumption of 25% for the next 25 years, that doesn't exist. And just look back at history. And history has always been right about those things. So assets PE, below 15, even better below ten. Well, that would pass this test. But again, remember that I'm not investing based on one single task. It's a combination of all the towns I'm sharing here with you. We have is the blue-chip company, is their earnings consistency is currently the market price of the company. Cheap. So with giving me at a 50 into ten times its current annual earnings. Why I'm giving you another reason why I don't like to buy companies that have price to earnings ratio of 100s, of 50 or even 35. There is one statistic which is not discussed a lot. In fact, by investors, which is the average. I'm a lifespan of companies on the S&P 500. And there has been a thing, It's Professor Foster from, I think it's the New York University. There has been doing an analysis and has been showing that over the last century, the lifespan of companies and big companies in the S&P 500 has in fact been decreasing very, very strongly. So likely decade ago, you had companies like in the 1920s, 1930s, accompanies had an average lifespan of rial. It's probably like 90 years, 80 years if they were listed on the Dow Jones or the S&P 500. Now we see over the last year is that this has come down to like 15 to 20 years. So it means that you have a very high chance. And if you look at in the last 15 years, 52% of the S&P 500 companies have disappeared. If you're buying a company with a PE ratio of 30. So you're buying 30 years of earnings. You're buying two of those companies with similar price earnings ratio, there's going to be very probably one of those companies that it will have this appeared in the next 15 years, but you have just bought 30 years of earnings, but after 15 years the company disappeared, disappears. How do you think that you will get your money back? Sorry, that doesn't work except if somebody has acquired a company with a premium price. But that's the reality. So that's why I believe that also taking into account the price to earnings below 15, below ten. Not only is this something that I learned from Benjamin Graham and Warren Buffett, what is what it means to buy company at a cheap price versus its earnings. But also, I think it's in line with what Professor Foster from New York University has been in fact, studying, which is that the average lifespan of company has come down to 15 to 20 years, maximum in average. And we're speaking here about SAP 500 companies which have huge amounts of capital. They can easily raise money from the market. But at the very end of the day, it appears that even though with, even though they have firepower, they have strong brands that still after 15 to 20 years, half of the companies in the SAP for foreign, they have disappeared. Alright, let's go to the example of Amazon. So you remember that I'm currently re-recording this training. We are April 2023. So the first time the training was published was August 2020 as I've been starting to write this because in 2019, what I've updated here is the following. So discussing about Amazon because Amazon has always been considered as a growth stock. You see on the bottom left, I extracted the financial ratios at that time from Morningstar. So you see they are dated March 31, 2020 when I was preparing and writing the course. And on the right-hand side you have the latest one as Q1. 23 is not out yet. We have the December 31st, 1022 in fact ratios. What is very interesting is that you see, and I can share that at that time, the current price to earnings ratio of Amazon was at 119 times the current yearly earnings, which is absolutely huge if you would look today in 2023 based on the latest, let's say based on latest figures. In fact, even Amazon had the negative earnings, which was a little bit, Let's say, complicated for them to explain. And of course, if you have negative earnings, how do you calculate price to earnings? Price to earnings will be negative in fact. But over the last couple of years at price to earnings has come down. And in 2022, e.g. and the price to earnings went down 119-76, approximately. So you see that there has been a correction on the stock of Amazon and Amazon has not been able to grow, let's say the growth expectation that all those growth investors hats. So imagine that you would buy, let's say, based on the 2022 figures, 76 times its yearly earnings or even 2020 you would have bought at was what I was discussing because you would have bought at 119 years of earnings, even if the company would grow like crazy, you would still buy four years of earnings. Don't you think that you would have overpaid for that? Do you remember what Charlie Munger was saying in the BBC interview in 2012 that there may be great companies out there where all the tests are ticked off. But maybe at the moment that you have cash available, they're really too expensive. And Charlie Munger was saying, I mean, even if the company is fantastic, It's not worth an infinite price. And with all due respect to Amazon, I believe that in 2020, the company was really, really overrated and that's why you still had people that were buying the company and the price to earnings ratio of 119 years. So the price that you will paint was 119 years of its latest annual earnings. I mean, just think a second about that. That's just huge. Some people will say, but I'm okay with that. I would say, well, I'm happy for you if you're okay with that. I believe it's really, really extremely high. And that's for me really in the area of speculation. I could I mean, you would tell me I'm buying the company the price to earnings of 17 because their earnings will grow in the future. So basically if I adjust the earnings for the future, it will not be 17, may be 12, So it's cheap, I would say. Okay, you are close to the 1510. I don't understand. Understand the average lifespan of a companies blue-chip company. Maybe the company is around for 60 years, has strong brands, strong pricing power, has even strong earnings consistency. Okay, Understand. Got it. But here, it's not the case for Amazon. And you see on the right-hand side. So the price to earnings today in Morningstar is in fact not showing anything because in 2022 they printed a lawsuit has in fact been negative earnings here for Amazon. So just again, here history again, repeat itself. Buying company at 119 times, its earnings is really for me speculation. That's what I want to share here with you. Alright. One of the conversations as well that people are asking me is about what about permanent versus non-permanent stock positions? You may remember in one of the previous lessons I was sharing with you, my investment portfolio and specifically the holding period. And again, you can see this very transparently on the 36 squared capital.com website. And if you listened to Warren Buffet, he has always been saying by companies, and you want to keep them forever. And even if the market would be shut down, you would still have faith that the company would still be around after the market comes back in fact and it becomes operational again. The reality to me, very fair with Warren Buffet or at least with Berkshire Hathaway. It's mixed bag. I mean, if I take the latest investment, that's Berkshire Hathaway did on Taiwan semiconductors. I think the after one-quarter, they have been throwing out the company. What was the reason why? Maybe I mean, of course, with the firepower that Berkshire Hathaway has, when they buy a stock automatically the stock will go up so they're able to push by themselves through their purchasing decisions. Stock market prices up, which is obviously not the case when I'm purchasing a company. But it's true that's the attitude that you need to have. You remember we discussed about patients is that when you have done all your tests and all the tests appear goods. While you need to think that if you bind with a margin of safety of 25 to 30%, maybe it, maybe you want to keep that company forever. And think about consumer defensive brands like Danone and Nestle, Procter and Gamble, Colgate-Palmolive. And again, later on in the training share with you when is the right moments to sell? And again, I will already share a chair, already said in one of the previous lectures, of course one, the market is overvaluing the company by too much. Well, for me that would be signal maybe to sell and to taking the profits even though I liked the company would like to keep it forever in my portfolio. On the other hand, with all due respect for and buffer as well, and to be fair towards him, I mean, he has positions like Coca-Cola that he has for probably like more than a decade in his portfolio with 400 million of shares. So as I said, it's a mixed bag, foreign buffets. Just keep in mind that indeed the attitude that you need to have per default is that when you buy a company that you would love to keep the company, because you're buying at the price earnings of maybe 151010 times its annual earnings that you're thinking about keeping the company at least for the amount of years that you are buying, the price earnings ratio. So if the PE is 15, are you feeling comfortable keeping the company for 15 years at current earnings until the market than potentially shows the real value of the company through its share price, right? That's basically what I wanted to say here about the PE ratios. One last thing before wrapping up is looking at there is also a PE ratio for the market, which is, you have one which is called the SAP 500 PE. I've put you the URL, and some people call it also the Schiller ratio doesn't matter. But if you look here, there is, there is some, there is a say around this ratio that if the market ratio is around 15, you can expect an annual six to seven per cent return every year. In fact, just because the overall market ratio is low. And you see on the left-hand side, of course we had the tech bubble, we had the pre subprime crisis, let's say economical environment that was extremely hot. I mean, P ratios, they go up and down, they fluctuate. And that's why I'm saying if you are buying, if you don't want to be a stock picker juice want to buy an index by the S&P 500 ratio when it is low because you will see written on this and this is basically what I'm showing you here on the right-hand side. In average, when the PE ratio is below 15, you will for sure gain at least six or 7% every year. But of course, you need to be patient because not all the times the market average ratio. If if let's consider the S&P 500 would be for the US average, market ratio will be below 15. So you need at a certain point in time, maybe just to wait until really there's a crisis situation. That's why there is an attribute called patient's in the mindset of value investors as well. Alright, so let's wrap up here this third test. So we have been discussing, is the company blue-chip company? Yes. No. Does the company have earned consistency at least for the last five, if not ten years? Yes. No. Is the price to earnings ratio below 15 or below ten, okay, so those are the first three tasks that you have to go through. Next task will be the return to shareholders. Because if you remember, I said in the introduction, while we will be sitting on our money, we need to be patient because maybe it will take some time until the market realizes the real value of the company that we have invested into that we were able to buy cheap during that time. We want to have a return to shareholders and this is what we will be discussing in the next lesson. So talk to you in the next one. Thank you. 14. Return to shareholders : dividends, buybacks & payout ratio: Welcome back investors. We're still in Chapter number three, which is the first chapter we have been discussing various tests as well invested that you have to know. So if you recall very quickly, we have discussed first task is accompany blue-chip. Second task is their earnings consistency if after ten years in a row, third test is having a low price to earnings ratio below 15, below ten. That's at least what I recommend you to do on the first three tasks. The fourth one is returned to show us what we will be discussing now. And so whenever we are discussing returns shallows, we're going to see various types of returns to shareholders and how they affect in fact, the, if it is the book price of the share price of the company. So first things first, let's just very quickly come back to the value creation cycle that we had when we were discussing what happens with capital. Capital comes in with some cost of capital expectations. The capitalists invest in real assets. We hope that the company would generate profits from its assets. And then basically if it is senior management and all the board of directors and shareholders, depending on, let's say, the delegation approvals that exist in the company. The company has in fact, four options if profits have been generated, either reinvesting into assets or paying off debt and all paying off debts and are providing a return to shareholders. And this is what we will be discussing. In fact, we will mainly be focusing on the flow number six, which is a remunerated shareholders, by either providing dividends to the shareholders, are increasing the book value of the company by executing share buybacks. But let's go into it. So the first thing I did not mention it for the time being when I was discussing how does management or the board of directors or share, Let's take a decision. 45-6 are just a couple of lessons ago, mentioned that, well, I mean, it could be that 60% of the profits are allocated to buying new assets, buying a competitor, going into new markets, flowing into research and development to develop new products and services. And maybe 20% is going to paying off debt and 20% is going to shareholders. But there is one element I have to add here, which is not directly linked to value investing, but you have to understand it in the context of company management and strategic capital allocation decisions. Which is in fact, if you recall, I introduced the term return when I was discussing the investor's dilemma. If you recall the investor, he or she, the dilemma that the person has is there are a lot of investment classes, investment vehicles that the investor can invest into. And of course, the written has to be higher than inflation, has to be risk-adjusted. If you remember what we were discussing a couple of lessons ago. So the decision, in fact, if you look at the flows 45.6, that will be taken will be on Fiverr to be very precise, on five, if the company has promised a yearly coupon to the credit holders, the company will not have a choice, but the company could potentially accelerate paying off debts. How will it take the decision? How will it take the decision going into flow number four, and we're investing to the company or potentially are going to flow number six, which is giving the cash back to the shareholders. It's, it's the concept of cost of capital that I introduced. This is what is called the hurdle rate. So basically the company has a couple of choices that you have understood, 45.6. And in fact, with every opportunity, if you look at for basically you're going into a business plan. Management will promise a certain written by e.g. acquiring a competitor. It means that, that promise of acquiring a competitor comes with a cost of capital expectations. And management has to make sure that the written is above the cost of capital. This is what is called the hurdle rate. The same except of the annual committed repayments of depth. So the coupon that has to go back to the credit holders. So the company could decide to liquidate the depth in an accelerated way, instead of waiting ten years, e.g. of five years remaining to pay off the debt holders. Again, this would be interesting thing to do if the company does not have a better investment opportunity either in four, in the front number four and flow number six, when does the company, when is the best option for the company to provide a return to shareholders? Well, when there is no good opportunity on reinvesting into real assets and potentially accelerating the paying of the depth. So 4.5, in fact carry a lower, let's say return versus six. So to make it simple is you have really to think that the flows 45.6 will depend on the return, on the cost of capital expectations of the company and companies management. So if I now give you an example, if the company is a growth company or startup, why are those companies not providing remuneration to shareholders? Because in fact, for shareholders, the return on invested capital, the return. On the capital that it will be invested into the flow number four, which is a buying new assets wouldn't be in fact much higher in the future. The now providing e.g. a. Cash dividends to investors. That's a strategic capital allocation decision that companies are in fact taking for very mature companies, it's the other way around. I mean, if the company is present in all markets and it doesn't make sense, there is no opportunity to buy a competitor or even buying the competitor. The efficiencies that will come out from merging both operations together will provide a lower return on capital invested versus e.g. paying of depth and compare it to the hurdle rate. Well then maybe the company is better off and the shareholders will be happy. Because otherwise, if buying a competitor, the written is below this hurdle rate, the company is in fact destroying wealth. So it's better than to provide a written to the shareholders, e.g. that's the kind of thing that you have to think where senior management CEO CXOs was typically it's a CEO and CFO conversation. This strategic capital allocation recommendation that is then submitted to the board of directors, that is then potentially submitted to the shareholders for votes during the annual shareholder meeting. The typical returns that company have is indeed to provide. So to have those flows 45.6. But just keep in mind that the decision, one of the strong elements that will come into the equation into the decision process of going for, for R5 and R6 is really this hurdle rate. So I hope that this is clear. Alright, so now we're going to be in this lesson focusing purely on the return to shareholders. So remunerated shareholders because the return on capital invested in flows 4.5, in fact, do not make sense. And actually the company would be destroying, let's say, value to its shareholders. And the company says, we will not acquire an, a competitor, e.g. if we think about flow number four, we will not expand into new market or develop new products because we don't have a good business plan and we believe that we will not be able to grow and to generate the profits from those assets. So with that, I mean, the shareholders, you need to understand that we prefer an effect to give you money back and you do with that money, whatever you want. So that would be an outflow of money from the company's balance sheet to the shareholders. And I will be discussing this now. Why don't we discuss return to shareholders? I mean, inflow number six are always mentioned. It's a cash return to shareholders, but there are various ways of doing returns to shareholders. And I'm only speaking here about equity returns to shareholders. So there's going to be in fact three. The most common ones are cash dividends and share buybacks. And we will discuss scrip dividends very, very quickly, but scrip dividends is not something that is very, let's say common. They do exist. I mean, it happened to me as well on Telefonica e.g. which is still one of my holdings after more than six years. There are certain moment in time actually, Telefonica was providing scrip dividends, but let's focus on cash dividends and share buybacks. What has happened as well over the last, let's say two decades. And you have here a graph from Standard and Poor's. You see in fact that the amount of dividends has steadily been growing, while the amount of share buybacks has in fact accelerate. And then today, companies on the SAP 500 are actually doing more share buybacks versus paying out cash dividends. The reason for that is, in fact tax reasons. I will explain to you how it works. So you have those two vehicles, one vehicle which is providing a cash dividend to I mean, to you as a shareholder, to me as a shoulder and you're going to see an inflow of cash after-tax is to your bank account. So imagine that the company is paying out the gross cash dividend of $1 depending on where you are sitting. You I mean, the company will all your broker will remove very probably the taxes from the gross cash dividends. And you will then see on your bank account, you're going to see the net cash dividend flowing in at a certain moment in time. And it would be e.g. in this example, if the gross cash dividend was $1, you're going to see one minus the tax rate that you are exposed to. The share buyback is the other way around. In fact, the first thing is you will not see any money flowing into your bank account, into your broker accounts. So what is happening is in fact, is that the company is employing cash that is sitting in its balance sheet to buy back shares from the market. The effect that you will have is you will see in fact the book value. And I will explain this later on. I will start first with a cash dividend explanations, but you're going to see the book value increase. And normally, except if we are in a depressed market, but you're going to see as well the market share price that will adapt an increase when executing share buybacks. So it's the very end of the day. It's interesting because in fact, if you have bought a company at a share price of $100 and the company is being shared buybacks. And because of that, your share price is going up to $105. You just have. Earned a capital gain of $5 per share. We will be discussing share buybacks later on. So let's start first with the cash dividends. So remember that when we're looking at those effects, you need always to keep in mind simplified balance sheet. So remember that on the right-hand side of the balance sheet you have the sources of capital which are adept or equity. And on the left-hand side is the employment of capital that is typically represented by tangible assets like property, plant and equipment. So that's buildings, trucks, airplanes, office space, manufacturing plants, and intangible assets, which is like trademarks, intellectual property brands, those kind of things. Alright. One supplemental concept that we have to introduce here when we will be discussing and practicing returned to shareholders. And we'll start first with cash dividends is the concept of basic versus diluted shares. I was already mentioned in a couple of lessons ago, but I want to hear very precisely mentioned what's the difference between basic shares outstanding and diluted shares outstanding? If you recall what I said, basic shares out the total amount of basic shares outstanding and we are continuing that we only have one class of share is in fact the number of common shares that you could buy on the market, and that would represent 100% of the total amount of shares outstanding. The diluted amount of shares is in fact the basic shares, but you add to the basic shares potentially outstanding stock options that the company has been promising, e.g. to employees. And those, let's say stock options are in fact can I say being vested and maybe they're investing over five years. So the diluted actually calculates a higher number versus basic. So it's already showing in the future what will be the total amount of shares outstanding, including those effects of stock options warrants even convertible depth, e.g. you have those hybrid adept instruments where e.g. a. Shareholder is providing a loan as adapts to the company and the shareholder has at his or her full discretion, the opportunity to transform that, the amount of depth or the amount of dip remaining into a shares for examples, that would in fact increase when that would happen. That would increase the amount of shares. So it's always better when we will be doing the calculations, you should always use the total amount of diluted shares versus the basic charts because the diluted one is higher. So we're going to have a higher denominator. Alright? So we'd have to bring in a couple of formulas here. So the first one, as we're discussing, in fact, return to shareholders and we will starting with cash dividends. So I need to bring into formulas. The first one is dividend per share. So in order to calculate the dividend per share, you would take in fact, the total amount of money that has been paid out to shareholders and you divide it by the total number of shares outstanding, diluted, always take the diluted one, it will always be the bigger one. We will be practicing this on the McDonald's financial statements. Then as well as second concept or formula that we have to bring in. Because of course and settlement in time, we want to see what is our return on our money. In fact, that we have invested by buying shares of that company is what is called the dividend yields. And that's a value that is expressed not in currency but in percentage. In order to calculate this, you calculate the dividend per share divided by the share price is or the share price when you bought the company. Or the share price, if you would think, or the current share price if you're thinking of buying the company. In fact now, e.g. from the New York Stock Exchange or European Stock Exchange. Just to give that as an example. And of course, dividend per share can be substituted by the formula total amount paid out in terms of cash dividends, divided by the total amount of shares outstanding, diluted. And you're dividing them that by either your purchase share price or the current share price, depending if you're looking at historical, let's say purchase that you did or you're thinking about by now. In fact, very quick comments here. That's why I added awesome dividend tax rates graph on the right-hand side. So remember that when you're doing your calculations in terms of dividends yield, which is kind of a return, a passive written that you are getting from a company that per default the company. When you will be doing the calculation, you will be calculating this pretax. And of course this will be country-specific. You may have countries whether amount of taxation on dividends is extremely high and you have other countries where maybe the amount of dividends or taxes on dividends is low, then of course it depends as well. If e.g. if you're buying a company that has headquartered in the US, and you are living in Spain, e.g. and Spain and the US do not have a double tax treaty. You will be taxed twice. So that is what is called the DTT double tax treaties. If the country has, I mean, if those two countries, so the country of who is issuing dividends and the country where you are residing, they do have a double tax treaty. You shall only pay once an amount of taxes. That's why those double tax treaties exist. In fact, mine personal investments start as well. I briefly mentioned it a couple of lessons ago, is I really want to have at least 4% per year after taxes on dividends. Of course, I need to calculate my pre-tax exposure. And currently and I shared this a couple of lessons ago when I was sharing my current portfolio, I do earn a6.02 percent after-tax per year in terms of dividends is of course, with the assumption that the companies are not stopping paying out cash dividends. And then we'll explain to you afterwards one of the test, which is the payout ratio, how you can I have a better level of assurance that the company will still have the opportunity to continue paying out dividends in the future. That's a very important test to do as well. Alright, so let's practice a little bit. So here I've extracted the income statement and the cash flow statement of McDonald's. And this is the fiscal year 2016. I have not used the balance sheets here because we don't need it. So what I want you to do is a couple of things from what we just learned. The first thing is I want you to spot the number of shares. And of course I want you to spot the amount of total shares diluted in one of those two statements. And I want also you to spot the, which is our flow number six, if you remember in the value creation cycle, I want you to spot the amount of dividends that have been paid out to regular shower or so to come and shareholders. I want you to do a manual calculation of the dividend per share. And I want you to make a minor calculation of the dividend yields. So for the dividend yields and what you will need, of course, you will need to know the current share price. So use for the time being as an assumption that the share price of McDonald's is sitting at $186 dots $0.10. So that's the assumption that you can use for your calculation when you are ready to, I mean, stop here, look at the financial statements. So the cashflow statement and the income statements and spots asset the diluted the total amount of shares and total amounts so that flow number six, how much stock dividends have to be paid out? So of course you have to think and you have to read the lines. I mean, the information is on those two financial statements. You have to look at the income statement, the cashflow statements, and try to find out, I want you to practice your eye, as I said, on looking into financial statements. Alright, posterior, because I will now when you will be resuming, I will give the explanation, of course. Alright, so I will be resuming now. So when you look at the McDonald's income statement at the very bottom, and this is something that happens very often. Not always, but I would say 95% of the companies at the bottom of the income statement they provide with the earnings per share, basic and diluted, and below that, very often they provide the total amount of number of shares that are outstanding basic and the diluted one. So you see in fact, for McDonald's, we are speaking about 2016 at the amount of shares, total amount of shares diluted was 861 dot 2 million of shares. On the second question, which was the total amount of dividends paid out to common shareholders. That's an outflow of cash. It's a financing. If remember the three sections of the cash flows, the operating, non-operating thing, is it investing? Know that's flow number four here. Flows number 5.6, if you remember, they are sitting in the financing activity or section of the cashflow statements. So you see in fact, when you look at bullet point number two, that the company has been paying out a little bit more than $3 billion of common stock dividends. And you also see, in fact the line above, which is called treasury stock purchases. That's the share buybacks. Oh, they did 11 billion, 171 million of share buybacks in 2016. So those are the two numbers that you, in fact, what you have to spot on the first two questions when you do a manual dividend calculation. So again, we are making a dividend calculation per share pre-tax. So in fact you take the number. So common stock dividends paid out 3,000,000,058, dots two, and you divide it by the bigger number, which is diluted total amount of shares outstanding. So you actually divide, use the formula here, 3058 dots 2/861 dots 2 million. So always of course be attentive that you use the same units. So we are dividing millions by millions. And this will give us a three to $5 of cash dividends pre-tax per share in the year 2016. So I just want to, very quickly, you can read it for yourself, but just to show you the effect of using the wrong number, which would be the basic number instead of the diluted one. You see that is, it will generate a three-center difference between the two because you are dividing by a smaller number, so it would be $358 on 355. Does it change the world? No, it's not. It would be a smaller mistake. But still, if you want to be on the safe side, if you don't want to be defensive, always take the bigger number, which is normally the diluted one as it adds to the basic number, the amount of, let's say promises in terms of vesting. I've stock options warrants and even potentially convertible debt that has been added. Alright, so now continuing the calculation, we are calculating the dividend yield. That was something I was asking you as well. So of course, if you have generated over, the company has paid out a three dot 55 years dollar per share pretax cash dividend 1016. You divide that number by the current share price because we are thinking here, we're taking the assumption that we are thinking about potentially buying into McDonald's at that moment in time. So that will provide us a one dot 90 per cent dividend yields on the price of $186.10. Is that great? Well, it's not nothing. But first of all, it's pretax. And you remember your written has to be above inflation. If at that moment in time inflation is sitting at three per cent, you are destroying wealth. So it's maybe that's why I've put it in red. That's not maybe the best thing to do. And this is why just coming back to what I said, this is why I'm always thinking about having at least a 4% after-tax return because I believe that long-term inflation will not be above that four per cent. Remember monetary policy of the US Federal Reserve and European Central Bank, that should be long-term, mid-term at 2%. Alright? So that's one thing how you can calculate the dividend cash. So the cash dividends per share pretax, and then the dividend yield. And you have to think about what's the written that I'm getting versus my cost of capital? Alright? One of the things, one supplemental task that you have to do, and you will have this in the Excel file, which will be pre-calculus, pre calculating it for you as well, is in fact what is called the payout ratio. So the payout ratio is in fact, is there a margin of safety not on the share price, but really about what is the safety that the company has to continuing ping out the cash dividend in the future. And so the payout ratio in fact goes the following. You take in fact the total amount of dividends that have been paid out. So not per share, but really the total amount in the currency for McDonald's was a little bit more than $3 billion. And you divided by the total net income. And this will calculate that the payout ratio. In the case of McDonald's, in fact, the payout ratio was 65%. So what does it mean? If I go back to the flows 45.6, it means that from the profits generated and if you take the flow number three, number three is telling us the company has generated for dot $686.5 billion of profits from its assets. So 65% of that profit will be in fact allocated to the flow number six. So 3-665% is being allocated to the return to shareholders. It's, it's not very complicated, it's just common sense, but you need to understand how to read this. The 65%, and I will share with you, what is my honest feeling about it? 65 per cent for me is a mature. We are speaking about blue-chip companies where the expectations are written off capital R, Let's say fair. So in that sense, 65% is fair. So I consider that. And this is part of my tests. First of all, I want to have a more than four per cent dividend yield per year. But at the same time, or I could say, and at the same time, I want to have a dividend payout that is sitting 30-70%. Why? Because I believe that if the company is providing less than 30% to shareholders, for me, at least as a value investor. I believe that I'm not getting enough return from the profits from the company. And if it is above 70%, what could happen is that the company will not be able. I mean, it would require just a small fluctuation in profits. So in net income that the company would no longer be able to pay out its cash dividends. So that's why I believe that having also here, a margin of safety is also something goods. And of course, we don't want companies to raise dept, I mean, let's be very clear. That would be totally unacceptable. That management would raise depth to pay out a cash dividend. That's just crazy. So that's the kind of thing, of course, that you have to pay attention to. But the tests are very clear. You need to have some kind of cash return. For me, it's more than 4% after taxes. And I want to make sure that the payout ratio is 30-70%. And this is automatically included in the Excel file that I'm using when I'm doing valuations and that you will have access through this course as well. Alright. So then the second, I mean in the flown number six, a second type of written to shallows that can happen is really the share buyback. And I want to explain to you how share buybacks work. So remember that share buybacks. In fact, the company is buying shares that are available on the market from the market. And what is the effect of that? Then you can see it in, in various examples that I've put in here is that it's imagined. I start with a very simple example. If you had a company that had an equity of 100 K US dollar and the company that equity was represented through 50 shares. One book value per share was in fact $2,000 if the company would buy five shares back in the equity. Technically speaking, that equity will remain at 100 K US dollar and the book value, because you would divide the same equity amount by less shares outstanding as a company has bought back five shares, your book value will increase. So technically speaking, means that in this example, you would get a gain of 11% on the book value of one single share. Because the company has spent a certain amount of money on reducing the amount of shares outstanding. So here I want to be very precise because there are effects that you need to be attentive to allow me to be a little bit more technical. So as I said, you have this balance sheet. The company in this example has a balance of 240 million. I'm taking another example to explain the things that are important here to understand, the company has same amount of debt and equity, just, just an assumption that to do a balancing is 240 million and the company is spending $20 million for doing a share buybacks at that time. And you have the company has 100 million shares outstanding. The book value of one share would be $100,120 million of equity divided by 100 million shares outstanding, which would be one dot two. Technically speaking, they are doing a share buyback. There are two steps to it. The first step that you're going to see in a lot of companies is you're going to see in the equity portion of the balance sheet, you're gonna see a line, a negative line appear, which is called treasury stock. Treasury stock is in fact the amount of shares that have been bought back since they won, because we are looking at the balance sheet. In this example, you will in fact see the equity go in step one, go down to 100 million. And here there is a very strong assumption that it depends on which moment in time the company does the share buybacks. And I've been discussing this in a webinar as well. If the company is buying back shares from the market at a very high price, actually the company may be destroying too much cash versus the amount of shares that are bought back. Here, I took the assumption that for 20 million of US dollar spent on share buybacks, The company was able to buy back those shares at $1 per share. That's why the amount of shares on the right-hand side of the graph has come down to 80 million shares outstanding. But imagine the company will in fact, by the sheriff's back on the market for $2 a share, the amount of shares would only then go back to 19 million, 100 million shares outstanding. Before doing the share buyback, the company spent 20 million and is buying each share at US dollar per share. So the company is buying 10 million shares from the market. And instead of having 18 million on the right hand sides, the company would only have 90 million. So you need to be attentive that that can have bad effects. And Warren Buffett is speaking about this bad effects and the timing when the company is buying back the shares from the market is important, as well. As a general remark, I like share buybacks, Warren Buffett Live Share buybacks as well. I'm just very attentive to when the company is buying the shares from the market. If the company is buying the shares from the market at the tip of the share price, that's maybe not good. Maybe the companies should spend the money at a reasonable price in order to buy more shares back from the market. In this case, as the company was able to buy back the spent a 20 million at $1 per share. The amount of shares outstanding is at 80 million shares. And you see at the book value has in fact increase. The equity has raised 120 million. Monitor treasury stock is 100 million, then divided by 80 million shares outstanding, and you have a book value of N of 125. And this is what you have. Also hear from McDonald's. You see in fact that they are, in 2016, they did treasury stock purchases for $11,171 million, 11,000 $171 million. And you see in fact that it's nearly four times or three-and-a-half times the amount of cash dividends. What I want you to do here is really to comment evolution of stock buybacks between the two. In fact, on McDonald's between the years 2014, 15.16. Pause here and then resume when you are ready. So when your resume you see in fact that McDonald's has been, let's say, pretty flat on the amount of cash dividends spans. So they have been spending rough cut 3 billion in 1,415.16. Why the amount of share buybacks has doubled 14-15, 3000000198-6000000000099. And then again, they added another 5 billion between 2015, 2016 to end up at 11 billion spent on share buybacks in 2016. Of course, this has an impact on cash. So you need to think about what's the impact on cash? Of course, you hope that, you know, that cash would be destroyed, but the company has generated higher profits to be able to do those shampoo phi of x and those stock dividend payments as well. So always think about looking at the end position of cash. While the company is spending huge amounts of money on doing those share buybacks and cash dividends. So what you then need to calculate as well, and this is where we will be finishing here, what I want to share with you is you have to think about total share buyback and not just about cash dividends yields. Here you need to be able to calculate that. In fact, while you were only getting a one dot 9% cash dividend yields, while the company has been spending more than 11 billion. If you make the calculation, the company has spent $12.97 on a share. So basically the company on your $186 has been adding to the one dot 9%, a 69% share buyback healed. And so your total year, and this is in the actual file, is also precalculated automatically calculated your total yields is the cash dividend yield plus the by the buyback yields, which is the amount of money spent on the top. So you divide the total amount of treasury stock purchases divided by the total amount of shares outstanding diluted. And you take that amount and you divide it by the current share price, and this gives it a 609 per cent share buybacks. So look at the formulas here. So at the very end of the day in 2016, McDonald's was providing an eight dot eight per cent total shareholder yields, one that nine per cent cash dividend yields and 609 per cent share buyback yields. But of course it's 6.9%. You will not see it in the bank account. So before we move on, you can see in this summary slide also aware in fact, if you remember the dividend per share and the dividend yield formula, you actually substitute dividend by buyback. And you can calculate the buyback per share and the buyback yields, but isn't important assets. And as we saw in the example of McDonald's, is that you then I able to calculate the total shareholder return per share, which is basically the dividend per share plus a buyback per share. And you can calculate the total shareholder yield, which is dividend yield plus buyback here. And this is how we ended up having a more than 8% return on a McDonald's or return to shareholders for McDonald's as a company, at least in the year 2016. So remember it was a cash dividend yield of one at 9% plus a share buyback heel up 609. So before moving on, keep in mind that the share buyback heal normally will reflect in an increase in the share price because the book value will artificially be, let's say, increase by having less outstanding shares that are free floating on the public markets. But if there is a button that you will not see the share buyback yields and land in your bank account will only be the cash dividend yield that you will see after-tax landing in your bank account and your broker account. Alright, two last things before wrapping up this lesson. The first one is when we speak about dividends. And I believe that dividends are a very, very strong, let's say, element for building up this snowball effect and building up wealth. You have some companies and in fact are called dividend kings or dividend aristocrats. And what is the definition of dividend king given aristocrat, it's in fact a dividend aristocrat is a company that is listed on the S&P 500 for more than 25 years and has been increasing. In fact, the payouts, the cash dividends to shareholders for the last 25 years. Dividend king is the same, not necessarily in the S&P 500. It's a company that has been increasing the payouts, the dividend payouts for the last 50 years. How is this possible? Well, because of inflation in fact, and very often you're going to see dividend kings and dividend aristocrats be inflation resistant companies, e.g. I, remember I had nestle in my portfolio unless they had been paying out dividends since 1959. What has been increasing that dividend year over year? I had the same for BASF, which currently pays €3 dot $0.40 per year. And that dividend has been increasing year over year. Of course here, the payout ratio, the dividend payout ratio plays a very important role. But as long as profits, as long as the company is profitable and it can potentially charge inflation to its end customers. Chances are very high and it's the same for Unilever, e.g. that I had in my portfolio as well, or the nonna that in fact those companies are in fact increasing the amount of dividends. So the cash dividend year over year, and there are some so I have currently 03:00 A.M. in my portfolio, which is one of those, but they are more so this is a very strong snowball effect. Why? Because maybe the day you bought in, let's imagine you bought in six years ago and at that time you are already having like a five to 6%, let's say dividend yield. Well, without doing nothing that dividend yield will increase year over year. And maybe today you're already at nine or 10% of dividend yields by holding that position. So that's something that is extremely powerful and not enough people in fact, look into those things. So if you look at my portfolio, in fact, I do have some of those companies that are dividend aristocrats, dividend kings. Because not only do I want to have passive income, but potentially I want to have 15. Profitability (ROE & ROIC): Welcome back investors. We are nearly at the end of Chapter number three in the next fundamental task of a metal screening, be discussing financial powerhouses and also the measure of profitability will be discussing ratios, return on equity, return on invested capital, and written that tangible assets. First things first. Remember when company is created at the moment of inception, the balance sheet of the company looks like this. There's gonna be no dept. And very probably there's going to be equity return. Another form of shareholder paid in capital that will vary probably sits at the very beginning as a cash assets in the balance sheet. Of course, remember the intention is to use that cash that has been brought in by showers and to transform that cash into assets that will in fact generate profits through the operating cycles of the company. So very probably the company or supplements hum, of the balance sheet of the company will look like this. You're going to have the capillary that has been paid in by the investors in the very beginning and in the first cycle you're going to have some cash remaining to pay off, let's say short-term debt, e.g. like supplier salaries, those kind of things. And the rest of the casual probably have been employed to transfer or be transformed into tangible assets like property, plant and equipment, and also intangible assets potentially, if the company has been buying, I don't know, trademarks, right of use, type of assets. What happened also very often is that the company at a certain moment of time needs supplemental external money and will then consider either going back to its shareholders and raise money, fresh money from those shareholders. And all can go to moneylenders like a bank and borrow money from the bank, e.g. something that I can already share here with you very quickly. And it's something tension in the value investing, trading to go deep into it. But the high risk investments normally are funded by cash and low-risk investments are typically funded by adapt. One of the main reasons is that in fact the cost of depth is normally lower than the cost of equity. And the reason for that is that depth told us, if you remember, when I was introducing financial statements and specifically the order of liquidation, the balance sheet on the liability side, the orderly liquidation. In fact, lambdas come first versus equity holders. Hence, their risk is smaller than the equity holder risk. And for that reason normally, the cost of, let's say, borrowing money from lenders should normally be lower than the cost of borrowing money from capital. So from equity holders are from shareholders. That's the main reason to make it simple, and this is why high risk investments should be funded by cash and low-risk investments should be funded by that. Alright? What we want to achieve if we come back to the value creation cycle inside the company. So remember that I've split it, the balance sheet into two. You have on the right-hand side, the source of capital with debt and equity on the left-hand side, you have the company operations that are reflected very probably through an amount of cash and cash equivalents, tangible assets and intangible assets. What we want to measure here is the profits and how good the company is generating profits from its assets. So by doing that performance measure, of course, we're evaluating the performance of the management. That is in fact, normally converting economic activity, so revenue, sales into profits. So we will introduce the three measures of looking at the performance of a company. The first one will be written on equity, the second one will be return on invested capital. Then you're going to see there are some, let's say, variations to that. Some people like to look at return on invested capital, including goodwill and other people like to exclude goodwill. Goodwill to make it short, is the premium that has been paid on top of the book value during an acquisition, during a merchant acquisition. In fact, my preference is to keep goodwill in the calculation because I want to see if the company has been overpaying for an acquisition. And I'm comparing a company I'm thinking about to invest into with another company that has less goodwill. Well, maybe the other company is better at generating profits with a smaller balance sheet. So I tend to keep goodwill in my performance measurements are in my profitability measurements. There is another one that also Warren Buffet has been talking about, which is written on that tangible assets that we'll be discussing as well, which basically excludes all goodwill and intangible assets like trademarks, property and those kind of things. So it isolates the performance measure and the profitability measure purely on tangible assets in fact. Alright, let's go into the definition of it. So in order to calculate the return on equity and what is written on equity, in fact, you take the profits and in fact are going to be very precise here. Typically, we use net operating profit after taxes. Why? That's because it's revenues minus expenses. Of course, you need to remove the costs from the economic activity operating because we're only considering operating revenues and expenses. Profit is we want to see the bottom line of the measure, an after-tax, because taxes are costs that the company has to incur. And potentially there are tax differences between one company and the other because maybe one company has a better tax treatment versus the other company. Typically when you calculate the return on equity. So you take these net operating profit after taxes, you exclude non-operating revenues like revenues that are generated from a cash investments e.g. and also you remove in fact interests, expenses. It's arguable to be very fair. Some people consider that you could keep the interests expanse in the calculation because as cost is a tax to the companies, so our interests expenses as well. In fact, you can discuss about it, but to make it simpler, consider that in typical financial circles, return on equity is net operating profit after taxes divided by equity. So I see on the right-hand side, which portion of the sources of capital that I'm using. When you look at return on invested capital. In fact, she was still using the measure of no pants or net operating profit after taxes. But this time you divide through, you divide by the invested capital, which is in fact, you're adding to equity the adapt. And to be very precise, Typically, again, this is arguable. You're going to see through a couple of examples, why does arguable typically you could also say that cash, in fact sitting in the asset side of the balance sheet is money that has not been employed. And because of that, it's not considered invested capitals. So when calculating the return on invested capital, you could say, the formula could say that it's no pants divided by depth plus equity but minus cash, because cash is not being employed. And even if cash would be employed into generating interests revenue, so finance revenue. In fact, you remember that in net operating profit after taxes, that is in fact excluded. Here, judgement is required. You're going to see how I tend to use it. I tend to in fact, to leave cash when you looking at invested capital because I believe, I believe that cache that is sitting in a bank account is an asset as well to the company. And if the company has not been deploying it or using it, well, that's a problem of the company. So when I'm bench-marking to companies where I will be comparing also how good they are at employing cash as well from adapt perspective. And you're going to see this is how I have set this up in the actual file. I'm only looking at long-term dept. I could consider current assets and current liabilities, so the net working capital. But to make it simple, in the other value investing training, I consider that invested capital is equity plus long-term debt. And I keep cash in, not removing from the invested capital, the cash position in fact. Alright? So if there will be one measure, I mean, I mentioned now here 33 versus four measures of performance or return on equity, return on invested capital, return on invested capital, and you're removing cash and also return on net tangible assets. If there isn't one that you have to keep in mind, it's RIC. It's as easy as that. Everybody when I mean, when I'm talking to shareholders, when I'm talking to people about how to measure the performance of a company in the sense of how good the company is at generating profits from its assets. I mean, 99% of the cases you have to think ROIC, that's it. Full stop. There is nothing else. I will explain to you why RIC is important, but if you wanna go a little bit deeper, I mean, I recommend you either looking at McKinsey. Mckinsey has a very interesting papers about how to look at total return to shareholders. Why growth is not a performance measure by itself, because you can also generate growth in an unprofitable way. So growth has always to come at a profitable way and again, underwritten that is higher than your cost of capital and your cost of capital has to be higher than inflation. You see that how things come together here. On the right-hand side here you see the Berkshire Hathaway 2007 shareholder letter or letter to shareholders that Warren Buffett has written. And in fact, I've extracted a couple of interesting elements. I mean, he's speaking about three types of companies that generate profits. And what is very important here, he clearly says that a truly great business must have an enduring mode that protects excellent returns on invested capital. So for him as well, the most important performance measure is return on invested capital, full stop. So keep that in mind. It's very important, but keep in mind that good companies, they will have sustainable ROIC. And one thing, just to be very, very clear, why we do not look at return on equity. There are a couple of reasons. The first reason or the main reason is that ROIC is a better number than ROE because in fact you are adding all the sources of capital into, let's say, the profitability measure. And we will be practicing this in a couple of slides. So I think it's fair because you, I mean, at a certain moment in time and what you had is you had companies or let's say maybe two decades ago, people were maybe looking more at return on equity as a performance measure. And you may have had CFOs that liked to raise Dept. And of course, that does not appear in the written on equity performance measure because return on equity, you are dividing the notepad only by equity. So this is where return on invested capital is a better measure. Because even if the company will decide to raise capital through debt holders or through depths, you will include the dept as a source of capital in the performance measure on how good, I mean, comparing at the profitability of roses, it's total amount of invested capital, which will be the depth plus equity holders and not just the equity holders. For me to be very fair. Not later than four or five weeks ago at INSEAD in San Francisco when I was doing model2 of my inset RDP training, we discuss about that and the professor was asking, is it ROE ROIC? And of course the answer was ROIC as well. So I was absolutely not surprised when we were discussing the financials of corporate companies. The performance measures that also the Insert professor was, of course, and I would say, thanks God, because otherwise it would have a problem in interpretation of corporate finance and financial statements. Of course, confirming something that was already clear for me since many, many, many years. And again, something that Warren Buffett mentioned in his 2007 letter to shareholders, that ROIC is the right measure of performance, where you can argue is if you keep cash or not, I tend to keep cash in it, but okay. That's a matter of judgment that you have to take into account. Alright, so I'll start with the very simplistic example and then we will look at a couple of real companies with Kellogg's and Mercedes. Here what I want you to do as an exercise is the following. So you have here two companies and it's a fixture. So it's a theoretical but easy to understand model where you have company a balance sheet of 2001 company band of 2001. Company a has generated a no pan of $1,000. You see it's a very small operation and company B has generated a notepad for the fiscal year 2001 of $1,500. Do you see that in the balance sheet of company a, it has ten K in cash, five K in PP&E, and 200 in goodwill, again is a theoretical example that is zero, so no leverage and equity is 15 k dot two. So total balance sheet is 15 k dot t2 on the companies be a company B's balance sheets, you have the company has cash 20 K, PP&E is 7.5 K and goodwill 150 K for total asset side of 27 650k US dollars. And on the liability side, when you look at the source of capital, and again, it's a simplistic way of looking at it. You have adept at ten K and equity at 17650. So what I want you here to understand, that's why I'm using an extremely simple example is you couldn't not just say, I mean, if the question is, I want you to be able to comment which company is in fact a better at generating profits. You could not just say company B is better at because they have generated a higher profit, that company a, that would be an unfair statement and that's what sometimes people do. They do Just compare profitability versus profitability without taking into account, let's say the size of the balance sheets and, or the, what is called the capital structure. So how much debt and equity the company carries? This is what I want you to practice it. So what I want you to do is that you calculate the return on equity with the formulas that we saw. So the NOPAT divided by equity that you calculate the ROIC. So that you calculate our IC, which is the formula notepad divided by equity plus debt, you can decide to remove cash or not. Here you're going to see how the, how this impacts the calculations. And then I want you to calculate the return on net tangible assets. The net tangible assets over total assets minus Intangible Assets, and then the total liability, so minus total liabilities. Alright? So when you do the math, in fact, you have, if you look at company a, that has generated one key US dollar of profit for the last operating cycle of 2001, you have an array which is of 658 per cent. That's one thousands of NOPAT divided by equity of 15 K12. The ROIC, if we keep cash in its remains the same because company has no depth. Now what I want you to do is compare the R0 E for company B. Company B has generated more profits. So $1,500 on a little bit higher equity, $17,650. And you see that the ROE, In fact for company B is higher than the ROE for company a. So the return on equity of company B sits at H dot 50% while the ROE on company a sits at 06:58 per cent. So if you would only be looking at return on equity, indeed, he would very probably common, That's Company B is better at generating profits versus company a. So I'll probably invest intercompany be right. Okay. You would need to do the valuation of the company versus how much you would need to pay for the shares of the company, B versus a. But that's another story. We'll discuss that later on specifically in chapter two. Now what I want to show you here is that ROIC is a better performance measure because you probably have already understood why I've took this very simple example. That in reality, company B is not as good as company, sorry, generating profits. The reason for that is that Company B, while only having 17,650 K of equity and without generating $1.50 per cent. So $1,500. In fact, it would be unfair to do that comparison, comparing return on equity of company B with return on equity of company a. Y, because company B has $10,000 of depth, while company a has zero depth. So when you do the math and you calculate now ROIC and let's keep, for the sake of simplicity of the example, you keep the cash in it. In fact, you would see that the 1500s or the ROIC, the 1500s divided by the total liability side. Debt to equity of company B is only five, that's 42%. And we already calculated the ROIC for company a as accompany a does not have any depth. Well, the ROIC is equivalent to return on equity of 658 per cent. And that's what I wanted to prove you. That in this, again, it's very simplistic example, but it's really that you get. The point is that ROE is not a good performance measure. It has to be ROIC. And for me, cash, unemployed cash, I tend to keep it inside because I consider that that has also a cost. And this should be part of measuring how good the company is generating profits. I like to use, in fact that total assets. So also keeping in the cache e.g. so you see a said that they are ICF company B's only five dot 42% or the RIC of company a six or 58%. Why did the ROIC of company B goes down compared to the return on equity of company B, which was sitting at a top 50 per cent because the company has raised through debt holders 10,000 K. So in reality, with a bigger balance sheets from a proportionality perspective, it's unable to generate as much profit as company a. The right interpretation here is that company a is more profitable than company B. Alright? You could do the same for, of course, real companies. And of course, in the axon file that has been the companion sheets, the ROIC will be calculated and I will be using in fact, the formula of total equity and long-term dept, I leave current liabilities aside because I consider that current liabilities are covered by current assets, I could add net working capital to it, which is different between, between the two. But I decided for the sake of being simple, that the RIC performance measure is in fact net operating profit after taxes divided by long-term debt plus equity and I keep cash in the calculation. So here, when you look at on the left-hand side of our citizens and Kellogg's for the same operating cycle of the fiscal year 2000 or the calendar year 2022. You see in fact that Mercedes has generated 3 billion, €627 million on a total revenue of 154. So if you would just divide those two numbers together and you would even keep the interest income, interest expense. It's not. Those figures are small. You would see that Mercedes had the profitability of four per cent, while Kellogg's at the same moment in time, has generated 1 billion, $251 million of profits on a total net sales of 13,000,000,717. So the profitability is nine per cent in fact. But this is on the income statement. Of course. The better performance measure is looking at the ROIC. So if you would calculate the ROIC for Mercedes, you would be adding up at an ROIC. And I'll make it very simple here. I would just take three. So you remember that in the income statement and we have a net profit after tax of 3,000,000,627. And I would divide it by the total amount of equity and liabilities, and that would give me an ROIC of one dot two per cent. If I would do the same for Kellogg's. Kellogg's has a total equity and liabilities of 17996. And again, I'm taking here a shortcut. I could remove the current liabilities on both sides. But it's a little bit more complex for Mercedes because they are also playing the role of a bank or financing their financing their customers for the purchase of their own cars, which is arguable as well. So I decided here to make a judgment call and just for the RIC calculation to take the net income attributable to the shareholders and I'm dividing it by the total balance sheets. But I could adjust this a little bit down. But if you see already here, if I'm just doing the same, I'm comparing apples and apples. Kellogg's 1,000,000,251 of net income attributable to the Kellogg's shareholders on a total balance sheet of 7,996 billion US Doris is generating 695. So you see in fact from this that it looks like that Kellogg's is not better run company, but is able from its business to generate higher profits at least for the year 2020. But again, as I said in the Excel file, it will be automatically calculated. The main purpose of this lesson is really that you understand that the main performance measure for company is looking at it's ROIC, not on return on equity and not unwritten on that tangible assets, really, you have to look at the ROIC and judgment is required. As I said, I typically look at RIC, I take the full equity and I take the long term debt and I keep current liabilities side, which would mean in fact, if I take an easy example here for Kellogg's, if you look on the right-hand side, if I leave the total current liabilities aside, I do see that the long-term debt is sitting at 6,000,000,746. And I see that equity is sitting. I would need to do the calculation. No, it's here at 3112. So I would then probably have to divide to have this is how it is calculated and the axon far the ROIC would be one to 51/6746, which is long-term debt plus the 3112. So that would be a rough cut, 9,000,000,858. So you see that you have a Kellogg's is having our IC which is close to ten per cent. So the one last thing, just to understand also why RSA is important to management and where management can or if you are setting up the board of directors or if you are a shower that where in fact you can push management to improve the performance of the company. In fact, the formula of ROIC, and we'll go now a little bit into corporate finance. But just to give you a glimpse of how you can look into this, you could in fact, the formula, net operating profit divided by invested capital. You could multiply it by one and dividing the notepad BAR revenue and multiplying the invested capital by revenue as well. So you have not changed the RIC calculation. What is interesting when you do that is that you have in fact various ways, various options where management and board of directors can push the needle. If you look here on point number one, it's really about cost control on the input prices, e.g. raw materials, and also cost control on e.g. sales general administration. So the expanse of the people in the company. When you look at bullet point number two, of course, you could push the company with the same amount of assets to generate more revenue, more sales. Of course, this will increase ROIC. And bullet point number three, in fact, which is revenue divided by invested capital is the efficiency of the resources. So potentially you could through that also reduce the amount of assets that the company has. E.g. as well reduces the cost for raising money if the company has a big dept position in its balance sheet. So that's the kind of thing where management can improve the performance of the company by really, you see that taking the initial RIC formula notepad divided by invested capital. And now I've divided know pepper revenue and I multiplied it by revenue divided by invested capitals. So I'm not changing the logic now the calculation of it, but this allows me to push the needle if I would be the manager of the company on various ways that I have to increase the performance and of course increase the ROIC because that's basically what investors wants. One thing that I learned from Warren Buffett as well, and you're going to see this when you will be analyzing companies, is that. Companies that have strong modes, they have ROIC, which is close to 10% and this for many years in a row. So that's in fact the performance measure, that's the test that you have to do. Does the company have, first of all, positive ROIC? First of all? And secondly, is it somewhere close to 10%? And for a couple of years in a row, if that is the case, you are in fact, observing a company that is able to charge a high price is very probably to its customers or has modes like a monopolist situation or duopoly situation where prices can be charged high and through that profits are in fact high. And remember when? And this is something that we already discussed that every investments, so when will bring us there is depth dollar of shareholders bringing capital into the company. And that capital is transformed into assets. That, that transformation of capital into assets is carrying an implicit cost of capital. What you want to achieve is that if you remember that the return that you get on your assets is higher than the cost of capital expectations. And of course, if you want to avoid destroying value and destroying wealth, your cost of capital has to be higher than inflation. So when you bring all this together, now going to be adding one technical term that is important to know as well in your vocabulary. Because corporate finance is the language of business, It's what is called the WACC, the weighted average cost of capitals. So first of all, before I explain to you how the WACC works very quickly through an example. So the right formula that we have to think is you remember that you start from inflation. So everything. I'm not speaking about philanthropy, but when you invest money into something, your written has to be higher than inflation. So we need to know what is the cost or what is the amount of inflation that you have? Depending on your investment horizon? Of course you could if you want to be on the safe side investment e.g. a. Us 30-year Treasury bonds, which is yielding e.g. at three dots 6%, if I'm not mistaken lately. And of course, if you're taking more risks, you want to have a return that is higher versus the risk-free rate that is provided by the US government, which is more or less covering inflation. So by doing that, and remember we mentioned, and I mentioned the term capital spread. It would be great if you would be able to generate three investments, return on invested capital that is higher than your cost of capital. But we will be speaking about weighted average cost of capital, which is higher than the risk-free rate of the third year, US treasury bonds, which is higher than inflation. This is how investors and this is how companies create value. They're gonna get cost of capital expectations from their shareholders. And management has at least to be on par with those cost of capital expectations. But in corporate finance, we don't use the term cost of capital. We use the term WACC, which is weighted average cost of capital. What does it mean? I mean, if you just look at the balance sheet, remember that on the sources of capital, we have two sources of capital. I mean, we were discussing this return on equity versus return on invested capital. Return on equity is only considering equity as a source of capital. Return on invested capital is considering the credit told us plus the equity holders as sources of capital. What happens very often in companies is what we call the company has a specific capitals structure, the capitalist structure to make it simple as a proportion of how much of capital has been brought in by equity holders versus depth told us, the WACC in fact is a weighted average of, let's say, calculating the cost of equity versus depth. And I will not go too far into the details here because it's not a corporate finance course. I wanted to just that you understand that those terms exists. So when I was initially mentioning that your written has to be higher than cost of capital, has to be higher than inflation. Now I can say that your return on invested capital has to be higher than the WACC, has to be higher than risk-free rate and has to be higher than inflation. How do you calculate the WACC? Well, it's pretty easy. I mean, depending on the amount of money that you are raising from equity and from depths. And of course the cost that comes to it. I mean, if you want to know the cost of dept, just go to your bank and ask for depending on what you would like to have for 100s, thousands, million, 10 million. And they're going to tell you versus your risk profile, what will be the cost for you of raising that amount of money from or to borrow that amount of money from the bank. So, I mean, let's make it very easy if you are an investor and in this example, you want to invest into the market with you. Remember I said that you should not raise DHAP to invest into the market. You should only invest your own money. But in this example, if you would raise 63% of your investments through adapt and 37% through your own money, which would be equity. You could. In this example, let's consider that the bank is giving you a 4% return or cost. In fact. On the depths. And you're considering that's the cost, that your cost of capital is 12% because maybe you're investing into more high risk investment vehicle. In fact, as the 12% cost is representing only 37% of the inputs, which is an equity inputs. And the 4% is linked to 63% of the source of your investments. In fact, the weighted average cost of capital would be 696 per cent. Of course, your investment has to match this, so you need to have a return that is above this cost of capital of 696 per cent. Otherwise you will be destroying wealth, of course. But if you're able to earn e.g. 896 per cent and you having a cost of capital of 696% while you have a capitalist spread of two per cent. So you're actually creating more value to yourself by this. And this is how it works. Also this financing mechanisms, this is how it works for companies as well. If the company has to go to the bank and raise money from the bank versus the company is raising money from its shareholders. Both half Cost of Capital expectations for the shadows will be the cost of equity expectation. And for the bank, it will be the cost of debt expectation. And of course, the cost of that will depend as well on your risk profile as a company. And last but not least, because, I mean, I remember many, many years ago, I wasn't thinking. And you remember that I said in the introduction of this lesson that the cost of depth normally is lower than the cost of equity because depth dollars half or they carry a lower risk versus equity holders, which is true. Why then in fact, raising money from equity holders, it's matter of equilibrium, what is called the financial gearing as well, which is linked to in fact with the capital structure if you're only raising money through depths. In fact, the example I was giving on the WACC was a theoretical example. If you are financing something with 63% of depth, very probably you will not get a 4% cost of depth expectations from the bank. Very probably the bank will consider you with a higher risk. Depends. Maybe, of course, if you're borrowing 1 million and you have already having 10 million in cash in that bank, while they may be considered that lower risk. But if you have nothing from them, then maybe the cost of debt will be 15% while the cost of equity will remain at 12 per cent. So you see that then the effect than the WACC, because of that, will be higher than the cost of equity. So this is where in fact, at a certain money time this what is called the gearing ratios, the debt to equity and we'll be discussing debt to equity in the upcoming chapter as well. And the solvency and the interest coverage ratio just need, you need to keep in mind that it does not mean that per default, the cost of debt is lower than the cost of equity. That you should think. That you can finance everything exclusively through dept, the people that you want to borrow money from the depth TO loss. If you are not adding any equity to the investment, they will then consider, you're asked as a very, very high risk, and then they will raise the cost of debt to extremely high levels. This is what I'm showing here. In fact, at the bullet point number three, where if the amount of equity that you're bringing in is really low at a certain time. The cost of depth, in fact, is skyrocketing and it becomes exponential. So there is a right that equilibrium to bring so that the cost of equity remains higher than the cost of debt. And this one I'm showing here in this curve, but that's little bit more technical, but just wanted to share this with you because lot of people, when I speak about cost of debt and cost of equity, they think that's because I said that because of debt is lower than cost of equity, that they should only raise money from external credit told us and that's wrong. You need to finance something with your own money. I mean, if you are buying a house, the bank will expect that you bring in a certain amount of your own equity into it. And then depending on your risk profile than they will provide you or make your proposal for the cost of depth. So the interest rate that you will have when investing into house e.g. that you do not own, but you need some kind of depth for that. This is a gearing ratio that we're speaking here about. Alright, so wrapping up here, so we are nearly at the end of the level one fundamental screen. So remember that first test is, are we having blue chips? Is the company that you want to invest into blue chips? Yes. Yes. No. Does the company have earnings consistent for the last five if not ten years? Does the company currently, on its current share price provide your price to earnings ratio that is below 15 or even below ten. Does the company provide a passive written two shells of at least four per cent passively after taxes. Does the company provides a return on invested capital that is above 10% consistently? If that is the case, it looks like already starting to look at a good company, you have not yet been able to calculate what's the intrinsic value that will be part of the next chapter. But the one last thing is, as we have been looking into financial powerhouses and the debt to equity conversation is also look at the solvency of the company and how too much depth, in fact, can kill a company's business in fact. So we'll speak about that in the next lesson. Thank you. 16. Solvency, debt to equity & interest coverage ratio: Right, value investors. Last lesson of Chapter number three. We are still, we are in fact wrapping up the level of one fundamental tests that we have to do. So in the next one will be discussing solvency, debt to equity and interest coverage ratio. So remember when we're looking at a balance sheet and we have been now extensively discussing this in the previous lecture as well about the sources of capital. And that you have, again, you see how the pencil comes together, that you have that as a source of capital and equity as a source of capital. One interesting measure as well. Then I like to look into is the debt to equity ratio, which is basically the ratio you calculate. In fact, you take the external liabilities of the company and you divide it by the equity and liabilities of the company. And this allows you, in fact, this ratio is a measure of performance, but also of risks and also of benchmark, of comparison with other companies as well. One thing that I can already share here is, of course, debt to equity and it's the same for the RIC. I mean, you may have industries that are more capital intensive than other ones. So there are, in fact, it's interesting to compare the ratios within the same industry, but for you, nonetheless, as an investor, if you're interested in three to four to five different industries, while you need to take into account that may be industries that are less capital-intensive and provide similar returns are in fact more interesting for you. Alright, so coming back to the wag very quickly, remember that the cost of capital, or what we now call the weighted average cost of capital, is a measure that is averaged by the amount of equity that is brought in versus the amount of depth. So in the table below what I'm showing you here, e.g. if you would have a cost of debt sitting at five per cent of cost of equity is sitting at nine per cent. As a theoretical example, if the amount of debt that you would bring into investment would be zero per cent. The amount of equity that you would bring into investment would be 100%. Your WACC would be equivalent to the cost of equity at nine per cent. Of course, if it is half, half, you have half of the investment that is coming from depth at a cost of five per cent and half of the investment that is coming from equity at the nine per cent cost, then of course your WACC is perfectly balanced between the two. You're going to have a WACC of seven per cent. If e.g. you have 1990 per cent of investment that is covered by depth and that has a cost of five per cent. And only 10% is covered by equity. Equity has a cost of nine per cent, while the WACC would be a five, not four per cent. So keep, keep this in mind that now when you speak about written has to be higher than cost of capital. In fact, I mean that return on invested capital has to be higher than the weighted average cost of capital. This is where we need to bring in also ratios like depths to equity. So of course, when you remember in the previous lecture, we were looking at a very simple balance sheet of company a and company B, where I wanted to prove to you through a simple example, the ROIC is a better performance measure than return on equity. In fact, I did not show you, but I had already precalculated the debt to equity ratio. Of course, debt to equity ratio for company a is zero because if you take depth divided by, so you take 0/15200, it will always be zero because the company has no adapt. If you look at company B, in fact, they're, the debt to equity ratio is still okay ish. It's below one, but it's 10,000 in terms of depth divided by 17650 in terms of equity. So it would not be now dramatic. And you will see that afterwards at the end, I will conclude that having a debt to equity ratio, of course it depends on the industry but adapt to equity ratio that is below three below to even below one that five is in fact great to have because then the company carries a lot of equity and has not too much external leverage. What you can do, of course, as I said, is you will find on a lot of websites on morningstar.com, e.g. they will have already precalculated debt to equity on the latest quarter. And here I was analyzing, I think it wasn't thousand and 1,900,020. I was analyzing and debt-to-equity of the latest quarter for the car manufacturers. And you see in fact that you have really, I mean, it goes from, I think the highest one was Ford Motor Company with the debt to equity of 309. And porch at that time, person has a very specific structure. In the meantime, they have IPOs and the ticker is P9 11. It's very funny, in fact what they have chosen as a ticker. But I exclude Here Porsche automobile holding. But you have like Ferrari handed up to equity of 141 key I headed up to equity of zero dot 14, which is extremely, extremely low. Daimler Ag. So that's a Mercedes. In the meantime, they had a debt to equity of one dot six c2, which is still not a lot, but it means that they have more equity, 62 per cent more equity, sorry, 62% more depth versus equity. That's what the debt to equity in fact means. So a very concrete example, how in fact you remember we are having this cycle, this value creation cycle, where capital comes in is transformed into assets. We hope that those acids generate the profit from the operating cycle. Then company management and board of directors and shareholders, depending on what our reserve methods to those three, let's say bodies. What has been delegated to those bodies, they then have a strategic capital allocation decisions flow number four, if you remember reinvesting into assets flow number five, ping of death, flow number six, giving are providing a return to shareholders. This example, in fact, we are looking at flow number five, so we are in fact reducing the amount of that. So on the left-hand side and we'll expand the example we're having and we use this example of simplified balance sheet a couple of lessons ago where the company has in terms of sources of capital, a depth of $120 million sitting in the balance sheet, and an equity with the same amount at 120 million years old as by pure coincidence, of course. So when you calculate the debt to equity ratio, it's 120/120. So the debt to equity ratio is of one. Now, the company has generated profits. Let's imagine to make it simple at the company has generated $20 million of profits and is using 100% of the profits generated. Just, you know, they're going to flow number five. So we're going to be reducing the company management has decided we want to reduce the amount of depth. So what happens is that 20 million of cash are burns from the balance sheet and the balance sheets. So on the left-hand side, there is an outflow of $20 million from the bank accounts. That outflow of cash is going, e.g. to the debt holders. So to the lenders, let's measure would be a bank. And the bank now has received a payment of 20 million. What remains in the balance sheet of the company is that the total amount of depths, as you see on the right-hand side, has been reduced 120-100120 -20. The equity amount has remained unchanged. The company has allocated 100% of its profits to the flow number five, so the equity there are no retained earnings and have increased the book value. So the amount of equity remains the same, $120 million. Do we like that? Well, yes, we do like that. Why? Because the debt to equity ratio has just decrease. Look at just make the math on before doing this reimbursement of depths, it was 120/1 attendee, so the debt to equity ratios of one. Now, in fact, we have 20 million lines of depth and the debt to equity ratio went 1-083, which is a calculation $100,000,000 of depth divided by the same amount of equity, which is $120 million. This is deleveraging as it is called. I do like those things as well because I prefer that the company has less depths to carry in its balance sheet. That's always great. But of course, in some industries you will need to raise depths. And that sentence is cheaper than equity. But nonetheless, the debt to equity ratio has to remain reasonable. So in this theoretical example, you see at the debt to equity ratio once down. So when we look at corporate dept in fact, and you're going to see that I'm not speaking about it too much in the other value investing tuning, I'm speaking more about it in the other reading financial statements is when you do what is called a vertical analysis, you look at what are the substances but other bigger items in the balance sheet. In fact, very often if it is equity, but also the finance liabilities of the bigger portion in the balance sheets very, very often and of course it varies. I mean, it's an car manufacturer that has huge manufacturing plants, has to invest a lot of money into R&D. It's something different if you have pure marketing business like Nike, e.g. where you outsource a lot of things. So your capital intensity is probably much lower. In fact, offer a franchise, franchiser, e.g. so what the investors, what you have to look into is, of course, the size, the amount of debt that the company has. And this is typically done by looking at debt to equity ratio. Also what we'll see is the interest coverage ratio. So that's really the cost not reimburse the adapt because the data has some reimbursement timeline set, what is called the maturity. And if you look into the other reading financial statements course, I'm explaining how to read the timeline of the liabilities because it's not necessarily linear. So you are able already to see what is the amount of money that has to flow back into flow number five over the next e.g. six to seven years, there's gonna be a timeline for reimbursement of the depth that the company carries in its balance sheet. And it's not linear. As I said, there may be peaks in there as well. But for me, the two most important ratio that I like to look into the debt to equity and the interest coverage ratio. So with that, I'm introducing in fact the term that I have not discussed yet. So you have understood how to calculate debt to equity and I will tell you how to test up to equity. There is another one, which is the interest coverage ratio. But before doing that, we will be discussing this in chapter number five when we are looking at external stakeholders, how they perceive the company that you're thinking about to invest into. You have in fact, rating agencies like Standard and Poor's, Moody's and Fitch, you have other ones, but those are the three most known ones that in fact rates the solvency of companies. And you gotta have those, let's say, ratings that go e.g. for what is top grades. Investment level is always considered AAA you have is also for sovereign bonds. So four bonds. So for depth that is raised by countries as well, countries also are getting ratings, e.g. Luxembourg has a track record on triple a ratings. Then of course, if the solvency is going down, it goes from triple a to double a, triple B. So that's still investment-grade investments. And then when you go below, then it becomes speculative and you will understand how to calculate it. So the source I'm using here, and I've put it here on the bottom. I'm using a guy. Maybe you see the book behind me. It's about company valuation. The guy is called us what does move around and it's like really the experts on a company valuation. In fact, he has written a couple of books, is a professor at the Stern Business School at New York University. And what is interesting is that he in fact provides at publicly, I mean, you can download it. He provides in fact, how the ratings are linked, in fact to the risk of the company. And what does that mean in terms of cost of capital? And cost of capital increases or premiums that you need to add depending on the risk of the company. So let me explain the following. So we are discussing depth here. So when we're looking at depths, the first thing that we want to test is what is the amount of debt versus equity? So that's the debt to equity ratio, very easy to take both numbers. We divide that by equity and you have a ratio. What is great is when that number is somewhere below three below to even preferably below one dot five so that the company does not carry too much depth, right? But that's not enough the company in order to serve that depths as also to pay interests. And that's the interests expanse cost. So what we want to do as investors to look as well is how much of the profits I in fact, eaten up just in order to service the existing debt of the company. And this is what is called the interest coverage ratio. So typically what we do is we take the earnings before interests and taxes and we divide it by the interest expense. That is the interest coverage ratio and that ratio. And you'll see on the right-hand side on the table, depending on how that ratio, what the result of that ratio is. If typically you are having an interest coverage ratio that is below one dot five. Well, it means that. What does it mean? It means that most of the profits are in fact going to servicing just the cost of the depths. Of course, if you have an interest coverage ratio of one, that's the easiest one. Let's imagine the company has generated 100 million of EBITDA earnings before interest and taxes. And the interest expense is 100 million as well, where nothing is left to do 45.6 because interests expanse isn't that reducing it's not flow. Number five is not reducing the amount of depth. The amount of depth is there. It's just the cost to service the depths. And that's of course dramatic because nothing is left even to reimburse the adapts. So that's why you need to have an interest coverage ratio. Typically that is above, I would consider above 105 about too, that's really, really the minimum. So when you have an interest coverage ratio that is below one, not five or lower. I mean, I tell you the company will vary, probably struggle a lot too. So we'd probably have to restructure it stepped in fact. But if you're having, I mean, you have companies that have interest coverage ratio that are sitting at 13 times or even ten times. It means that when you have an interest coverage ratio of ten, 10% of the profits are in fact consumed to serve as the depth. At the same time you have 90 per cent that remain maybe to reduce the amount of adapt. So with that also the amount of interests, expenses may be going down in the next operating cycle. This is how I have to think about what that was, what the model around says Through his tables on the right-hand side, depending on the market cap. But if you look at large, I mean, I invest into blue-chip companies. If you look at large non-financial service firms that they have market caps about 5 billion. I mean, he's considering that an interest coverage ratio above H dot 50 is in fact triple a rating. So the risk premium that you would need to add to your cost of capital is only 69% at that time when the calculation was done, that was January 2021. If you have an interest coverage ratio of e.g. one of one, which is 0-1 dots 25. You need to add to your cost of capital a risk, let's say a risk premium of 940, 6%, that's huge. And it's normal because asset with an interest coverage ratio of one, I promise you the company is struggling, seriously struggling, and it's just surviving and taking all the profits to reimburse, just service, to end to pay. In fact, the interest expense, not even to reduce the amount of depth. So that's the kind of thing where you need to be attentive and that's why you see how osmotic neuron is matching. When you look at the 90814999, is considering that as a triple C rating. And if you go back to the previous slide, a triple C rating is considered a very high risk investments. So that's speculative. Let's say zone. If you're having a interest coverage ratio of H dot 50, e.g. he's considering this as AAA. Aaa is investment-grade, top-level. Our premise of the company will not go bankrupt just by its interests expense. So that's the kind of thing that you have to also understand and this will be calculated in the actual file as well. And to make it simple, is the debt-to-equity ratio, the lower the better and the interest coverage ratio, the higher the better. And this is something that's when you will put in the actual file, the values. And we will be discussing specific appendix that explains how to input the various how to input the various numbers. You will see in fact, through color codes if the debt to equity is low and also if the interest coverage ratio is giving enough margin of safety on the amount of interest expense versus total amount of profits. To, to last very quick tests that you could add as well, which sometimes are forgotten, is what I call the cash to market cap in the context of depth. So it's interesting because when markets are extremely depressed, it happens that. And here you have the example of Ford Motor Company at that time when I was doing the analysis that the amount of cash versus the market cap. And remember what the market cap is, the number of shares outstanding multiplied by the share price. I mean, you will nearly buying the whole company's cash account only. This is how much depressed and Margaret was about fourths. So they were only adding, I mean, if, if you would consider banning the total balance sheet, the markets. So if you would have the firepower to buy all the shares of fourths, you would actually buy. When you wouldn't be buying one share, you will be buying 82% of the cash account of fourths. And the rest of the balance sheet was only representing 18% in one singular share price, which is crazy low. So that's something that's, of course you need them to compare with the amount of debt that the company carries. But that's also a measure that from time to time, I like to look when markets are extremely depressed. It happens that markets are giving me the company at a cache to market cap that is, in fact very close to 100%, which is like crazy cheap. In fact. You have to calculate this, of course, and I think it's calculating the actual file as well. So this is what I want you to do here, is that you estimate that you comments if you look at Ferrari specifically, if you look at at that time when I was doing the analysis, the cash to market cap was of 2.5th, nine per cent. And I want you to make the interpretation. What does that mean? I'm wondering when you are ready to resume. First of all, you pause and when you're ready to resume, I will explain. So similar to Ford, where you were looking at 81, 97% while a Ferrari having a cache to market cap of 2.5th D9. A. That means that Ferrari is overvalued, or it means that it carries an extremely low amounts of cash. It means that when you buying one singular shelf Ferrari, that only 259% of the share price is linked to their cash position and the rest is linked to the other assets in the balance sheet. In fact, this is how you should do the interpretation. Alright, wrapping up a level one fundamental screen. So let's just rehearse very quickly. So first test is the company being a blue-chip. So the company that you want to invest into is2 blue-chip company is a big does it have strong brands? Seconds test? Does it carry earnings consistency for at least five to ten years in a row? Third task is the PE below 15, even below ten, returned to shareholders at least four to five per cent passive income, four per cent for me, after taxes, you could say five per cent pre-tax. Does the company generate profitability on its invested capital at a rate of around 10% in a consistent way. Does the company have a debt to equity ratio that is below three below to even better below one dot five so that the company does not have too much debt versus equity. The interest coverage ratio we want to have at least an interest coverage ratio of three, which means that less than or let's say a third of the profits I in fact allocated to servicing the cost of the depths. Of course, the higher the battery. Remember that on the interest coverage ratio, if you are above a dot five, you are having in fact, only a ninth or tenth of the profits that are allocated to servicing the cost of the debt. What are wrapping up here? Last, let's say conclusion message that I want to share here with you before we move into chapter number four, which will be the evaluation process will be calculating. And we wouldn't be able to look at a share price that the market is giving us versus how much In fact you value the company will be using various methods for that. But here, one last thing I want to share with you. I mean, we have seen a couple of tasks, blue chips or inconsistency PE, returned to shareholders, return on invested capital debt to equity and interest coverage ratio. Please, again, do not put your money into the stock market based on one ratio. That looks good. It's a combination of all of them, right? Of course, judgement is required because maybe debt-to-equity will be tougher for pharma industry, maybe tougher for, I don't know, utilities, those kind of things that are more capital intensive versus a pure franchisor, e.g. so you need to think about that. But with those tests, if you combine those tests together, you're going to see in fact that how the corn spreads from the crop. And I mean, it's very interesting to do that, but please again, do not invest your money into the stock market just based on one ratio, that looks good, that would be foolish. And as I told you, a two-month, too many people actually invest into the market just by looking, e.g. at the price to earnings ratio that is low in fact, but that's not good enough. You need to take into account the other factors as well. Alright, wrapping up here, talk to you in the next lecture and next chapter. In fact, which is the valuation process, we're going to be discussing couple of methods, how to value the share price of a company and comparing it with the market. And if we having this famous margin of safety of 25 to 30 per cent, talk to you the next one. Thank you. 17. Case study : Performing a fundamental analysis with VingeGPT: Alright, the investors. So now, having finished the let's call it the theory with some practical examples about the fundamental screens, what we're going to do now as we have now labs that are included in the trainings, I'm going to show you how to use VNGPT to, in fact, be very productive and efficient doing the fundamental analysis of any company. Allow to access Vin GPT, I'm showing you can here go to the website, you just type vingbt.com. You're going to see the website loading, and after having loaded, you can immediately either click here on GT Ving GPT, or if you go to Get Started, you go to another screen where you also have the user guide that you can download and also there, you can go to Ving GBT as you wish. So if I go back to home, I'm just clicking here on GoTo VingBT. We open a window on the Open AI store. So you see you're having now access to VN GBT. And so this looks very familiar if you're used to ChanBT, but this is our own IGBT that is, in fact, built on top of the Open AI engine. As I'm always saying to people, it's not a wrapper because you have a lot of custom GBTs that pretend to have their own data, but they are not. It's just a facade on top of the Open AI engine. I want to show you that this is actually so this is curated with more than 150 pages of our own knowledge, very interesting knowledge, which is coming from the courses that are available on platforms like Udemis, Giulia skill, success, et cetera. And the data points that are behind are coming from our own backend you're going to see this. So we are practicing now the fundamental screen. So the intention is that you are able, let me just increase a little bit the Zoom here. So the intention is that you are able to very rapidly perform the various tasks that we saw on the fundamental screen. So the first thing that you should do, and again, I'm doing it now here in English, but any language that is supported by the Open AI engine, if it is Spanish, Chinese, Russian, Korean and any language, French, German, you can, of course, interact with VNGBT in those languages. But first, let's take an example. Let's look at, for example, I don't know. Let's compare Microsoft with Apple, for example. So first, what you have to ask is, as it is a new conversation is do you have Microsoft in your companies. So I'm submitting a simple prompt. So you're going to see that winch what's going to be doing. It's going to first search in its knowledge. And so I'm saying, Yes, I would like you to perform a fundamental fundamental analysis of the company as an example. So here what you're going to see. You see, it's talking to the connector. So it's talking to our back end. So this is where we have millions and millions of data points, and it's showing you here because I'm doing the recording on June 26. It's actually structuring the response as we have been teaching this course, as this course is structured. So you start with relative valuation and elements like price earnings, price of free cash flow. We look at dividend yields, dividend payout ratio, share buyback. We look also at solvency and financial health like debt to equity, interest coverage ratio. The Altman Z score, there is a specific more advanced training on the Altman Z score, which is a metric about the risk of bankruptcy. And then we look at profitability like RIC, for example, and return on assets. And we have in VNC for the time being, so we have 35,300 companies. We have 361 companies who have mode, either white mode or narrow mode information. In the case of Microsoft, I mean, we have fueled, let's say, the VNGBT data back end with mode information. You see that what is nice, as it knows the method of the very interesting training. I immediately suggests if you want to do a level two analysis of the intrinsic value, which is part of the lesson that you have not done yet, or even the Level three about Cosmo sentiment and brand value. But what I'm going to ask is, I would like actually to have Microsoft compared with Apple. Can you analyze now Apple and then do a side by side comparison of both fundamental analysis? So let's see what it does now. I mean, I'm doing this life, so I'm just typing the prompts as I think I should submit the prompts. So you see it's again, talking to our back end. So first, it comes back with the fundamental analysis here now of Apple with a ticker. You see it comes with the same structure. It comes with passive income. It comes with solvency, data, profitability, and efficiency, and then also the mode. Then because I ask in the same prom to do a side by side comparison, you see, in fact, here that you can easily have a side by side comparison between both companies. So you can then, of course. And again, inch knows that the next step would typically be a level two analysis also called intrinsic valuation. Last prompt that I'm going to submit here, I'm going to take another company like, I don't know. Let's take a for example, Pepsi, and I'm going to actually show you that you can have even a quicker way of prompting VingPT is calling the L one or level one analysis. So I'm going to ask now Vingch is perform a level one analysis for Pepsi. And the name of the company is not Pepsi. It's I think Pepsi Co, if I remember well. So it's again, talk into the back ends, and it fetches, so it searches for the data. And when it has found the data, it will then come back and provide you the results. So I mean, it has to do also the level one analysis. So you see it has talked, so it means that it has received information back. So probably it has found Pepsi in the 35,000 companies. Then you see it coming back with a ticker name, the dates of the latest updates, and you see it comes back with price earnings, price free cash flow, and then again, same structure, passive income, shelter return, solvency, profitability, and efficiency. So all of this is already prepared for you. You see again, it has a white mode and we have fueled it with the type of information that is needed for value investors. And it even is now suggesting to do side by side comparison between the three companies, which is something that we will not do now. So this one I wanted to show you with a couple of simple prompts, and following the structure and the learnings that you have seen here using Ving gPT very, very rapidly, you can have a quick analysis with one prompt about the fundamental screens of a company. So let's move now into the next part of this training, which is going into the intrinsic iteration. Thank you. 18. Book value & Price to Book: Right, value investors. We have finished Chapter number three, which was in fact the first chapter where we're really discussing various fundamental tasks that you have to do, which are more used as a screening mechanism to filter out from your investment universe. Already I'm some kind of companies that could be cheap looking at those various ratios that we discussed, blue chips, earnings consistency, price to earnings ratio, return to shareholders, ROIC, debt to equity debt and interest coverage ratio. Remember that the analysis of one ratio shall never be enough for you to invest into the stock market on a specific company. Right? Now, we are starting chapter number four, which is a very important chapter as well, because we not do remember when I was much younger. In fact, I'm now 50 plus, when I was much younger, I was always intrigued by Warren Buffett when he was speaking about intrinsic value and mean many, many years ago, I didn't not really have a clue how to calculate the intrinsic value of a company. And that's basically what I tried to, all the learnings that I was able to, let's say compound and gather over the last more than two decades. Then I'm bringing up here in this chapter number four and how in fact giving you various methods and how to calculate the intrinsic value of a company from there, in fact, that you can compare it with the current share price and then decide if you have this margin of safety. So remember this is again, what I'm showing here in this graph. I told you in the very beginning of this course, there is one graph that I want you to keep in mind is this one. So typically what you want to have is you want to be able to determine the intrinsic value. So the real value, the accounting value of the asset that you are potentially willing to invest into. Being able to compare the intrinsic, the underlying value of the assets that you want to buy versus what the market or a seller, if it will be private equity, is giving you and what you want to have a margin of safety of at least 25 to 30%. This is what I learned from Warren Buffett and Benjamin Graham. Alright, And for that in fact, we will of course use various approximation methods. Remember there is no silver bullet, there is not one signal methods. There is. I mean, let's be very feather as one method is mostly used by most of the people, which is a discounted cashflow, discounted free cash flow to the firm calculation, but it's not the only one. And we will not be discussing startups here we are really in the investment universe of blue-chip companies, of mature companies that are normally profitable. So I will leave the Startup Valuation aside. That's something there's a specific course on sort of valuations here. In fact, I'm gonna share with you a couple of methods that you could use in fact, to determine the intrinsic value. So the first one we will be discussing is the price to book. In fact, the price to book is something it's very easy ratio to calculate. And it's basically comparing the markets. So the firm's market capitalization to its book value and to find undervalued companies. Of course, as always, the price to book ratio as a single ratio should never be used alone as a single valuation of a company. And what I mean in terms of interpretation, we will be, will be discussing this through concrete examples of first very simple theoretical example and then a concrete example on Coca-Cola that I didn't 1,020. So what I can already say here is the lower the price to book, very productive means that the company is undervalued. Why you need to, of course, to be attentive is why is the market of the potential seller Providing a price that is very low? Is it's related to the company yes or no. And sometimes it can just be that Mr. Market is depressed in general above the market. And to be very fair, it happen to me multiple times over the last decade, two decades that I was able to buy companies that were in fact having a price to book ratio below one in fact. So here there's an important statement I want to make here. So when we speak about the book value of the company, it's basically the equity value that you have in the balance sheet to make it simple, right? So basically what a company is worth and that's why I'm showing here very simplified balance sheet is you have the assets on the left-hand side of the assets are the conversion of the capital that has been brought in, either through death tolls or through equity holders into the company. And that's the assets that are there. In fact, don't know, of course, if the company has been generating profits, remember this flow number three. Then if the company has decided to reinvest part of its profits in its own assets. That's flown number four, then of course the book value will increase. I mean, we have been discussing this, right? So the term book value of the term equity value of a company is basically what remains after. You are removing from the total amount of assets, all the liabilities. That's basically the book value of the company, right? So what I'm sharing here, It's the assets minus the debt holders. So one very important thing when you look, I mean, when you look at how to calculate the book value of a company, it's very simple. Again, you don't need a PhD, you don't need, I mean, this is not rocket science. It's very simple, but you need to understand the logic behind it. One of the things that I always share with my students is that when you are willing to buy and assets, typically, like we're speaking about, investing. So assets that generate profits, I'm not speaking a car. A car is not for me and investment because the value of the car will depreciate over time. But if you're investing into company that has assets that are generating profits, normally you don't buy a company for its book value, right? And this is where we will be discussing the methods of discounted future earnings, discounted free cash flow to the firm. Normally you buy a company for what the assets will generate in the future, then you decide on your investment horizon. Is your future ten years down the road is it's 30 years down the road, as I tend to do for very mature companies, because I believe those companies will still be around in 30 years. That's very important when you will understand. This fundamental thing is that you never buy a company for its book value. So imagine that the market is giving you the company at a price to book ratio of one will be explaining this. In calculating this, it means that basically the market is giving you the company just for what it is worth, removing all liabilities. It means that the market thinks that those assets minus liabilities that remain if you're buying them at a ratio of one, those assets will not generate profits in the future. That's not logical, right? But it happens from time to time. And this is where I want you as value investor to understand this ratio. Because again, don't buy a company for its equity or book value by the company normally for the future earnings, the future cashflows that the company will generate on its book value. And this is where we then discuss what is the ratio or the multiple between, let's say what those future earnings and future cashflows are telling you versus the book value. But we will speak about that. That's another method that we'll use later on for doing the evaluation. That's the one I was using the term discounted cashflow. The real term is discounted free cash flow to the firm. That's really the one that's typically is used in fact to do valuation of companies. But we will discuss that in, I think it's in the fifth, fourth, and fifth lesson of this chapter, in fact, alright? So price to book ratio, as already said, basically you take the total amount of equity and you divide it by the total amount of shares outstanding, diluted, of course, remember you take the worst, the biggest figure that is the diluted one, the price to book ratio of this because first we need to determine the book value per share because the market is giving you a per-share price. So you need to bring it to the same unit, which is a book value per share. And then you compare the market price to the book value per share. That's the PB ratio. So the price to book ratio. So you take the current market share price and you divide it by the book value per share that you have in fact calculated. Let's practice this first, first things first, a very, very extreme simple example. And then we go into Coca-Cola, which is a real-world example. So price to book ratio. Remember the two formulas for us to calculate the book value per share. We have here very simplistic balance sheet. The company has 100 million of assets on the left-hand side, has 50 million of liabilities on the right-hand side. And has, because of that, obviously the equity or book value of the company is 100 -50 in terms of liabilities on hundred million of assets -50 min of liabilities. So the remaining book value is $50 million. Imagine this theoretical example, the company would have 25 million of shares outstanding. So the book value per share is the total equity number, which is $50 million in rats here on the right-hand side of liability divided by the number of shares outstanding, That's 25 million of shares outstanding. So it means that your book value per share is 50/25. So it's true. In fact. Now, of course, what you would need to think is, what's the current share price? And let's imagine that the market would be, let's say, pricing this company or one share of this company at a price of four. So your price to book ratio, which is the current market share price divided by the book value per share that we just calculated being of $2 would be four, because let's imagine that would be the current share price for dollars divided by the book value by $2. So price-to-book ratio is of two infects. So what does this mean in terms of interpretation? It means that that if you would have infinite power, firepower, and you would be able to buy the whole company basically. So from an accounting perspective, the book value of the company is worth 50 million, right? But with the price-to-book ratio of two, it would mean that you would have to spend $100 million to be able to buy 100% of the share capital of the company. So let me again re-explain this. So if you would be able to buy the whole company, that's just the book value. You would need to buy the company and the book value per share of $2 per share. So $2 multiplied by 25-minute of shares outstanding. If you would have the firepower with 50 million, if you would put 50 million on the table, it would be worth at the book value of the company is worth. But the markets not giving you the company at the price to book ratio of one. The current share price is of four, so it's two times the book value would mean that in order to buy that 25 million of shares outstanding and the current share price of four. So 25 multiplied by four, you will need to put on the table $100 million to buy 100% or so to become a 100% shareholder of the company. So you're basically buying with a multiple of two versus the book value, which is a 50 million. And you can bring this back to a per-share thing. If you want to buy one share, you would need the book value is worth two, but the market is giving you at force. You need to pay twice the amount of the book value. It's a book value of price to book ratio of two low yes, it is because it would mean that, I mean, of course we will need to understand how much the company is, has been generating profits in the past. But I mean, very probably let's imagine that the company has been generated 10 million of profit on a normal operating cycle with those 100 million of assets would be an ROIC of around, let say ten per cent. Well, after five years, in fact, you already have, Let's say if you would have spent $100,000,000, 50 million on top of the book value. So five years of 10 million of profits. In fact, after the sixth year, it's full, full profitability for you. This is how you need to think about this price to book ratio. In fact, I hope it's clear how you need to interpret this. Right? So the price to book ratio typically was also very often news by value investors for decades. And even Warren Buffett has been speaking for very long time about this price to book ratio. And very often value investors have been considering that a good price to book value would be in fact the price to book ratio of below one. Again, as I said, when markets are super depressed, you have great companies that indeed are being sold below the book value. I'll give you a concrete example. I have the case with BASF. I think I bought a settlement time the company at €40 or share. I think at that time the price to book was at zero dot seven BASF and not go bankrupt tomorrow. So I was actually buying just the balance sheet of the company at a 30% discount. So that's just crazy cheap. Of course. Again, one ratio is not enough. You need to know that the track record of the company as a company good at generating profits. How much are you paying versus its current earnings to avoid being trapped in what is called the value trap. So those kind of things. So value investors today consider that stocks that have price to book value below three, cheap and even below one dot five, it starts to become very cheap because you are buying nearly if you would have unlimited firepower, you would buy the full price to book ratio of one that five does with 50 per cent on top of the equity value, you would be able to buy the whole company. So the multiple is very, very low in fact. So of course the ratio depends also. I mean, it depends between industries. I mean, if you look at tech companies, you will look at the price to book value. I'm just speaking about that ratio. Now, you may have companies where the price to book value, and I'm considering that you have an equity value that is positive, otherwise the price to book, you may have a book value that is negative. So imagine that, that happens as well. But typically, in tech industry you have price to book variations that are very, very, very, very high. We're speaking about Coca-Cola in the next slides and then we'll share with you why Coca Cola's stands today as well. So again, I just want here to repeat that one single ratio is not good enough to take an investment decision, but the price to book ratio is a very interesting one. And it allows to compare what is the market valuation of the company versus what is the accounting value of the balance sheet of the company. But remember again, you're not buying a company for the value of its balance sheet. You're buying a company for its balance sheet, but the earnings that will be generated in the future on that balance sheet, on the assets that are sitting in the balance sheet. That's really the logic behind it. Alright, a real-world example after this, very simplistic to explain the interpretation and how to calculate book value per share and price to book ratio. So it's Coca-Cola. Coca-cola has been a blue-chip companies since many, many years. I even think they are. Consider the dividend king on dividend aristocrat, I think they have been for many, many decades increasing the amount of cash dividends being paid out. And when I did the analysis, I think today Coca-Cola is rough cuts valued at 63 or $69 in April 2023. When I did the analysis in 2020, it was worth 40 eight.06. In fact, what I want you to do, so I've put here at the balance sheet on the right-hand side, it's a US gap balance sheet. So we have the assets first from very liquid to illiquid. Then you have the liabilities of foreignness, short-term liabilities, long-term liabilities, and then the equity part on the left-hand side, we have the income statement. So what I want you to do is I want you to calculate the price to book ratio and to comment it. So in order to calculate the price to book ratio, you need first to calculate the book value of the company. In order to calculate the book value per share of the company, you need, in fact, take the total amount of equity and divided by the total amount of shares outstanding, take always the diluted one, which is the bigger denominator that you will be using. So it will actually reduce the book value per share. Then you compare it, compare it with 4806. Let's imagine it would be the share price at that time because we're looking at it 2019 balance sheet as well. Alright, when you have done the calculation, please then suppose you are now try to look here in the balance sheet and the income statement. Where are the figures that you need? And then pause and when you're ready to when you have done the calculation, then please resume because I will be explaining how to do the calculation. Alright, so resuming here. So in fact, as I said, the first thing that you need to calculate is the book value per share. So the book value per share is the total amount of equity. So in this case, 21 billion 098 divided by the total amount of shares outstanding diluted, which is a bigger number at which you're sitting at that time and if 2019 at 4,000,000,314. So with that, in fact, if you do the calculation, you have, in fact the book value per share, calculate it at four dots, $89 per share. And then you compare the photo, the 1800s dollar per share with at that time it was April 2020. The market was, let's say, evaluating or selling Coca-Cola shares at 40, eight.06. So take those 4806, that's the market price, the current market price, at least at that time when the analysis was done, and then divided by the book value per share that you calculate on the 2019 full year balance sheet, this gives you a ratio of 982. This is your price to book. Is it? Hi, Molly us. It means that you would be buying ten times the balance sheet if you would buy into the company. One detail here that, I mean, I'm really speaking, but there's much more in the art of reading financial statements, which is already more advanced training for value investors. But one thing that I want to be very clear here, I said that in order to calculate the book value per share, that you take the total amount of equity, you divide it by the diluted amount of outstanding shares. In this case in Coca-Cola. When you look on the red frame on the right-hand side, you see in fact that Coca Cola has a total amount of equity that is bigger than the equity attributable to the shareholders of the Coca-Cola Company. You have a line in-between that is not in bold, which says equity attributable to non-controlling interests sitting at 2,000,000,117. So this is now, let's say accounting technique, but I'll put it in a simple way. It happens that those big companies like Coca-Cola, they have subsidiaries that they do not own 100%, they may own them at 90%. 9085 per cent. Accounting rules allow the company, Coca-Cola, group level to consolidate 100% of the balance sheet of the subsidiary into what you're seeing here in the balance sheet on the right-hand side, for the remaining ten to 15% that are not controlled by Coca-Cola. In fact, you will see in accounting terms in the equity side, in the equity, let's say items of the balance sheet. You're gonna see this line. This is equity, there's attributable to shareholders that are outside of Coca-Cola, e.g. the remaining 15 or ten per cent of that subsidiary, e.g. so in reality, when you have this setup, you would need to recalculate. And this is what I'm doing in the next slide. So the book value per share, you should not take 21 dot $0.98 billion, but you should take 18000000981/4000000000 of shares outstanding, you would end up at the book value per share of photo 39-year-old zeros per share. And you see the effect on the price to book. So before it was 982. Now as you are dividing by four dot 39, in fact, you are ending up at a price to book ratio of 1094. So nearly ten per cent more, which is normal because, I mean, from 201098, I have removed basically 10% of the equity of minus 211 $7 billion, which are attributable to shareholders that are outside of Coca-Cola. And you are in fact, if you're buying a Coca-Cola share, you are Sharona of Coca Cola. You are not an non-controlling interests shareholder. I mean, just be attentive to that. It's a small detail. But you see that here in this case of Coca-Cola, That's smart. I did it in a two-step approach. If you take the total equity, in fact, you keep the non-controlling interests inside, you're going to in fact, let's say overvalue the book value per share on what you need to do is really to think, well, there is a portion of Coca-Cola consolidated that if I buy a Coca-Cola share, I'm not owning, So we'd actually need to remove non-controlling interests over total equity. Alright, so this is a concrete example. So just wrapping up here, I mean, as I said earlier, I think that Coca-Cola is today April 2023, valued at 63, $70 per share. And I'm very quick looked at Morningstar on the latest price to book. And indeed you see at the price to book of Coca Cola has been pretty constant at 11 to 12 times over the last years. And how you interpret this? Well, it's expensive. So if you would just consider the price to book and we'd consider that all the other tests will be ticked off the price to book of Coca-Cola with a multiple of 11 times buying the balance sheet is for me just too much. I will show you in the next lesson how potentially you could adjust the book value either by looking at intangible assets like the brand value or e.g. property, plant, and equipment that is very often carry it at cost in the balance sheet. But we will discuss adjusted book value and you will see how this will impact in fact, the price to book of Coca Cola moving forward versus what we just calculated. So talk to you in the next lesson about adjusting the book value of the Coca-Cola Company or not so general how to do the adjustment on a book value. Thank you. 19. Adjusting Book value & Price to Book: Right, next lecture in chapter number four, we are in the level to course content. So this is more technical one and the intention is after having shared the fundamental screens which are used in fact to filter out already on your investment universe. Here we are really looking into valuation of the company. We started with price-to-book. And I'm going to show you in fact the how I do adjust the book value of companies which obviously will have an impact on the price to book ratio of, we're going to be practicing this on Coca-Cola as well. So the first thing, I mean, mostly when I'm in something I learned also from Warren Buffett, there are two main elements when being able to potentially review just the balance sheet of a company, specifically the asset side we're gonna be discussing about brand valuation. We're gonna be discussing the valuation of property, plant, and equipment. So I started with brand first. And I in this course are really focused on the brand thing. I will very quickly address the property plant equipment readjustment. So remember that we were discussing in the beginning, and I've been defining what is Modes and modes, as you have understood are. So it's basically brand strength. Those are companies, the companies that have modes. It's, they have an empire that is very difficult to attack because either it requires huge amounts of capital that some people are not willing to put on the table. Or the brand is so strong that people will just stick with the brand. Remember the example I was sharing about Gillette, e.g. in the world of shaving for men amongst others. When one of the things we will be discussing these in level three as well. Another thing that I like to look into as I do invest into blue-chip companies. And you remember when I was discussing my blue-chip, I was showing you how I set up my monitoring investment universe. And I take, amongst others, the top 100 brands in the world. And I'm lucky there are a couple of brand agencies like Interbrand, Brand Z, etcetera, who in fact provides on a regular basis the valuation of those brands. And when you see about valuation of the brands, you may ask yourself, well, how does this relate to the book value? Well, in fact, in the balance sheets, if you remember, so if I take a US gap balance sheet, you have like the very liquid assets like cash, cash equivalents, inventory, then you go into more long-term tangible assets like buildings, office space, so everything that is property, plant and equipment. And then you have the intangible assets and then you have to make it very simple. Two categories, goodwill, the premiums that are coming from acquiring companies and the other intangible assets are trademarks. It could be R&D as well. That would be potentially put into would not be expanded but capitalized and also so everything that is trademark. So this is where brands sit. They sit in the long term intangible assets of, of the balance sheet. And IFRS remember, it's just the other way around. So it would be the first long-term intangible asset category. In fact, the main, the main question for value investor is, how is the strength of the brand? How can that be reflected in the balance sheet? And is the company already reflecting it? And what is the standard that the company is taking? Is the company taking more defensive stance or is it taking more aggressive stance on valuing the brand and the strength of the brand of the company. And as I said, we'll be discussing very quickly the property, plant, and equipment undervaluation that you typically have in balance sheets, which will, of course then have an impact on the price to book value, the book value per share. And I will also discuss the brand valuation, which is an intangible long-term assets. So a key question, and actually it's a question I've been asked in a webinar that I've been recording, sorry, that is not out yet for new, let's say training platform in the US where they one of the one of New York option trader asked me. But when you do the adjustments of a brand and we were discussing Spotify, e.g. which is for me know, the blue-chip company, but they have a strong brand. He was asked me, but are you not counting twice when you are adjusting the balance sheet with the brand valuation. And if you take the value of Interbrand, e.g. and that brand value is ten times higher versus the brand value that is carried in the balance sheet of the company. I think that it requires some clarity and it's something that I've only been adding now in this course in 2000 2023 update, which is when you discuss brand valuation. In fact, you have two ways of reflecting and adjusting brand valuation in the financial statements of the company. The first one is that you would potentially in, because the company has a mode, has a strong brand, you would apply that to the financial cash flow models. And we will be discussing this in this chapter when we will be introducing you to discounted cashflow, discounted free cash flow to the firm, and discounted future earnings as well, which is basically linked to the income statement while the discounted free cash flow to the firm is linked to the cashflow statement. There. In fact, you could decide that in terms of brand valuation, if the company has a strong brand that you would adjust the revenue and sales velocity, you would adjust revenue growth. You would adjust the margin levers and investing expenses in those cashflow and future earnings projections. The second way of, let's say, let's say integrating the brand valuation is looking at the intangible asset side of the balance sheet. And I have decided that's a personal choice that I will focus on adjusting the book value of the company. So adjusting the balance sheet of the company for the first, let's say option that would exist which is adjusting the cashflow and future earning matrix, I consider. And it's a judgment call. That's why value investing isn't odd as well. I consider that the brand strength, if the company has already mode, is already integrated in the current earnings, in the current margins, in the current revenue growth, in the current return on invested capital for the last couple of years. In the consistency of profits for the last five to ten years. There are indeed, and that's my choice again, if I would then adjust those variables, like revenue growth, margin levers the amount of investing. I think then I would in fact calculate twice. I've decided only to look if the balance sheet is undervalued on property, plant and equipment, and intangible assets sides of this trademarks, those kind of things. So that's a choice. You can agree, disagree to it. I'm just explaining why. When I'm taking the value of a brand, I'm taking property, plant, and equipment that is carried at cost. I'm only adjusting the book value of the company and not the discounted cashflow, discounted future earnings because I believe that's already integrated because you're basing your future assumptions if there's a 1020, 30-year investment horizon on already existing modes. So that mode already is producing high profits. That's why you have a high return on invested capital, e.g. which is basically showing high profitability, the asset turnover. Alright, so I'm gonna give a concrete example on Coca-Cola and Coca-Cola. This is the brand valuation. I think it was 2019 when I did this exercise. And the logic you can take the 2022 numbers is the same. So Coca, Coca-Cola in that year was position number five of the top 100 brands in the world. And it had Interbrand Institute was estimating the brand value to be at 66,000,000,066, $341 billion. So I showing you the example, I took the balance sheet of 2019 of Coca-Cola and you can do the same today with the 2022 into brand valuation. You can do the same with the 2022 balance sheet. If Coca-Cola, it remains the same, just the figures we change in 2019. In fact, when you look at the balance sheet on the left-hand side of Coca-Cola, you see that Coca-Cola was referring to trademarks with indefinite lives. That will carry it a valid in the balance sheet at nine dots to $66 billion. Okay? So it means that I'm taking maybe a shortcut here. I don't believe it's a shortcut, but I mean, it's the only line that kind of mentioned there could be other intangible assets, but that's just 62,017 million, so it's not huge. I've considered that the trademarks with indefinite lives, those nine dots, 2 billion, that's what interbrand has valid at 66.3 billion. So basically, when I do this adjustment of the book value of a company, if the company has a strong brands. In this concrete example, just do the math. I take the difference in order to avoid counting twice. I take the difference between what interbrand is giving me $663 billion, what the company carrots in its balance sheet so they value, let's say indefinite trademarks that NANDA to Bill and the difference is 57 billion between the two. And I add this to the balance sheet. So it's basically, technically speaking, I'm increasing the amount of trademarks 9-66. 606341. And I will show you how, what's the impact on the calculations on book per share and also the price to book ratio versus what we just saw in the previous lecture. You have the Simon Property Plant and Equipment. And of course, if you don't read the footnotes, will not know that typically lands. If it is IFRS companies or US GAAP companies, that land is first of all, not depreciate it. And very nearly all the time, land is carried at cost. But we all know, I mean, if you bought, if you bought a piece of land 30 years ago, just due to natural inflation, that piece of land is worth much, much more today. And I'm going to show you it's an extract from a more advanced course that is called the art of company valuation, where I've did a precise calculation how to readjust the book value of Reshma of this luxury brand holding by really looking at the land that they were carrying in their balance sheet. This is what I'm showing here. Those are three slides. Again, it's not the purpose in this course. The other value investing, I'm purely focusing on brands and Mode Adjustment on the book value, not an adjustment of the PPE, but I mean, to be completing the explanations, there is an opportunity to adjust the book value of companies in their balance sheets book value by looking how much land they carry and then potentially readjusting because that land, except if I mean, if the soil is contaminated and there would be a cost to, let's say, clean that up. But if it is normal land, that land has increased a lot in value. And now what's showing here? I show you the three slides very quickly. So really small in fact has rough cuts. Property, plant equipment worth 99 to 10 billion. To make it simple. With accumulated depreciation, It's like net PP&E is like 6 billion rough cuts. And in fact, the land that they carry, of course, need to find out what has been the cost of inflation where they are having the assets. You imagine that this takes more time to evaluate. And in fact, I looked into it for the other company valuation advanced training. I looked into all the balance sheets of the company since 1989 to 2020. I estimated that there wasn't 148 million undervaluation on the land assets of Reshma. So of course what did I do? And I'm going to show it now here on the brand because it's the same thing. It's an asset that I'm readjusting, that I'm increasing, not artificially. It's just that I'm making a judgment call on the asset that is carried in the balance sheet, how it is reported by the company, and how I believe it should be reported. If I mark the lands to the current market value, and if I mark the brand value to its market value on the, on the balance sheet only, not on the discounted cashflow, discounted future earnings for what I was explaining before he ended concrete example of Coca-Cola. So we have a balance sheet of Coca Cola. And remember I was showing this in the previous lecture that Coca-Cola has 2 billion rough cut of non-controlling interests. So that's, let's say percentage of scholarship that is outside of normal shareholder. And those are minority shareholders. But Coca-Cola has fully consolidated their assets and liabilities in the balance sheet. The equity book value of Coca-Cola, if you remember, was 189814, rough cut photo 3 billion of shares. So total amount of shares outstanding, diluted, right? So you remember what I just mentioned a couple of minutes ago. So I'm adding 57 billion because Coca Cola is carrying its trademarks with indefinite lives at nine was at $9 to 2 billion. Interbrand is telling me what the brand of Coca-Cola is worth. In fact, the asset, the intangible asset is worth 57 billion. Sorry, it's worth, that's the difference. It's worth 66 dots 3 billion. So I'm adding just a difference between the two to avoid double counting. So I'm adding to the trademark line. I'm adding, I'm going from nine dots to, to infect those six is six to 3 billion. So I'm adding 57 billion of us dollars of trademark value. What is the impact of that? Because remember on my balance sheet has to be balanced. So i'm, I'm changing, I'm increasing the asset side automatically. I'm just increasing the equity side because that's the only way I can reflect in fact, the change addition in brand values by recalibrating the balance sheet on the equity side. And of course, this has an impact because I then have to recalculate the price to book. You remember that we were having a price to book value of 1094 in the previous lecture. And by increasing the book value by 57 billion. So my total equity becomes 76 billion instead of 189. So my adjusted book value per share is now 17, $63 per share at that, I mean, taking the fingers of 2019. If I was thinking about buying the company early 2020, in fact, I would then do an adjusted price to book. So what has changed is just the value of the equity that has changed. I'm no longer on the book value per share, taking the equity of 189 billion and dividing it by the total amount of shares outstanding diluted, which was photo three. But now I'm taking the $76 billion and dividing it by the same amount of shares diluted, outstanding. And then I have a book value per share, which is 17, not 63. Then I adjust, of course, the price to book because I have a new book value per share, my market price has not changed at that moment in time, keeping the figures constant so that you can compare with the previous lecture. So at that time the market was giving me a coca-cola shared Fourier dot $6 per share. Now I'm dividing by the adjusted book value per share, which is now a 17, 63 years dollars per share. And suddenly my adjusted price to book ratio came down 1094-2, the value of 72. So you see how brand companies that have strong brands, you can in fact adjust the balance sheet and at least on the price to book, it will tell you, I mean, having a price to book of 11 versus a price to book of two dots 72. It's a different story. You remember that I said that value investors like to have price to book value that are below three. I'd love to have them below one dot five and even to have them below one because it's telling me that the market is giving me the company at a discount just on its balance sheet, not even looking at the future earnings in the future profits that the balance sheet, so the assets of the bank to regenerate. That's, that's what I wanted to share with you. So you may argue that you agree or disagree with this, but that's also something that I learned from Warren Buffett that you have, at least from my learnings over the last two decades, you have those two elements that are typically undervalued for blue-chip companies is the string of the brands. And it's very often the land and sometimes the buildings, but the land very often if you read the accounting policy footnotes, it mentioned that the land is very often carried at cost, but if that land has been bought 40 years ago, sorry, just because of inflation. If that land was bought at 100 million and that land is valued at 100 million without depreciation in the asset side of the balance sheet, it says 100. Of course it has an impact on the equity, but it's maybe worth 300. So you would need to add 200 million to the equity side as well. So those are I will not say tricks, but this is judgment which is required. And this is the beauty of cost of having strong brands. Because if you have a small company that doesn't have, let's say, pricing power towards its customers and customers easily switch from one brand to the other. Well, there, I mean, you will not have the opportunity to adjust the book value of the company. So to adjust the balance sheet, maybe you can adjust it on the land very probably, but on the brand, on the intangible asset, you will not be able to do that. So this is something so the adjustment of the book value on the intangible asset, It's by the way, is something that you can do as well for growth companies at something e.g. that I did for Spotify in this webinar that I recorded a couple of weeks ago that will be hopefully published very soon by this new US investment learning platform. But, but that's something that is applicable as well to growth companies. But remember, we're not looking at just one ratio to take an investment decisions. But here I'm giving you ways on how to do the intrinsic valuation of companies. And first, I've started with the book value of a company per share, and then also now the adjusted book value per share. And through the multiple that comes out of that calculation, the price to book or the adjusted price to book. It gives you an indication if the market is considering the company to be expansive of the market is giving potentially the company way at a bargain. So that's the kind of thing that you need to know as well and you need to read this. Of course, this is reflected in the Excel file in the companion sheet. So you will have the opportunity to, I add in fact the brand value. Then depending on that, there's gonna be an adjustment. So you're going to have the calculations of adjusted book value per share, an adjusted price to book next to the book value and standard price to book as well in the companion sheets. So wrapping up on this one and in the next one will be discussing dividend discount valuation models with growth, without growth. But we will discuss in the next lecture. Thank you. 20. Dividend discount valuation models, growth model & total shareholder return: A comeback investors chapter number four. So you remember we are in the level two part of the tests and level two-week. Remember, we are discussing valuation methods or calculation methods to estimate the intrinsic value of the company that we are potentially interested in. So in the first two lessons of this chapter, we discuss price to book, so we were able to determine a book value per share. And also I showed you how to adjust as well the book value per share take into account e.g. brand valuation and or property plan and equipment. In this third lesson, we'll be discussing dividend discount models. In fact, it's not just one. But you're going to see that I will be introducing three ways on how to in fact calculate, approximate the valuation, the intrinsic value of company by looking at its dividends and share buybacks as well. So something that I already shared with you a couple of times, but I will repeat it. Sorry for that. I will continue repeating this a lot of times is when investors buy companies. If you are buying a share of a publicly traded companies, typically, you should have two type of cashflow expectations. The first one is while your money sit still, if you remember what I said, that you get dividends or some kind of passive return while your money sits still. From the moment you have bought the company until potentially the day you are selling of your position. And a second, Let's say kind of return is when you are selling your stock at the end of the holding period, of course you're hoping to sell the stock. So you hope, I hope for you that you have both the stock with a margin of safety it wasn't versus intrinsic value 25 to 30% below its IV. And the second cashflow that you will receive is in fact, the moment you sell your position that you will see written coming in there. So when selling the shares of the company that you bought, maybe one to three years ago. So those are the typical two types of caches that you have to think about when. And in order to determine the intrinsic value, you can actually on the first type of cashflow, use the dividends during the holding period to estimate the intrinsic value of the company. And I'm introducing here what is called the dividend discount model. And why, why can we use dividends as a way to determine the intrinsic value of a company? Well, it's pretty easy. In fact, let's say pretty straightforward. Not necessarily easy, but it's pretty straightforward as it is. One of the only two caches that you will see is in fact, you could make the sum of all the cashflows that you are expecting from the company in the future, of course, risk-adjusted. So we have to adjust that to the amount of risk that the company, in fact carriers, remember this risk versus return. If it's a small cap company, the risk premium will be higher if it is a big cap company, omega cap company. And potentially you have also learns how to look at the solvency like if the debt to equity ratio, interest coverage ratio, or goods, probably the annual returns have to be brought a little bit lower, of course, always above the cost of inflation and above you're expecting to have written that is above your cost of capital. So basically what we will be doing and we will be doing this in the next lesson as well. We will be bringing into its present value of expected future cash flows and discount them at a cost of capital or return expectation that you have related to its riskiness. So the two initial models, I will be introducing the third one later on. But the two initial models that we will be discussing and practicing is in fact the first one is a stable growth dividend discount model. So it will be abbreviating it TDM, where in fact the company in the future. I mean, what you can expect is that the dividend will not grow. We're speaking here really about cash dividends. And we are speaking about them pre-tax to be precise, not after-tax. You need to take into account that you may lose maybe 15 to 25%, 30% of the amount that we're discussing here just because of your tax exposure and this is country dependent. So what I'm saying is that the first model being introduced is the stable growth dividend discount model. The formula for that is pretty easy as we are thinking about valuing the share of a company by bringing to its present value, the sum of all the expected future cash flows discounted at a rate which is appropriate or which is risk-adjusted. In fact, the formula for the value per share of a stock using the dividend discount model method is basically. You sum up all expected dividends per share and the future, and you divide it by your cost of equity, which would be your cost of capital. But as you're not raising debt, and typically dividends also linked to equity. If you would look at the Guatemala Iran valuation books also is always dimension of cost of equity, but you could say its cost of capital, it's the same. So that's the first formula that you have to know. And of course, in the companion tree, this is being calculated automatically, but you will need to tell the model in the excellent companion sheet is what is the amount that the company has been paying off in the latest year? And this will be taken as an assumption then to estimate the future cash flows. And of course discounted at the rate that you will have decided to put it in the companion sheet. The second model is called the Gordon Growth Model. And you may recall that we discussed briefly already dividend kings and dividend aristocrat. So you have companies that for the last 25, last 50 years have been increasing their dividends year over year. So the dividend discount model would not be able to reflect this in, let's say in the formula. So the Gordon Growth Model has, in fact is an extension of the EDM model and the formula goes the following way. So the value per share of stock for Gordon Growth Model is in fact the expected dividends per share over time until infinity. And you're dividing your cost of capital, but from your cost of capital, you are in fact removing or subtracting, in fact, your dividend growth rate. And we will be practicing this. Let's see a concrete example. So you have on the top here the two formulas. So you have the value per share of stock, which is then tagged as the DEM, that's the dividend discount model. No growth on dividends in the future. And the value per share of stock. This tag, g, g, m, That's Gordon Growth Model. You see that there is difference in the formula. So if we take a stock share that we provide is zero dot $5 per share pretax. And let's imagine that your cost of capital expectations are of six per cent, no growth, the value per share of the stock using dividend discount model. So no dividend growth expectations. The calculation you will provide as a result of $833 per share. Of course, now you would need to compare what is the market at? What price is the market giving me that share? And do I have my 25 to 30% safety margin, yes or no? And I will show you how to do that in a couple of minutes. The second, so the value per share of stock. But following this time, the Gordon Growth Model, let's assume again, it's an assumption that that company has been growing and we expect that will continue to grow. It's a cash dividend per share pretax at a yearly rate of 3%. And the amount the latest dividend that has been paid out has been zeroed out five years dollar per share pretax. And you consider that we can live with a cost of capital or cost of equity expectation of 6%. You see that your zero dot five-years dollar per share, in fact no longer divided by 6%. So by 006, zero.06, but this time it will be thorough five-years all appreciate divided by zero.06 minus 003, expressed in percentages. So it's zero dot five-year-olds dollar per share divided by 003. So it's in fact twice as high as accompany the same company that would pay out the same amount of cash dividends on the road, five years on a per share, but without dividend growth. So here you, of course, you see the power of the dividend growth because it allows you to value in this example, the value of the company is in fact multiplied by two for one single share. This is not part of the companionship, but I'm just showing here for educational purposes, if in fact you would bring this in turn, you can do this for yourself into a table where you have, in fact the years one to 50, you have the discount rate. So if I just quickly come back to the formula. So the discount rate is basically when you are bringing to present value a monetary amounts. In fact, you're taking that amount, you dividing it by our cost of capital exponential, the year. That is a wave from now. If it is, you are discounting zero dot $5 per share next year, you are then dividing by zero.06 exponential one in fact, which is then divided by zero.06. This is called the discount rate. If you are looking at an amount of zero dot $5 in two years time, you are in fact, your discount rate will be 6% exponential Tussaud's. So six per cent square. In fact, this is what I'm showing here on the table. So of course, I mean, you don't have to, let's say do this manually. In the companion sheets. Those calculations are done manually. So you see e.g. with a discount rate, the discount rate evolves. This is normal between the years one to ten to 15, 20, up to the 55 years I've calculated. So of course you see here the effect of calculating the present value and discounting. Also the discounting the cost of equity depending on how far that streamer of money will be away. Because you remember from the inflation conversation, That's the value of money changes over time and you see that next year, I have decreased it. I mean, you see that the discount rate is 94. But you said e.g. in 50 years time, of course, because of inflation, bring into present value, the same flow of money is actually extremely low at that moment in time because 50, $0.50 in 50 years time is nearly with nothing it's worth. In fact, then you see the calculation, the third line, the present value of the dividends per share. So in 50 years, this 50 cent is in today's money, in today's purchasing power worth $0.03. So you see how the discount rate works next year, the $0.50. So you take the first column, which is year one. So we have gross dividends per share of zero dot 50. But this countered, it will be zero dot 47 worth because in one year's time, the purchasing power will have been reduced. If you do the intermediate sum, you see in fact that after 50 years I've been adding in fact all the present values of the dividends per share. You see in fact that after 50 years I have an accumulated sum of seven to 88. That's what you see on bullet point number three. We are again speaking about accompany you have this again just repeating here on Britain number one, we have, we're simulating a cost of equity of 6%, growth rate of 0%. The latest dividend per share has been 050, and we believe it will continue to remain at 00:50. And you will see, I just estimated the payout ratio at 50 per cent, but that's not necessarily hearing potent. See that on bullet point number two in the red frame that the dividend discount model without dividend growth, as we have put in zero, It's giving us this eight, 33%. And what is interesting when you compare the value of the bullet point number two and the bullet point number three, is that remember that this dividend discount model is actually calculating this to infinity. What is the share price worth under the assumption that dividends will be paid out forever. And you see that the dividend discount model formula is giving us a value that goes beyond the 50 years. So it's giving us $833. So 11 share of that company would be worth a dot 33. While you see that after 50 years, I was Let's say, only able to accumulate valuation of 788. What you see on the bullet point number three at the very right hand side, which is actually I'm adding the dividends of your number 409-40-8407 up to one. So this is adding up. In fact, you'll see that even after 50 years, the BDM formula, which is normal because DTM formula goes to infinity, is in fact beyond 50 years of accumulated dividends. Now, when you do now, the same, but we are now using the Gordon Growth Model formula. So remember that we are taking an assumption in the future. The company would continue to grow its dividends. And so we keep the cost of equity uses on the right, on the left-hand side, sorry, on the bullet point number one, we keep the cost of equity at six. We have the growth rate of dividends at 3%, latest dividend per share being at 00:50. And the Gordon Growth formula in fact, is calculating us that that company is worth 16 $67 per share. So remember we saw this in the previous slide. And you see in fact that when you compare this value with the accumulated sum of dividends after 50 years, we add 13.08, which again is now because the formula is calculating to infinity. And here we're only calculating and making the sum. So we're stopping at, if you would come back to the formula, we're starting at, T is one. So t is year one up to n, which is the amount of user will be counting. We would stop at 50. While those formulas, the n is in fact infinity. So it's normal that both values in fact, beyond what I've been able to calculate up to 15 years or two, sorry, 50 years. Alright, One of the things as well that I wanted to show you here is, of course you are. You have to think about, okay, So I was able to calculate with the dividend discount model formula and with the Gordon Growth Model Formula, an intrinsic value of that share of one single share. Here I'm making assumptions because we want to determine the margin of safety. And I said already couple of times you typically buy a company with at least 25 to 30% of margin of safety. So what I did is if following coming back to this famous payout ratio, I just considered, Remember that I want to be in the payout ratio, cash difference 30-70%. So I just said here, for the sake of the trainee, making it simple is that the payout ratio is 50%, but 50 per cent of what? Of the earnings per share. So this is why you see in the frames can stay now here with the Gordon Growth Model formula. You see that below the GM formula, you have the EPS earnings per share. Obviously, if the company is paying out in flow number six, remember the flows 45.6, if the company is paying out on flow number six, 50% of its profits, It's total profits are $1 per share, and 50 per cent of those profits are going back to shareholders. Another form of cash dividends. Here, the share price is a pure assumption, okay? So, um, it's just for the sake of the training. Just imagine that the share price of the company, the publicly traded chapters of this company is sitting at 14. Okay? So the question is now, you remember that we have calculated that for the EDM formula, one share is worth 833 years dollars and for the Gordon Growth, one choice with 16.67. So of course what is interesting is that I mean or not interesting is that the dividend discount model formula is calculating the intrinsic value of the company below its current share price of 14. 14 has been taken out of thin air is just for explaining here. But what is interesting is that the share price of the company in the Gordon Growth Model formula is worth 606071 of the publicly traded share price of the company is at 14. So basically the Gordon Growth formula is telling you that you have in 19 per cent, so that's the dollars 67. So it's the difference 1667-14. So you have $2.67 of safety, margin of safety, and that is the equivalent of 19 per cent. So it means that the market today if you're only using the Gordon Growth formula. And again, that's an assumption because of equity is 6% growth rate of dividends to infinity 3%. And we expect that the latest dividend per share is the right base. And this will in fact only grow in the future. And you'll see this on the second line, gross dividends per share. Next it will be 0 525-035-5506, etc, etc, up to $2 1950 years with that assumption. If that assumption is correct, well then in fact, the market is giving you the company at 19 per cent discount using dividend cash flows, right? And you may now challenge, but how can this be? Of course, it's easy because we clearly see that the Gordon Growth Model formula is kind of making the K is super positive versus dividend discount model which does not carry dividend growth in the future. But does Gordon Growth in reality exists? And you remember, I was already mentioning couple of times different kings and a dividend aristocrats. They do exist. So dividend aristocrat is a company that has been more than 25 years increasing its dividends and is listed in the S&P 500. That's typical definition of an aristocrat and the King is a company that's for the last 50 years, has been increasing its sovereignty over here. And it's not necessarily in the S&P 500. Do those companies exist? Yes. And that's the reason also why I have or I tried to have them in my in my portfolio in fact, so e.g. 3M, the first listed company or they're listed in alphabetical order. I was able to buy them at a certain point in time when the market was little bit depressed, about 3M Company has always been listed at around 100, $130-150 a share. And the company, because of legal litigation, et cetera, has in fact bringing it down, but the dividends remain very strong. But again, it's not a service station for you now two by three m, but RAM is one of the companies that are alike. I was never able to buy Coca-Cola at that time when I was even writing the training and have been publishing in August 2020. But when I was writing it in 19-2020. Coca-cola was around at $48 a share. And I said to myself, it comes below 45 because I didn't my intrinsic value calculation, I would buy it. But there are other companies like Johnson and Johnson, Procter and Gamble, Colgate-Palmolive. Those are companies that are like as well. They are part of the top 100 brands in the world as well. So is there a correlation between one and the other? A little bit. There is a correlation between companies that have strong modes and are able to grow the dividends year over year. In Europe, e.g. you have Nestle e.g. that I had in my portfolio. I started with a profit because it was then listed above its intrinsic value. I'm BASF, I will share with you in a couple of slides. It's one that I still have. It's one of my biggest positions with 3M. I mean, they are growing their dividends is what I'm showing in the graph on the right-hand side, they continue to grow the dividends. So we have now two formulas for companies that pay out dividends, cash dividends, I mean, to calculate the intrinsic value, this is likely with the holy grail for investors, you want to be able to calculate a price and a Capet that your calculated price with what the market is giving you. Do not forget that you need to apply level of tests and not just blindly buying a company because you having a margin of safety of 30% on a dividend discount model, the company has to pass the level one test as well. So it's like low price to book, low price to earnings, low debt to equity, high interest coverage ratio. So it doesn't get into solvency troubles. For me. At least it has to be blue-chip company. The company has to have a mode in the sense that it's a profitability powerhouse with return on invested capital consistently close to eight to nine to 10%. The company has to generate profits consistently for 510 years in the road. Do not forget that it's about that as well. So with those tasks, you're going to filter out already companies that are in bad financial shape. And then you will be using this model is the level two screens or the level of two methods to then determine if the market is currently attractive, is giving you the company at a good price or not. This is what we are discussing and so please do not forget that. Now you may wonder, are you or maybe you would like to ask me, but can you, not all companies pay out cash dividends rights? And you remember that I mentioned also in the past, in one of the previous lectures that in the past, in fact, dividends became less attractive because shareholders are exposed to attacks treatment on their cash dividends that they are receiving on this cash inflow that is coming to that broke or bank accounts. The company is in fact, to avoid having shareholders pay taxes. They turn in fact to doing share buybacks. So basically what is a share buyback, as already mentioned in previous lectures, is the company is in fact buying from the market this same shares that you are holding. In fact, what is the effect of that? Well, it's actually artificially increasing the book value of one singular share. If you do not remember that, go back to the price to book, Let's say evaluation lessons where we have been discussing this. So basically, this is a way of increasing the value of one single shares by reducing the amount of shares that are in fact dividing the whole equity. And because there are less shares out there as you're dividing the equity by last shares, the equity per share. So the book value per share is going up. In fact, it's very easy if you have an equity of 1000s and you're dividing by 1,000 shares, your book value is worth one. If you're having 1000s of equity and Nevada, by half of that, your equity just has been multiplied by two. In fact, the book value per share has been multiplied by two. Alright? So as I said, this has been become, let's say, more regular for, I mean, specifically for a big tech companies, they tend to do more share buybacks and spend a lot of money on share buybacks versus cash dividends. But not only. And this has become more attractive over last two to three decades. In fact, I would say before. I mean you, if you read old books, share buybacks were in fact not existing. So what I want to share here with you is the following is that basically a share buyback, Can we consider likely yield in terms of percentage? So you could actually, as we have been calculating that a zero dot $5 per share dividend on, let's say on $115 share. Well, that is a yield that is returned. And you remember when we were discussing passive income that I am expecting at least to have somewhere around at least four per cent of passive income of cash dividends, maybe share buybacks as well, but at least after tax, That's what I want to have. So here I'm showing you how in fact, the dividend discount model methods and Gordon Growth Model methods have to be adjusted. To bringing a notion that did not exist like very weakly 50 years ago or 60 years ago, which is adding to those formulas are mobilizing the share buybacks as well. So here I'm introducing and I'm calling this the total shareholder return model, because that's the total, let's say if you're looking at the flows number six, That's a total. It's the sum of all the cashflows that are going somehow directly cash dividends or indirectly share buybacks to the shareholders. So basically I'm adding supplemental variations to Dividend Discount Model, gone growth model, which are the following. I calling I'm abbreviating the turtle shell are written as TSR to make it short. So we have DTM to GM and TSR. The TSR one is mobilizing the share buybacks spanned by the company. And we are in fact considering that the share buybacks will be increasing at the same rate that dividends in the future. So if it is zero, it's zero. If we expect in dividends to grow at 2%, we can take the assumption that the company is also a will be, let's say, a growing to share buybacks at a rate of two per cent in the future as well. Does this make sense? I mean, of course it's arguable. It's risky as well because I mean, it's huge amounts of money that has to be spent. But it's one way of looking at things and always keep in mind. Here we're doing a modelization, right? So it's not the silver bullet, but it gives you an approximation of the intrinsic value of the company between the DDMS, the Gmail, and the TSR one model, the tears are two mole is a more reasonable approach where you could actually use the Gordon Growth Model. So the expected dividends per share in the future divided by cost of equity minus the growth expectations. And you add to that value the expected share buybacks per share. And we will be practicing this. And you're dividing this only by the cost of capital. But we are considering that the amount of share buyback will remain constant. That's the TSR to model. So let's just for the simplicity here of the model, consider the Ts are one model. So the Ts 1 mol, as I said, is expected earnings per share plus expected share buybacks. Prussia, expressing amount of US dollars per share divided by cost of equity minus the growth rate for both. We are considering that the growth rate is linear. So let's imagine that company a that we have been analyzing so far is providing a pre-tax even pressure of zero dot value as our Prussia has a cost of capital of 6%, that's your expectation in terms of return. And we can use the assumption that the company will grow its dividends for 3% up to eternity. Assumption here in 2019, we're looking at 1900's simulation in 2019, the company spent $100 million. And at that time the share price, as we already saw, was $114. The total amount of shares outstanding diluted at that time was 500 million. So how much shares was the company able to buy back with 100 million of cash spent? Basically the company was able to spend, in fact, or TBI back 100 million of cash expense divided by 14 years dollar per share. Let's imagine that the spans the whole 100 million on one day on the market was giving the shepherds of the company at fought in US dollars. So this is giving us in fact a certain amount of, it's seven dot 142 million of shares. And so the new number of shares In fact outstanding, diluted is no longer having done this 500 million, but 500 million minus 7142 because the company has just remove 7 million shares from the market. So the total amount of outstanding shares diluted has come down from 500 million to be precise, found at 92 dots, 86 million of shares. That's one dot 42 per cent less versus the previous year. So with that, in fact, you already see this is a return of one dot 42%. In fact, the total amount of outstanding shares. And if you do this, you can bring this figure. And this is something I, the first time I heard it was during a podcast. So it was one of the annual shareholder meetings of Warren Buffett. I did not understand to be very honest, how it was calculating the buyback per share on the monetary basis. I understood how it would be calculated from a return percentage perspective. There's something I learned from him, So I mean, kudos to him because he was able to read 22, I would say to make it clear to me how he was bringing this on a monetary basically is also currency basis. Euro, US dollar, whatever, yen, etc. How this is calculated, the buyback per share in currency terms is you take the share price. Let's imagine it was at $14 and you multiply it by one dot 42%. And this is giving you a monetary currency value of 019, $88 per share. So this is what we need. It is this one dot for it to present written on one single share. That is worth 019 $88. Now, coming back to the turtle shell or written formula number one, we can in fact ads. So we have the expected dividends per share that will add zero dot 50. We are now adding the 01988 and then dividing by the cost of capital or by your written expectations minus dividend growth, that was sitting at 3%. And this is where we will be in fact ending up. I'm showing you here the value of the stock T as R1 in black bolts. So we are in fact landing at a 23, $29 value per share. In fact, with this TSR one, because if we are leaving aside share buybacks, in fact, we're not looking at the total written that is provided to shareholders. Again, it's true this return of zero dot 1988 will not hit your bank account, will not hit your brokerage account. It's fictive. But normally what happens is that the market will see this and the market will adjust and the share price should actually be growing from 142 more because there are less shares outstanding that are dividing the total amount of equity. So if we express this in terms of yields in percentage value, so the cash dividend yield is $5 on $14, the company is providing a pre-tax dividends yield of three, 57%, so pre-tax, so it's still below my four per cent that I want to have after taxes. But I could add in fact the one not 42% share buyback. And oh, interesting, my total shareholder return expressed in percentages is sitting at $4, 99%, which is 3.2, 57 cash dividend yield plus a one-node 40 to share buyback yields, and that is giving me a return pre-tax of photo 99. You see how this is calculated and this is extremely powerful and not a lot of people are in fact, considering that dividends are an extremely powerful tool, not only to get passive income from the company, but also to be able to estimate what is the intrinsic value of a company. Alright? So basically now we can wrap this up because we have been able to create or to define intrinsic valuation models for no growth coming from dividends for no growth dividends in the future. That's the dividend discount model. We have the Gordon Growth Model, that is value of a stock with dividend growth. So it's the expected dividends pre-tax per share divided by cost of equity minus the growth assumption to infinity. Then we have the value of the stock with dividend growth plus share buybacks. And then I'm using the TSR one just to give me an approximation. Even though of course, it may say provide even a better figure than this 16, 67 years that we had on the Gordon Growth Model. But still, it's afterwards, of course, to me to be able to judge if that makes sense or not. Here you have. So I've extended the first two tables to the third table with the TSR one formula. And you'll see in fact how by using those three valuation methods, a dividend discount model, no dividend growth and share buybacks, is calculating us an intrinsic value of one single shell that company at 08:03. Three Gordon Growth Model with a 3% growth assumption with the cost of equity of six, is calculating us the value per share of stock for the Gordon Growth formula at 16, 67 years dollars per share. And the TSR, we are adding the share buybacks to it. And with that, in fact, you, we are actually other models are calculating an intrinsic value of the company at 23:29, of course, at the share price of 14. With those valuation models, the margin of safety is of 66 per cent. What you can do with the TSR formula as well. You can just put growth to zero. And then of course it has our formula. We'll consider that there's linear, Let's say dividend per share. And there is a linear flats share, buyback per share and met considering that those two values will remain constant over the future, the tiers of the formula is able to calculate this if you bring in a growth rate of zero, e.g. or maybe you want to be a little bit offensive, a little bit of gold. You put in zero dot five per cent return a t 1%. But this will be automatically calculated in the companion Sheet. Alright, good. So now as I said, you need, not only, I mean, it's great that you have now already a first set of formulas that is able to tell you. The company is worth. So this intrinsic value calculation. And of course, what is important is to understand what is your margin of safety. And this is what I'm showing here. At current share price of $14. Dividend discount model is not giving me the right margin of safety. I'm missing 40%. So I'm in fact, the market is giving me the company at 14% above. It's valid, it's real value, its intrinsic value, with the assumptions of no dividend growth zero dot five-years or a pressure. And of course, the cost of equity of six, if you would change the cost of equity, if you would bring it down, the intrinsic value would go up if you're dividing by a higher cost of capital because the risk is higher, intrinsic value will go down. In fact, this how the models work. With the Gordon Growth. We're having 19% of margin of safety and with a t as our one model, we have a 3% growth to eternity we're having and cost of equity of six, we're having 66 or 36%. One thing here then our n already can drop because it's a question that comes up often. Also when I'm doing the webinars from time-to-time, is the conversation about what should my cost of equity and my cost of equity, cost of capital actually be? I do believe that in a 2% average inflation, That's something 6-7% should be your cost of capital. I made ones oppose the couple. I think it was like You're a one-and-a-half years ago, where, I mean, we're still in high-inflation environment. Even though the inflation is coming down. Also due to monetary policy of the central banks and the US Fed Federal Reserve. Probably today, I would say maybe factor in something 7-8% just to reflect a little bit the short-term peak in inflation. But again, that's your choice. I mean, I can, of course, this has to be above inflation. Again, inflation related to investment horizon, inflation will not stay at 7% for the next 30 years. I promise you that that's not work, that will not work. Then we're going to have other kinds of troubles. So basically you could then say and bring this visually into what I have set up here on the right-hand side, like what is your margin of safety? And basically you have three zones. You have one zone where the current share price is in fact, too high versus intrinsic value. We have a zone where in fact, the undervaluation zone, where the share price is that you could buy today the company is attractive, but it's not giving you this 25 to 30% margin of safety that you would like to have as a value investor. And then the last zone, which would be the bias zone, is where indeed the share, the current share price on the market, is in fact, much lower than what you were able to calculate in terms of intrinsic value. This is basically what we have with the tiers or one model. That's an, we are in the zone of undervaluation where in fact, we are estimating that the price is at 23:29, but the market is giving us the company at $14 per share. So we have a huge margin of safety. Remember, with the level one tests, which are the ones that are filtering out the already companies that have bad financials. Please keep that in mind. The Gordon Growth Model is putting us somewhere in a zone where, well, maybe it's, I don't have enough margin of safety today, but I will continue to monitor In fact. Then here in this case, the linear dividend discount model, it's not giving us the right margin of safety. So that would be either a no signal or even potentially a sell signal. Because it could mean that Today the intrinsic value of the company is worth 833. And imagine that you have bought a year ago and the market is giving it at a share price of 14. Well, that's 40, 40% above its intrinsic value on this methods. Please wait Also for the next lesson where we'll be discussing discounted free cash flows to the firm and discounted future earnings. But here, at least with those three models, the DTM model would be a sell signal because the market is overvaluing the company. Again, it will not be a combination of the 31 company will either do dividends. Maybe it's doing share buybacks than you already immediately in the tiers, our model, if yo 21. Case study : BASF : Concrete example of share buybacks & treasury shares extinction: All right, well investors, welcome back. So this is kind of, I'll call it the supplemental lecture. And because I think it's important that also I share with you how to practice your I, I think I mentioned this a couple of times in the training. Being good at investing requires practice. Like being good at a specific sport, it requires, high performance athletes to regularly practice. So here what I'm trying to share with you is a concrete example how to read and understand share buybacks and treasury share extinction, in fact. I'm using for that, and it's actually a topic that was discussed in one of the very first webinars that I have been organizing. And so remember also that I'm organizing and I'm sending educational announcements more as every two to three months, there's going to be a webinar where you can actually propose make suggestions about topics that you would like me to cover, for example. Here, I mean, on the concrete example that I'm using for share buybacks and treasury shares or bought back shares extinction, I'm using BASF, the chemical company, where I'm also a shareholder since a couple of years. So we'll not go into the details. I mean, you can look this up by yourself. Who is BASF? Go to the BASF website, and you're going to see that they're into materials, agricultural, nutrition, surface technologies, and chemicals. It is interesting enough put you the URL is that in 2022, they actually brought out and it's something that I mentioned also in the course that when you're a shareholder of a company, you should subscribe to the shareholder letter newsletter so that you get first hand information when they are obliged to communicate things. So here I received the communication being a shareholder, of course, a very, very small shareholder, but still a shareholder. Where they were mentioning 2022 that they had taken the resolution to the decision to perform a share buyback program, and they would be allowed by the shareholders and the board of directors, actually. So management would be allowed by the shareholders and the board of directors to execute up to or to spend up to 3 billion euros until so from January 2022 until end of 2023 on buying back shares from the market. And what they also mentioned, and this is what you see is the second line in the red frame on the left, is those shares would be then also canceled. Because remember that when companies buy back shares, those shares are carried as negative value as treasury stock in the equity section of the balance sheet. But the risk is always, I mean, technically speaking, the company could always bring those shares back to the market and sell them at a certain moment in time, right? Until the treasury shares, so the shares that have been bought back that are carried as treasury shares in the balance sheet, in the equity section of the balance sheet of the company, until those shares are not cancelled, there is always a risk of equity dilution, in fact, just to be precise on that. So here, I mean, again, I mean, I'm mentioning this and I've created also other trainings like the out of reading financial statements. It requires practice. So I'm giving you here the screenshots so you can see that BASF has been in the annual report of 2022. They have been mentioning that until December 31, 2022, that BSF had acquired 24 million, 623,765 shares for purchase price of one dot 3 billion, which was representing rough cut 260 8% of outstanding shares. The 260 8% is actually the yield that they have. So it's kind of a passive yield. It's not the cash dividend yield, but it's a share buyback yield that they have generated. I remember, go back to the lecture about return to shareholders level one where I'm speaking about that actually you can calculate on even in the Level two intrinsic valuation, for the dividend valuation models like dividend discount model and Gn Growth Model, you could actually add the share buyback yield to it, as well, and not just the cash dividend yield. So, and they say, so they have spent 1,000,000,003. They put it back somewhere else in the financial report where they explicitly mentioned 1,000,325. So 1 billion 325 million, 486,177 80. So and remember that they are allowed until the end of 2023 to spend 3 billion on that. So in the year 2022, they just spent like rough cut a third of the authorization that the shareholders were giving to management, in fact. So one of the things that would be interesting to know, and that's a comment. I'm not sure if I'm making this in this course, but I already have made those comments even during conferences is, of course, and that's something that we have learned from Charlie Mong and Warren Buffett. We don't want company management to buy those shares at a premium price. We want company management to be reasonable and buy the shares of the company at a reasonable price. So I could ask you, can you calculate the average purchase price for BASF, having the two numbers, the money spent, 1,325,000,024 6 million. So maybe pause here the video and just think, can you calculate the average purchase price for BASF in the year 2022? So pause here and resume when you are ready. So the calculation is pretty straightforward. You take the amount spent, you divide it by the amount of shares, and it tells you that rough cut BSF has bought shares at around 50 nearly 54 euro per share, which is still at that time, a little bit expensive, I must say. And so that was the calculation that I did, but actually it was mentioned explicitly in the financial report of BSF in another section. You see this here. So they said again, they repeat how many shares they have purchased from the market. They mentioned that this is 260 8% of the share capital. That's like your yield, your share buyback yield. And they are actually coming to the same conclusion that my calculation, which is they brought at an average price of 53 dot 83 per share, in fact. Um, this is already a little bit, I would say a little bit more complex, but you know that I want you to practice your eye reading also cashflow statements and financial reports and balance sheets. So we see, in fact, so there is a section that is called key BASF share data in the financial report. Where we see the number of outstanding shares of the company. When you look at the difference between 2021, 2022, that's what you have in the Rt frame here. You actually see that in 2021, so December 31, 2021, they had 918 million, so 918.5 million shares outstanding. And on 31st of December 2022, they have 8939. Make a difference between the two and Oh, is that a coincidence? Of course, it's not. But you again see here confirmation that they have, indeed, repurchased 24 dot 6 million shares. So that's really the intention that those shares actually are removed from the market, and by that, the price to book actually, and normally, even the share price should go up because there are less shares outstanding available dividing the same balance sheet amount. We see here as well, you remember that they have spent rough cut one dot 3 billion that was mentioned earlier. And we see in an aggregated way, so there is a small difference, but you see in the cash flow statement in the financing section. So remember operating, investing, and financing. So you can see in the financing section of the cash flow statement, you see actually again, the number of one.331, so one dot 3 billion. That's the money and euros they spend in the year 2022 on share buybacks, in fact. This is, again, I mean, I'm just showing you that you can find this information in various sections of a financial report if the company is, of course, respecting the financial statement requirements. But also, and that's something that I'm discussing in the At of reading financial statements course. That's not part of the ATO value investing. But in the statement of changes in equity, which is one of the five financial statements. So we will here in the Audi value investing only discuss income statement, cash flow statement and balance sheet. And remember that I like to start reading the balance sheet first and the cash flow statement, and then only I look at the income statement. But there are two other let's say, financial statements. One is the statement of changes in equity, and the other one is everything that is comprehensive income. But again, that's really more advanced. I will go will not dig deeper into that, but you see even in the statement of changes in equity, you have the amount of 1325, which was mentioned earlier, but you can see here 1325, bullet point number two that is mentioned in this statement of changes in equity. So so I could actually ask you, where does the share extension have an impact? And what will be the effect on the book value and the intrinsic value of the company, in fact, and even on the earnings per share, I could ask you. So maybe take those questions in and pause here. And when you are ready to resume, I mean, resume the video, but I will now explain why share buybacks are interesting. So as I said earlier, when share buybacks are done and when also shares are extinguished, so they are actually destroyed, void, it's very interesting because, of course, all the ratios will go up. I mean, you are dividing all those ratios by a lower number of shares outstanding. So by that, obviously, the share price should go up. You should actually have an appreciation of the share price on the market. Same with book value when you calculate the book value per share when let's just take a very quick short cut here. If book value means equity value and you divide by a smaller number, your book value will grow automatically. So those are the nice effects and the same on the intrinsic value, you are dividing by a smaller number. So automatically, the intrinsic value of one single share is increasing. It's a way. Some people consider this it's financial mechanisms that are artificial to increase the value of a share. I would say, yes, I tend to agree on that, but the company is spending money to do this. Remember the cycles four, five and six. So they are spending money to provide some kind of return to the shareholder. So it's not artificially done, but there is real money that is invested into increasing the share price, also or let's say the book value per share of the company. So last but not least, I mentioned this already in the Blue Chip lecture. So again, just repeating here that in the past, also in the course, the At Val investing, I mean, you would have to use an Excel file and you would have to look up yourself, the numbers in the financial reports. Now, everything is available in this artificial intelligence tool that is called VNC and there is a specific training on EU Demi about how to use VNG. So VNG is a large language model that is so it's a fine tuned large language model that is powered by open AIs Chan JBD plus. We have been working. I mean, we have started this project November 2023. We are now May 2024, so that's why I'm also doing an update of this lecture because, in fact, you can actually chat. Like with Chan GBD plus, you have the financial information currently at launch dates, which was May 1, 2024, there are 1,100 plus companies that are part of the Investment Universe of Vinch. So you could actually, and you see here on the right hand side, you can prompt and you can ask Vinch Can you calculate the price to book value of BASven thousand 22 using the following numbers? Can you also tell me what would be the price to book if, for example, the number of outstanding shares would have been reduced by 280 6%. Can you recalculate the price to book ratio with this price? So I mean, I will not go into the details here, but you have now a very handy tool that is available to you that allows you actually to be much more efficient in the investment process versus what I had before, which was actually providing an Excel file, but you had to fill those numbers by yourself, and you had to look those numbers up by yourself in the financial statements of the company that you would be interested in. Now you have this tool which includes 1,100 companies, includes top brands. So I think currently we are at nearly 1 million data points for all those companies. And yeah, I mean, I mean, we did this project with my partners already ourselves as value investors, and I'm using this, and I'm gaining a lot of time by being able. So I got rid of my Excel file, and I'm using now this tool to calculate intrinsic value to perform the level one test, et cetera. But I will show this to you in the bonus lecture. At the end, I will show you a full valuation using Vinch as a artificial intelligence large language model for value investors. And of course, you can see here another screenshot that it can calculate the intrinsic value per share. And of course, if you change the amount of outstanding shares, it will, of course, adapt. You see here the result of me prompting the model. It shows you the original number of shares, 918 million, and I've told Vin Well, now, if I would reduce the number of outstanding shares by 280 6%, can you recalculate the intrinsic value? On the discounted cash flow per share method. And you see that actually the intrinsic value is increasing. Again, this is what I was asking you before. What is the effect of doing share buybacks and share extinction? Is that all those intrinsic values per share are increasing because you are dividing by a smaller number of shares outstanding. That's it for the BASF, I would say, specific example, and I hope it was useful for you. And yeah, looking forward to talk to you in the next lecture. Thank you. 22. Discounted free cash flow & earnings valuation model: Alright, in Leicester us. Welcome back. Last lesson already in chapter number four, where we're discussing the various valuation techniques. So we saw in the previous lessons how to calculate the book value. The book value. In the previous one, I was sharing with you three models that can be used for calculating the intrinsic value of a share of a company in general, which are the dividend discount model, the Gordon Growth Model, then the total shareholder return which adds in fact share buybacks which have become more, Let's save. Recurring over the last two decades. The last part of the last method in this level two methods and is in fact, we'll be discussing discounted cashflow, which is basically the method that everybody is using even for startups. Just looking at the business plan and drawing assumptions on the valuation of the company by looking at promises that are laid down in the business plan. And I will be discussing also discounted future earnings as well. But first things first, why has been discounted cashflow? A method that has been used a lot for valuation. First thing that I'm not writing here is because not all companies are paying out dividends and not all companies are paying out or doing share buybacks. So very often the dividends related valuation methods actually do not work. I mean, this e.g. does not work for a startup that doesn't have money to provide a cash dividends to its shareholders, nor even do share buybacks. They're only if you remember the flows 45.6, they only if they have, they're generating profits. Very often is not the case. They are generating losses in their flow number three out of the operating assets. But if they are the first profits will always be in the first year is reinvested into the, into the operating assets. In fact, to expand the assets in the balance sheet that they have. So outside of that, so as you understand, is that dividends variation methods do not apply to all companies just for very mature companies, discounted cashflow methods are discounted cash flow valuation really captures the underlying fundamental drivers that are in fact driving the profitability of a company. If it is growth, the cost of capital, how much the company is re-investing. So this famous flow number four, and very often discounted cashflow is considered as the closest estimation to valuing or two, to capturing the intrinsic value of a company. And unlike other valuation methods, and I've put here the example of discounted future earnings. Why a lot of people who prefer discounted cash flow methods to discounted future earnings are discounted future income methods is because in fact, if you remember when I was sharing with you the difference between income or I'd say accrual accounting and cash accounting. You cannot make up the numbers with cash accounting. So caches cache, while in income you can start thinking about being creative on how you recognize revenues, e.g. you can also be creative on how you report on expenses, e.g. research and development expenses. You could in fact say, and this is a typical red flag that I am discussing. And another training which is much more in-depth on reading financial statements. Where in fact, when a company is incurring expenses related to research and development, they are allowed in fact, to capitalize those investments and show them as an intangible asset in their balance sheet and not categorizing them as an operating expense. That's kind of a way of I will not say in a fake way, but it's a way of making things look better as they are, but it's allowed by counting measure. So I will not say that all capitalization of expenses are in fact manipulating the income statement, but nonetheless, I wouldn't need to be attentive on that. So the advantage of discounted cashflow, of free cash flow to the firm as we call it. Is that a true measure of how much cash is left to the investors? Why is it discounted? Because we remember we are trying to estimate the intrinsic value of a company over a certain investment horizon. You remember from what we were discussing and you have seen this slide. That's inflation is out there and inflation has an impact on the value of money over time. You remember I was giving you the example which wasn't Investopedia example, where a generic cup of coffee and 1970s, you would have to spend $0.25 for having this, for buying this generic cup of coffee. If thousand 19 fact, you would have to spend $1.59 for the same cup of coffee. The difference between the two, if you remember what we were discussing is inflation. In fact, one of the things when we discount so to bring back to the value of money to its present value, we are using a discount rate or discount factor. And again, now, I didn't not do it in the previous lectures, but here as we are doing more, let's say mathematical calculations. I want to share how this is calculated. So when you look at the typical DCF calculation files, also the ones that I was using, discount factors I was using in the previous lecture. So in fact, the discount factor is 1/1 plus the cost of capital that you have. And then exponential to the year or the year. That is a wave from where you're bringing it now to its present value. Let me give you a concrete example. So e.g. here on the specific coffee, generic coffee, cup of coffee example. If you think in terms of discount factor 1972000-19. So the power, the purchasing power in 1970 with $0.25, $1.49 years later is actually reflecting a three dots 84 per cent yearly inflation. That's also pretty interesting, Let's say figure to know the discount factor between the two is in fact zero dot 15. Or if you calculate in terms of multiple, it's one divided by this discount factor, it's 636 times. So it means that from the year 1970, 2019, that's the two by the same to keep the same purchasing power. In fact, your amount of money would have to be multiplied by six times over the last 49 years, which is a lot in fact. So you see here how the discount factor is in fact calculated to bring the 2009 value down to the 1970s values. So this is a way also you can actually calculate it both sides. I can calculate the discount factor. And this discount factor will be then multiplied by the monetary value like 25-year-olds dollars, or the other way around, it would be one dot 59 multiplied by 015 and you end up precisely 020 $5. So this is how you can move between years in time horizon by using those discount factors back-and-forth. In fact, from 025, you would multiply by 636 to end up at 01:59. And from 2019, you would multiply one dot 59 by zero dot 15, in fact, to end up at 00:20, $5 in fact for this cup of coffee. Alright. So remember again, I will not go into the details about it. But when I was explaining to you the differences between income or let's say accrual accounting. And when we will also introducing the cashflow statement with more specifically the cash accounting methods that there are differences between the two. We need in fact, to be able to do discounted cash flow methods we need to use and we need to know what is the free cash flow to the firm in fact, and for that, you remember this scheme, this is the cashflow statement. Remember the cashflow statement has three sections. Operating activities, investing activities, financing activity. I like it very easy. Today, most of the companies, when they report on the cashflow statement, they start with the profit before income taxes, which is basically the earnings before interest and taxes. Then they RE correlate or the reconcile the non-cash items with that income. They do report on the changes in working capital from one year to the other. So this is basically you end up with a cash provided by operating activities are the operating cashflow. And then of course they report how much this is a flow number for how much has been in fact, flowing back into the business in the sense of how much has been invested, but also even long lived assets have been sold out, so divested. That will also reflect in the cash flow from investing activities. So basically, it's very easy if you know the company is providing a cashflow from operating and net cash flow from investing. You don't need to have the financing one. You will end up in fact, with the free cash flow to the firm. So it's the sum of the two figures. Okay, so that's really important to understand. Now a question to you is, can now operating cash will be negative? Can an investing cashflow be positive? Because typically, I mean, for mature companies, operating cashflow will be positive and the investing cash flow will be negative. Why? Because we are expecting to generate profits from our assets. So the operating cash flow will be positive. And typically we're going to spend some money in the phone number for to reinvest into assets into the operating cycle. So that's why typically the investing cashflow would be negative. But can't operating cashflow be negative? Yes, it can. If the company is not, it's not generating profits from his operating cycle. Can invest in cash will be positive. The answer is yes as well. When the company is selling more fixed assets versus reinvesting into the business, then potentially the investing cash flow can be positive. It's a warning signal. It would be for me a red flag, but it's possible. So that's why I'm saying, and when you will be calculating this as well as just make the sum of the two figures, whatever the sign positive or negative is in front of those two figures. The two figures out the operating cash flow and investing cashflow. Alright? I've put here, I mean, you already have seen this probably sounds familiar with the dividend discount model. Basically the discounted future earnings and discounted cashflow is the same. I do both because I'd like to see as I consider, I mean, you know, that earnings or income has to reconsider with cashflow over time. You remember this limousine that has been bought has been spent to disband out in year 11 -100,000. But his expands as rate of -20000/5 years, which is the useful lifetime of this asset. I do calculate and you're going to see in the extra companionship that we have the discounted future earnings and discounted cash-flow. And you're going to use this to estimate the intrinsic value of the company. So one of the things that I like to do as well, having also learned from Warren Buffett and listening to his annual shallow meetings of Berkshire Hathaway with Charlie Munger. While I'm doing an intermediate calculation as well of what is the company worth if it would die after ten years, after 20 years and after 30 years. And the second thing is that something that's my personal choice is nothing to do with Charlie Munger, Warren Buffett. I do not use a terminal value because I believe, generally speaking, when you look at what I was mentioning, the average life of SAP 500 companies that is around, let's say 15-20 years. I believe that first of all, it's interesting to know what the company is worth after ten years, 20 years, and third years. And adding a terminal value, in my opinion, is not in line with the fact that maybe the company will not be around in 50 years, in 100 years. So I'm taking a more defensive stance because if you add this terminal value, it will just make your business case better. So your intrinsic value, in fact, we just increase. So I'm taking more defensive stance on this and this is what you will see in the extra companion sheet. So here, we can do here quick calculation. So if you have a company that has 1 billion of outstanding shares, the latest annual earnings were rough cut 4,000,000,499. Current share price 43 $94 cost of capital. We assume at seven per cent. Also in the model you're going to see in the actual companion sheet, you need to decide. So that's why you need to judge. You need to decide on your growth assumptions. And so I've, in the companion sheet you can actually, you don't need to decide for the same growth rate for the next 30 years because the model is calculating and he's stopping after 30 years, so no terminal value. And you can actually define a different growth rate assumption for the year is one to ten, different ones for the years 11 to 20. And the last one, the third one for the years 21 to 30, it could be the same if you'd like, then you have to put in, I don't know, e.g. three times 3%. But in this example, in fact, I've put a 3% growth rate assumption for the first ten years than two per cent for the next decade, 1% for the third decade. So this is an calculating those growth, growth rates and intrinsic value. And automatically you're going to see in fact when doing the calculation. So the intrinsic value calculation, ten years of 20 years And of 30 years, that with a share price of $43.94. In fact, and this is automatically calculated. The sum of the discounted cash flows or earnings is in fact, it depends which figure you are looking into. So here we can I mean, I was speaking about latest yearly earnings, but you're going to see in the companion to that, you have a section that is calculated the discounted future earnings and a section that is calculating the discounted cash-flow. And what I recommend is that you compare both if there is a big discrepancy between the two, you need to understand why there is such a big discrepancy between the cashflows and the earnings. It may be explainable, but be attentive, normally, should not be too far away, except that the company has been spending this specific year a lot of money on investments. So you see, in fact, that's similar to the dividend discount model. That's the model that the sum of the discounted cashflows with a cost of capital expectation of seven per cent with this 3% growth rate for the first decade, two per cent for the second decade and 1% for the third decades. And with an earnings of four dot, let's say rough cut folded $5,000,000,000 per year with a certain amount of outstanding shares because we need to bring the value back to an amount. Share valuation per share as we did for the dividend discount models. So you see in fact that after ten years, if the company would just go bankrupt and would nonetheless generate profits until then, the one share is worth $33 that you can compare with the 43, 94 that the market is giving us today. On the 20-years calculation, we see that the company is worth 50, 95 years dollars. You compare it with the 43, 94 years dollars. We're having a ton two per cent margin of safety the third years. So it's the sum during 30 years of all the earnings taking the assumption of the latest current earnings with specific growth rate assumption and cost of capital assumptions. The intrinsic value calculation on the earnings of the discounted future earnings related IV intrinsic value is 67, 71, which is compared to the current share price of 43, 94 is giving us a margin of safety of 35 per cent. So practice with this, going to the exit companion sheet and start playing with this. But you will need is the latest net income and you will need the free cashflow to the firm. So the free cash flow to the firm is the sum of the operating cash flow and investing cashflow. So with those two numbers, you're going to actually receive an extra companion sheets. Of course you can do it manually. You will see in fact how the intrinsic value and the one that we're interested in is the IV 30 based on discounted future earnings and the ID3 based on discounted free cash flow to the firm. So discounted cashflow, how much margin of safety do we have there? I will say the same and this will be my closing remarks for this lesson, I will say the same what I said earlier in the previous lesson. Of course, the company has to pass first all the level one tests. And you can not only look at the intrinsic value of a company if it is through dividends, valuation models of earnings or cash flow models. And you put aside the level one test that you're taking risk there. The level of mountains are there to filter out already bad from good companies. And then you have to do these calculations. Before wrapping up this lecture, I want to bring the whole story together. So we have seen in this chapter a couple of variation methods. The first one, the two first ones, which were the book value per share and the adjusted book value per share. You're going to use them as a ratio interpretation. So you're going to actually take the current share price and divide by the book value per share. And, or if there is an adjustment possible as you have seen, e.g. on brand valuation or property plant and equipment, you may then calculate an adjusted book value per share. In fact, the comparator, it will calculate it for you. And the companionship will then also provide you an adjusted price to book ratio. So on that ratio, you'll remember that I said that we want to have the racial somewhere below three. So buying three times the size of the balance sheet starts to get cheap. In fact, it's a relative valuation methods. But the other methods that I introduced, the dividend discount model and methods. So the no growth dividends, DTM, the width growth dividends, the Gordon Growth Model. And we also defined a total shallow return which adds to the dividends as well as share buybacks with or without growth as the TRS R1 model. And in the last while in this lecture actually, we have also provided on, I have provided two absolute valuation methods which are the discounted free cash flow to the firm, which is the preferred method, and the discounted future earnings, which is based on the income because it's random, It's good to be able to compare the two if there are no two big discrepancies between the two and the companion sheet will calculate this for you. In fact, you will have to bring in the net income and you will have to bring in the free cash flow to the firm that you have seen is calculated by summing up the operating cash flow and investing cashflow, right? So I'm going to share this, how the whole story comes together on a really small, so small is accompany that I had in my portfolio border around 50 something. I think I bought at CHf57 and solid like 93 or CHf95 like 12, 18 months afterwards, plus dividends that are received At that time. You see here on the screenshots, I was looking at May 2020, whether current share price was around CHf55. And so again, I'm in this summary table, I'm not bringing in the price to book, an adjusted price to book because that's a relative valuation methods. You just have to test if the price to book and if you can adjust it, the adjusted price to book is somewhere below three, the further away from three, down to 1.5. That's at least for that single test, is it's an, let's say vibration signal that the company is cheap. And as I told you, it happens from time to time. That the markets are so depressed that they're giving you the company at the relative valuation of price to book that is below one. I had a situation e.g. for BASF, the largest chemical company in the world, e.g. right. Outside of that, if we bring now the other methods together. So dividend discount model, the growth, so the Gordon Growth Model and the total shareholder return. And we add to that the outcome of the intrinsic value calculation for discounted free cash flow to the firm undiscounted future earnings. In fact, you are ending up with potentially five different figures, which is the figure that you have to use to compare it to the current market share price. And here I'm giving you the example. And the assumptions are not important but the example of Reshma. So when I was analyzing very small before taking the decision to buy the company and remember, and I will repeat this again. Enrichment have to pass all the level one tests. Right? And if one of the tests would not be passed, I would exclude from potentially investing into Reshma prolapse. I use the leverage to tasks which are the, which are the relative valuation tasks, price to book, adjusted price to book and the absolute valuation tests, dividend discount model, gone growth model, total shareholder return, discounted future earnings and discount is free cashflow. Those last five are giving me an intrinsic value per share. And you see her on those five values that in fact, depending on the methods, I'm ending up at an intrinsic value per share of between CHf68 and CHf76 at that time for what we smell was worth. So receiving rushmore at a share price of around 55 CHf56? When I was doing the analysis, I think at the end I bought it at around 57. It was giving me a margin of safety that was for all of those intrinsic value calculations above 25%. So you need to judge what is the right value is at 68, is at 76. Something that I learned from Warren Buffett, listening to one of his annual shareholder meetings, he said, calculating the intrinsic value of a company is not something precise. It's giving you a range. What is a reasonable, fair assumption? This is what you see with the various methods. The various methods will not give you the exact same number. Why? Because there are potentially assumptions that vary in those calculations. Example, the dividend discount model, you are considering that there's gonna be no dividend growth in the future. In the Gordon Growth Model, you assuming there's gonna be some kind of growth potentially in the future, in the future earnings, the figure is maybe overstated versus the free cash flow to the firm or vice versa. So you see that flourish more, you end up in a valuation range, CHf68-76. For all of them, you see that? Well, buying it at 55 or CHf56 for all of the tests is giving me the right level of margin of safety. That should be the minimum of 25 per cent. Remember, while your money sit still, you want to receive passive income through cash dividends and share buybacks. So this is very important that you are able to understand after it's in the companion sheet what the intrinsic value, so the absolute intrinsic value calculation is giving you as a result, if it is for the dividend cash flows. So DTM g, GM and Ts R1. But also then for discounted free cash flow to the firm, discounted future earnings. If you have big discrepancies between the two, normally you should first of all, favor the discounted future earnings. No, sorry, the first one is to favor discounted free cash flow to the firm. The second one is counted future earnings and in the hope that they are not big discrepancies between the two. If there are big discrepancies between the two, it may just be because the company has been largely investing and spending cash in the last year, e.g. but remember that cash and income, so accrual accounting and cash accounting we will correlate at the very end over a longer period of time. You may need to adjust the investments to make a judgment that at the very end of the day, the discounted future earnings is more reflecting the real intrinsic value, the discounted free cash flow to the firm because the company has short-term span at a lot of money on new assets, but those assets would generate new earnings in the future. If the company is paying out dividends, then you can also look at what is the dividend discount models, the three telling me in terms of sorts, the intrinsic value of the company. Then you have to make a call. You have to make a call saying, well, yeah, it's true that I mean, it's giving me for most of those tasks is giving you the right margin of safety. That's my value investing is an odd because a judgment call will be required by you. Alright, so I hope that this is clear. So you have multiple methods, relative methods, price to book, adjusted price to book. And you have absolute valuation methods, three for the dividends, cashflows, and true for the earnings and free cash flow to the firm. I hope that you're able to understand how you will have to judge which methods is the right to, the right one to use for than taking an investment decision. And please do not forget, that is not enough. You have to bring this together with a level of one tests. Not just looking at intrinsic value, but also adds how good the company is at generating earnings, how good the company is, e.g. at providing passive income and those kind of things, That's something that you will use for that level. One task on top of this level to relative and absolute valuation methods. Wrapping up here this chapter and in the last one that's more like an ongoing research, are going to share with you how I tried to quantify the mode and intangible metrics that are learned from Warren Buffett without having to talk to management of the company, employees, of the company, supplies of the company. So we'll be sharing with you, at least for the big brands, how to potentially get some interesting signals to, let's say, strengthen or not an investment decision that you would take. So talk to you in the next one. Thank you. 23. Case study : Performing Level 1 & Level 2 analysis on Apple, Chevron, Sirius XM: Vengpt.com. Welcome back, Investors. Welcome to a new video. This video will be actually, so we are August 2024, 15th to be precise. And I mean, for the investors in the room, you know that every 45 days after quarterly closing, Warren Buffalo has to publish a 13 F report as they have more than 100 million assets under management. So I'm going to give you an update on latest movements on Berkshire HeawaysPortfolio. Actually, the video has three parts. So the first part will just be about the movements in out and new positions that they have taken in their portfolio. The second one will be actually on those companies or some examples of the companies that you're going to be seeing where they have sold the securities, where they have bought securities, is how to use in GPT and to the analysis using Vin GPT. And then the third part for those who like to read financial reports, they're going to be showing you how to read the latest financial report from Berkshire Headway, so the latest quarterly report. So let's go into it and do not forget to subscribe to our YouTube channel, as well. Alright, so let's start with the positions that have been sold by Berkshire Hathaway since in the second quarter 2024. So we're looking at the period April 1 to end of June 2024. So I've put you here a, I hope, comprehensive table that summarizes the main negative movements, so what they have been selling in terms of positions. In the portfolio. So what you see actually, and that's the highlights of this quarter, you see that Berkshire Hathaway has been taking capital gains by selling rough cut 50%, actually 49 or 33% of their Apple position in the portfolio. So they have sold for rough cut $84 billion of market value. So that's actually the biggest change. You see below the Apple line, so I've sorted this table by percentage change, so from the biggest to actually the smallest one. You see that they sold some positions on Capital One, floor and Deco holdings, T mobile US, Louisiana Pacific Corp, which is a railway company, if I'm not mistaken, and Chevron, which was also one of the positions that they have taken in the utilities or energy and utilities sector, I think already a couple of quarters ago, so that they sold three to 55%. But the main highlight here is that they sold 50% of the Apple position. In terms of movements, so what has been added. So I'll start first with what has been increased because they had already those companies in the previous quarter, at least. So you see that I mean, here it's sorted in ascending order. So you see that occidental petroleum, which was again, another one in the oil and gas industry like Chevron. So there they have increased a little bit like 290 3%. I will not read through all the lines, but the main highlight of what they have increased in terms of position in existing securities or in existing companies is actually serious XM holding which is this satellite well, satellite radio provider in the US, which is very well known in the US, in Europe. Most people do not know serious exam. So they have increased the position by 262%. So in terms of percentage, it's the biggest change. But you see that the value in US dollars is, let's say, relatively small compared to other let's say movement. So we are speaking about $376 million, which is for Berkshire, that's small money, actually. So that's the biggest change here. Then in terms of new companies that have appeared in the portfolio that were not existing in ir quarter, 2024, you have two new companies, one that is called Alta Beauty Incorporated. So they are kind of a marketplace for everything that is beauty products, those type of things. You see on the left hand side, a screenshot of their latest website. For example, they are selling SoliGenera which is a brand that I know from my daughter because she loves the brand, SoldiGenera. I had never heard about this brand, but young people like this brand, so they're apparently selling that type of stuff as well. And then Berkshire Hadway has also added position. So they bought one or 2% of the outstanding shares of the Class A shares of HCO, which is kind of an engineering company that is also doing stuff in flight operations, flight support. So you see that the percentages that they have taken are small. So it's for ULTA Beauty, they have taken one 4% of the outstanding shares. And for HCO, so HCO has two types of shares or classes of shares. So they have taken one or 2% of the outstanding class A shares. You see the amount in terms of the value of US dollar. They are relatively small compared to the size of Berkshire. It's $185 million for Haku and 266 million for ULTA. So that's for the movement in the portfolio. Now, I mean, what is interesting is not just to know about the movement. Okay, we have seen Apple has been sold for 50% of the position, and we have seen serious exam increasing by 262% and two new additions. But what is interesting as I mean, if we are serious investors, is to understand what are the fundamentals of those companies. So what I'm showing you here, is actually how to use Vine GPT and how to prompt VN GPT to do analysis on a couple of those companies that we have been just enumeraating. So the first thing is we're going to be looking at out movements, so movements of selling securities in the portfolio of Berkshire Hathaway. So here you see the prompt that are going to copy paste into Ving GPT, where I'm actually asking Vin GPT to do some people call it a chain of thought. So it's a sequence of prompts, but structured under one single prompt, you see that it's like seven or eight lines of prompt. I'm asking Vin GPT to do a fundamental analysis of Apple and Chevron Corp. Those were two companies in the portfolio of Berkshire the way, where the percentage has been reduced. And I want actually VNGPT to show me side by side the fundamental analysis of those two companies in a comprehensive table. And I also want VNGPT to calculate the intrinsic values for those companies using various methods. You're going to see this in the results in the video. And also, I want VNGPT to calculate the margin of safety. I mean, for those who did the Audit value investing training, you know that we should buy companies at 25 to 30% of margin of safety versus the current share price, so that the intrinsic value is 25% to 30% above the current share price. And also I want Vin GPT to calculate the percentage immediately comparing the intrinsic values versus the current market share price. So let's go into it, and let's roll the video here. So you see, so well, first, I'm starting with inch, so just saying good morning to Vinch. And then what I'm going to do, you're going to see me actually copy pasting the prompt. So by copy pasting the prompt, you're going to see now me submitting the prompt and so this chain of thought. And you see that, of course, Vn GPT is talking to our back end. So here is the Vn GBT four.com Band, because, I mean, in order to avoid hallucinations, you know that Vin GPT has been created on top of HGPD plus. We do have many, let's say, processes and calculation stuff that is being done in our back end just to avoid glitches in the analysis. So here you see, let me just pause here 1 second, the video before continuing it. So you see here, actually the results of the fundamental analysis. So for those who did the Adder value investing trading, you see like price earnings ratio, price of cash flow, dividend yield, dividend payout ratio, ROIC, return on assets as well, debt to equity ratio, that type of stuff. And then, in fact, afterwards, you remember, in the prompt or in the chain of thought, we ask, actually Vin GPT to calculate the intrinsic value. Let me also again stop here the video. And you see how Vin GPT looks at the current share price and then calculates the three methods that it has been, let's say, fine tuned. So it calculates dividend discount so discounted cash flow, free cash flow to the firm, and discounted future earnings. And you see actually that it then calculates because I ask in the prompt, it calculates actually the margin of safety between the current share price and those three intrinsic values. So you see that actually for Chevron, is a positive margin of safety. It means that the current share price is 20 dot 87% and 24 dot 71% below. So the intrinsic value is below the current share price. So it means that basically there would be and again, I'm not now soliciting you to buy Chevron Corp, but it looks like that Chevron Cp is currently undervalued, according to our value investing methods. And again, I will speak later on about what are the assumptions that are being used to calculate those intrinsic value. So that's for the first two companies. Let's go into serious XM. So serious exam, in fact, let me just go back here. So here we are just submitting a single prompt to serious exam, which is now, can you now perform a fundamental ys of serious exam and please also calculate intrinsic value, discounted casuals counted future earnings for the company, and calculate the margin of safety for both IV. So you see that's a different type of prompt. You see here in the sequence of the Appohevax analysis, I'm just copy pasting the prompt that I just shown to you on the screen, and, of course, Vin GBT is pulling the data from its back end, doing the analysis, doing the intrinsic value calculations to avoid hallucinations. Of the large language model, and it comes back with the calculations. So fundamental analysis, again, I mean, for those who did the A value investing training, level one, fundamental analysis. And then it calculates the intrinsic values, looks at the current share price, and then provides the intrinsic value. I just asked DCF and discounted future earnings, and it calculates the margin of safety. Just one thing here because the margin of safety looks very interesting 42, 46%, which could explain why Berkshire has been buying more of those companies. Just one thing is nonetheless that I do not like about serious M, is that the company has negative equity. You see it here in the summary of the fundamental analysis. It's something that I've been asked up also related to Starbucks. I mean, I love the Starbucks brand, but it has negative equities. There would be for me a KO criteria and I would not invest into the company. Just wanted to highlight this to you. Again, I'm not telling you to buy serious M. I'm just showing you productive you can be in your investment process by leveraging Ving GPT. Okay, the third analysis, and we already discussed about Alta Beauty, which is one of the two new holdings that appeared in the outer 13 F repot. So here I'm showing you actually a sequence of various prompts with VnchGPT. So let's go into the video. So you see here, I started a new conversation, and I'm asking, well, first of all, I'm asking because I never heard about Alta Beauty before seeing it in 13 F repot. I'm asking Vin if it has la Beauty in its companies or in its investment universe, you decide how to prompt the model. It says, yes, it has it under the Tika Yelta then I'm asking actually perform a fundamental analysis of the company. You see that I don't need to repeat la beauty because VNGPT remembers the contacts and the prompts, and I'm asking also to calculate intrinsic values for the company. Again, as always, it goes to the back ends, performs the calculations, pulls the right data from the latest investment Universe update, and then it provides a analysis related to the company. And we see that the company does not pay out dividends, and you see that it provides a certain value for the discounted cash flow intrinsic value and discounted future earnings intrinsic value. And one of the things that again, I want to emphasize here is, of course, I did not provide any further assumptions when calculating the intrinsic values. So I'm asking now the model here as you can see in my prompting is, which assumptions have you used to calculate the IV? And Vin GPT is answering because it has been preprogrammed with that. Answering that it used 3% growth rate, 7% discount rate and a time horizon of 30 years. And I'm asking no basically Vin GPT to recalculate. I'm changing the growth assumption, and I'm asking Wing to recalculate with a 4% growth rate. And you see that, of course, it will adapt the intrinsic values if it is a DCF or DFE with a new growth rate. And also, I mean, and I've been discussing this a lot with my students is what is an appropriate cost of capital for any company. Per default, the model uses 7%, which we believe is a good average cost of capital for any type of company long term, valuing on 30 years. But here, I mean, I mean, if you have followed me, you know that I've been adding together with the Vin GBT team, we have been adding industry specific cost of capital, and you can ask the model, What's the industry cost of capital? And here it has replied that it was nine dot 82. And I'm asking now in GPT to recalculate the intrinsic values using this nine dot 82 percentage in terms of cost of capital. So I'm just here again, you see just reconfirming what growth rate it has been using because I did not, let's say, tell again to in GPT, which growth rate to use. So you see that it capped the 4%. So just another example on how to use VNG GPT, in fact, to do the prompting. Right. The third part of this video is having a look, and you know that me as an investor, I always read financial reports, and it's very important that you train your eye and that you practice on reading financial reports. I'm just showing you here the main highlights of the latest financial reports. So the ten Q report, which is an unaudited quarterly report of Berkshire Hathaway. So the holding Company of Warren Buffett. So here I'll start. I mean, you know that I always start with the balance sheet and then the cash flow same and then income sim, but I know that a lot of people they like to start with the income same. So let's start with that, but I will come back to the cash flow and the balance sheet later on. So on the income same and you see that with the red bullet points one and two, that's so if you compare quarter over quarter, the second quarter of 2024 with the second quarter of 2023, you see that the company made rough cuts the same amount of profits, so it's 33 billion. This year, while last year was 359. What is more interesting when you look at the first six months of last year versus this year, you see that the company has, in fact, generated 43 billion of profits, and so the first six months of last year, they had generated 71 billion. So the performance was a little bit better last year. For whatever reason, that's now at the point here. It's interesting as well, when you look at the cash flow statement, you see actually at the cash position so that Warren Buffett's Berkshire company has a cash position of 43 billion. So that's really cash and cash equivalents. And what we want to understand as well is how has the balance sheet evolved? And again, I have started reading the Berkshire Heaway ten cry pot. I started with the balance sheet because the balance sheet, as I always tell my students, it shows in a consolidated way at any moment in time, it shows what has happened to the company. So here, you see, and let's zoom in here on the equity side of the liability side of the balance sheet. So what is being compared here is the balance sheet position at the end of December of 2023 versus the balance sheet position of carter 2024. Again, unaudited figures. When we zoom in, actually, there are three things that we can call out. The first one is a retained earnings. So we see that and you know that I hope that you know that when profits in companies happen, they normally appear on the liability side of the balance sheet as retained earnings. So there we see that the retained earnings have increased by $43 billion. We see that Berkshire Hathaway, compared to last December, has spent $3 billion on share buybacks. So that's the treasury stock that is carried at cost. And again, remember, that's a negative value in the liability side of the balance sheet. Net net, when you look at the bullet pot number three, the balance sheet has increased by $39 billion. When we look on the asset side, because you remember balance sheet has to be balanced. So what are the main movements that actually reflect the plus 39 billion that we have on the right hand side of the balance sheet? So basically, we see and remember that Berkshire Hathaway has been selling for $84 billion of Apple shares amongst others. So, of course, we see that the investment in equity securities, so that's bullet point number two went down compared to December 2023. So we see that rough cut, they carry $69 billion, less in equity securities. They carry 7 billion less in fixed maturity securities. Did they do with the cash that they collected from selling Apple amongst others? And it was not just about Apple. Well, they have invested into US treasury bills. So you see that compared to six months ago, the balance sheet, so the asset side of the short term investments in US T bills has grown from $129 billion to $234 billion. So, I mean, this is really high amounts of money. So you see that net net, actually, when you just make the sum of those positions, you see, actually that rough cut. Remember that the balance sheet has grown by 39 billion. You see that rough cut from those 39 billion, 30 billion already explained just by those three position and movement as well. So that's basically what I wanted to show you. And in terms of conclusion, what can we say that Berkshire had the way, again, as very often has provided solid results. And they have taken in some serious capital gains, selling rough cut 50% of the Apple stake that they had. So that was the 84 billion share sale that took place last quarter. So that thanks for your attention. Talk to you in the next video, do not forget to subscribe to YouTube channel. Thank you very much, See you. 24. Moat & intangible metrics: Alright, well Investors, welcome back. We are finishing nearly this whole training. We're gonna go into a shorter chapter, which is Chapter number five, which is a little bit of ongoing research. And I'm gonna give you, if you remember an introduction, I set some elements how to measure, in fact, the perception of stakeholders of the company. And how this can in fact adds to a mode in the sense of, you remember that in the level one test we discussed about the mode being the return on invested capital being like consistently around ten per cent or above eight per cent for a couple of years in the row. But there is a little bit more. And actually I came across a book from Philip Fischer that was called Commons or that is called common stocks and uncovering profits. You have here the first page of the book. And in fact, but Philip Fischer, we're saying, is that when reading printed financial statements, but a company is never enough to justify and investments. One of the major steps in prudent investment quoting here must be to find out about a company's affairs from those who have some direct familiarity with them. So basically what he's saying is that it's not enough to look at the financials. It's not enough. I mean, you coming back to what I have been showing to you so far, having a level one, level two perspective on things. But we can augment the level 1.11 two tests perspective by adding some attributes that not a lot of investors actually look into. And that's basically what I want to share here with you. So when he's speaking about that, you need to talk to people that are linked to the company that have some direct familiarity with it. I mean, let's be very fair. This is not easy and specifically it's not easy for small investors. I mean, if you're, if your name is Warren Buffett, it's easy to call up the CEO of JP Morgan and have a chat with a guy. It's probably you have the scale to ask marketing agency to do some analysis and very thorough analysis about customer sentiment, e.g. of JPMorgan, all about Unilever. That's something that's frozen. Small investors. It's actually pretty difficult to do. In fact, here I'm trying to share with you in this level three tasks, some elements, how you can scale this in a way just sitting using internet and just sitting behind your desk without having to do an even you would not have the opportunity to talk to the management of those big companies that potentially either me or you want to become an investor. The scatter but method or technique, as it is called, is a method that actually looks at various perspectives. It looks at customers, suppliers, competition, employees. And when you look at it, it's pretty close. In fact, the five forces model of microbiota, if you look at, let's say a strategic definition, strategic assessment methods to see how the company is positioned on a specific market, on a specific customer segment, e.g. what I will be sharing here with you is specifically the customer and employee, which is pretty easy to gather on supplier and need to be very fair. I was absolutely unable to find for the time being, any kind of platform or website that actually provides a feedback from the suppliers about the company that you're thinking about to invest into. And I'm gonna give a quick perspective on competition because of course that's pretty important as well, right? So when we go into customer sentiments, and I'll try it for each of those two angles of this customer sentiment and employee sentiment. I've tried to share a little bit of research backgrounds, what the academic world or the consulting companies are saying. In fact, for each of those two categories. So when you look at customer sentiment and I've put the various URLs, you have, of course, the big consulting company, Mckinsey. And also there were some articles in the Harvard Business Review that will actually saying that improving the customer experience is increasing the overall shoulder written by seven to ten per cent. And HBR was also mentioning. So they did an analysis a couple of years ago for airlines I think was for car rental and also for the, remember the third category what it was. And they also saw a strong correlation between, I will introduce the term net promoter score, the NPS figures and accompanies average growth rate. So I mean, it feels, of course, common sense then if you have customers that are happy with your products, your services, with the after sales service or your company, that's probably they will come back at least for me, it happens to me. We just bought a car e.g. couple of months ago. We like the garage. We're gonna go back to this garage because the service is really great. So I will not I mean, at least if I would have to choose to go for another car company, of course, I wouldn't be expecting the same level of service. So and by that it's probably I mean, at the current garage, if I would have to have a conversation about buying a new car, etc, maybe you're going to be a little bit less pushy because the service is good. So I know what I would be losing if I will be switching. So that's a famous pricing power and switching costs that we're discussing here in fact. But the point is, how can you, through the Internet have a perspective on the watts without having to pay marketing agency and spending a lot of money on your investments. How can you get an idea about what is the sentiment of the customers about the company that you're about to invest into. Of course, the first one that I already mentioned when we were discussing modes on top of the pure, let's say technical financial measure, which is return on invested capital, was in fact, I showed you the Interbrand top 100 brands in the world. There are other agencies that are doing this like brand z, e.g. and we're going to look at the example of Mercedes when I will be sharing with you how to look at the customer sentiment for Mercedes. So here e.g. on Interbrand, you see in fact, here we are not discussing the value of the brand, but the movements, the variation year over year and what you see in fact, not only do you see that Rosetta us is on position number eight, you see that the brand value has increased by ten per cent from the previous year, 2021. What does that mean? It means in fact that customers are happy and the company has pricing power and has actually increased the pricing power from one year to the other nodes by ten per cent because that's the 10% is about the brand value, the monetary or the financial monetization of valuation of the brand value. But just by having this is at least how I interpreted it. Just by having an increase in the brand value. I consider just by looking at Interbrand, that the perception of the customers, of the bias is better. I'm gonna give you two other examples here on this slide. If you look at position 17.19, you see that Facebook has gone down by five per cent and Intel has gone down by 8%. This is for me, just by looking at the Interbrand, TOP 100s brands in the world. So this ranking that comes out once per year, I have the first perception about what is the customer sentiment, but that's not good enough for me. So I will develop this. Introducing what I mentioned already a couple of seconds ago, the Net Promoter Score. So the Net Promoter Score is a very maybe you know it, but if you're not, if you're not aware of it, it's a very easy measure, in fact, of how people are, what is their sentiment about e.g. a. Company? So we're going to see this also for the employee sentiment, you're gonna be using the employee Net Promoter Score. The calculation is pretty easy if you're doing a survey 0-10, the people that are responding nine to ten or promoters, the people that are responding seven to eight are considered passive. And the people that are responding 0-6 means that they are detractors. The NPS score is calculated. You take the percentage of promoters and you subtract from that the percentage of detractors and that will give you a score, in fact an NPS score. Let me give a very concrete example. We were discussing Mercedes and here I am sharing also the URLs. So you have today, at least from my research, to have, to websites like customer gurus and comparably. There are providing publicly, you don't need to pay for it. Maybe you need to reduce it, but you don't need to pay for it. That actually provides an Net Promoter Score. You see on the left hand side for Mercedes Benz, the Net Promoter Score on customer guru is 39. So they have by far more promoters and detractors on comparably. You see that at least for Mercedes Benz USA, they don't have it for the overall company. You have a net promoter score of 44. So you see that there are 64% of promoters, 16 per cent of passives, and 20 per cent of detractors. So you see how the NPS is calculated. It's 64% -20% that gives a score of 44. Nodding percent is an, a score of 44. And you see also on those sides what is interesting is that you can see, you can compare e.g. here in the manufacturing space. You see e.g. on the right-hand side that Porsche customers by promoting more the brand than Mercedes Benz, even though Mercedes Benz comes seconds for the US. And you see, I was commenting this to my wife yesterday as well. It's very interesting because you see Tesla having a net promoter score of 35, which is like the lower, let's say, a promoter score that we have here on this six-seven car manufacturers. So nonetheless, 35 is positive. So I always tend to say when you have a net promoter score that is getting close to zero, the company probably, I mean, customers are not happy about something at the company. But when you have such high promoter scores are above 20, that's normally that you have more promoters and detractors. Just for, I mean, as you maybe have heard in the previous lesson that I have in re-recording this very first training that I wrote in 2019 that was published August 20th. So we are now April 2023. I've been fully re-recording this training. Also, of course, I asked Chad GPT, if they could tell me the net promoter score of Mercedes, why why having to look for specific websites? And tragic PT does not provide that information. So they provide the definition of NPS, what it means, but they will not provide the Net Promoter Score of Mercedes. That's just for a little, a little joke, but just a little cliche about GPT. Alright, So for customer sentiment, so keep in mind that you can have a perspective on the overall customer sentiment by looking at the brand movement year over year that is being done by those marketing agencies like Interbrand, like brand z. But you also have websites like comparably or customer guru that do provide some sense of Net Promoter Score of customer sentiment about the company that you are about to invest into. I would recommend you that before investing, maybe as a level three tasks, you have to check what is the customer sentiment about the company. But if you remember in the scuttlebutt methods or even in the five forces model of Michael Porter. It's not just about customers, but it's also about internal people. So because one thing that is not necessarily shown in a financial balance sheet and that's a conversation that would take us too far. So just let me make another comment is that in fact, talented people are in fact not reflected in the balance sheet and the financial balance sheet. So, but it is important that you have, I mean, if you're investing into company as a shareholder, you hope, and you are expecting for management to treat the people in a correct way. And you hope that people are motivated, that they will go a supplemental mile to satisfy the customers. This is important also from an investment perspective because this will have an impact on profitability. This is what I'm showing here. There is an interesting study that has been done by McKinsey a couple of years ago. It's not too far away where they were actually. So the study is called performance through people. I've put you the URL, why they were showing that companies that are people and performance winner. So we're also people are very satisfied that the return on invested capital in fact, is the highest compared to companies that are purely performance-driven versus companies that are only people focus but are not performance-driven. Versus, let's say average companies that do not pay really attention to those elements. But companies as they call it, which are people and performance winners. In fact, the return on invested capital is the highest and that's basically what we want as investors. Because when we invest in India Company and the market is giving us the company at a cheap price. What we hope is fact is that the market will come back and that the company would generate a lot of profits over the next two years. And we're gonna see, are passive income coming in without any issue. And of course, at the market will see in fact the good performance of the company, e.g. one. The markets get euphoric e.g. so, um, so keep this in mind. And from, let's say from a research perspective. Now the question is, how can I, I've showed you how to look at employee, sorry, at customer sentiment. How can I look at employee sentiment? And I'm gonna share with you the side that I've been using for many years, which is called glass or the glass, the websites, not only surveys, payroll, let's say, feedbacks from the people that are working in those companies. But they also survey when people are providing feedback, they also serve a, what is the overall employee sentiments? If people are happy with the company, if people are happy with the CEO. And this is what you see here. And I've taken the example of Mercedes Benz group as we are taking that example. And afterwards I gave you the example of Tesla and Twitter as well. So let's see that for Mercedes Benz group, there are 4,500 reviews. So and there are 7,900 salary feedbacks provided. So I mean, you could discuss I mean, when you're into auditing e.g. you could discuss if that is a representative sample the company has. I don't know exactly, but let's imagine that the company has 100,000 people. I mean, 4,500 reviews. That's nonetheless a lot. So statistically it's kind of representative of about what is going on in the company. Do I have to call up employees? So I had to know somebody who knows somebody who works at Mercedes. No. Gloucester is providing me some insights into that company. And you see here on bullet point number two at the bottom right, you see that 85% of the reviewers are recommending Mercedes to friends. 89% approved the CEO. In fact, the overall score for the company is four dot two out of five, which is a good score. I mean, I think the highest one is the Microsoft's, which are sitting at fool dot file dot four. I'm going to deepen that a little bit further. The conversation I've taken into the extracts from the Glassdoor Website. So you see that e.g. for Mercedes, you have an overall score of photo too. But what's interesting is e.g. when you look at the trends on the bottom left, you see that the trend actually is increasing since now, let's say the last 12 months. Even more interesting, if you click on the CEO approval 89%, you see in fact that the CEO approval trends is in fact flats, which is a good sign. So people, it seems like from the reviewers that people are happy about the CEO. So that's the kind of thing in fact, that provide you some insights about the company that you are potentially about to invest into. Glass is not the only one comparably is doing the same. So not only are they providing an NPS, So the customer sentiment, but they also providing an E and P S, which is the employee Net Promoter Score. And you see e.g. that former cities I did the same research. Here is again only Mercedes Benz USA. So you had in fact 1132 total ratings, 149 employee participants. So they're providing a culture score of photo, the one on five. And the overall, let's say SEO score on this. Let say on a scale of up to 100 is of 77. And what is interesting is on the bottom right, you see the NPS score. So that's the, not this time customer sentiment score, but it is the employee's sentiment score and it is in fact of 24, so it's 50, 1% promoters, 22% passives, and 27% detractors from Mercedes Benz USA to be precise. And you could now, you may ask, Okay, But is this not this not a beauty contest? Is this not dressed up? And I actually took a couple of companies that are, I think interesting. One would be Meta and the other one would be Twitter, which has been taken over by Elon Musk. And it's pretty interesting when you look, in fact, if it is on comparably first, you have the URL below that meta has an overall rating of 78 out of 100 for Mark Zuckerberg as CEO. And it's interesting to see that Elon Musk is at 66 other 100s. Even worse for Twitter, you see that the NPS is sitting at three. So there does a couple of promoters, but also the amount of promoters is nearly as high as the amount of detractors. So that's not good. While at Meta you see that employees, apparently, they, I mean, 56% of the employees are promoters and 25% are detractors. So you see, in fact, I mean, you read through the press, we are April 2023 since Elon Musk has taken over Twitter, that indeed things are not going very well for Twitter there. I mean, I would say, a lot of, I will not say social plans, but people that are in fact laid off. And they're like back-and-forth about the strategy. But Twitter with the, let's say official accounts. I think that yesterday, two days ago and in Musk announced that he did not announce, but to, to announce that this is, will be no further official accounts on Twitter, e.g. so then I compare this also on Glassdoor and on Glassdoor you see in fact for Twitter specifically, and you just compare it with what we were seeing with Mercedes. The overall score for Mercedes, if you recall, was sitting at four dot t2 while at Twitter it sits at three dots, three. Even more interesting, when you look at the overall trends on the bottom left, you see in fact how the trends really has come down. With all due respect for Elon Musk. He may be a brilliant guy, but you see that the way how he has taken over Twitter has had an impact and this is reflected in Glassdoor. So you could think that Gloucester is not reflecting reality, but I believe that this is an example. I will not say that there's no scientific proof, but this is an example of signals that you can get from the companies that you're investing into. Last comment about Twitter, just look at the CEO approval rate. It's sitting at 13 per cent. 13. So if you compare it with all our calendars, who is the CEO of Mercedes, he has an approval rate of nine per cent. So this is I mean, I'm not trying here now to convince you, but at least I do use sites like Glassdoor, like comparably to have a perspective into the company, I do use the NPS score to have an idea about the customer sentiment if that is being well-managed and if customers are happy with the company or not, because that will have an impact. If you have unhappy customers, a premise, your customers, they're going to switch. Even if switching costs are high, they will be so ****** off against the company that they're going to switch. So I believe that this is something as well that you, at the very end before taking the investment decision, there will be good that you do those small sanity checks about what is customer sentiment and what is employee sentiment? Last but not least, just food for thought here about the CEO and the CEO stewardship and how CEOs appreciate it. So I'm giving you, you probably know, a couple of those people we have, Jeff Skilling from Enron, who was involved in a huge scandal a couple of years ago, and the latest one, with all due respect for those people, you have the CEO of WeWork, Elizabeth Holmes from Theranos and our FTX France. Some bank men freed where I've put you the URLs on YouTube and why I'm discussing this very quickly here is that, I mean, as business owner, you better know who is running the business. The problem is, of course, that you do not know if you can trust this person. And how do you feel about the person and the difficulty? And you remember Charlie Munger was stating this as well, that he would like to have great people that are running the company with a lot of integrity and also with lots of fairness. And that's something that is very, very difficult, in fact, to extract. If you just look at those interviews from Adam Neumann from we work through our nose, from SBA, from FTX. It's very difficult. I mean, those people are I mean, all of them, all the CEOs, they get communication trainings, they get PR training. They know how to speak in public. They know how to go around. Difficult question. So I mean, we are not here now a psychologist, that's not the intention, but I think what you need to be attentive is please do not be fooled by the attitudes of a CEO that is promising things. You need to do your homework and maybe trust your gut feeling. How do you feel about that person being the one that is running your investments as a shareholder? So this is really food for thoughts. I know it's not easy, but what I tried to share with you is, and I'm coming back to the example of Twitter, that maybe Elon Musk is a brilliant guy. But when you have a CEO approval rate of 13%, you have a lot of detractors. I mean I mean, by that you have a negative E&P as employee Net Promoter Score. I mean, you, even though Elon Musk quotes e.g. during a public interview, speak very well, be very strategic. B, let's say promising a lot of things at the very end of the day, if he is making mad, all the employees of Twitter, the best talents will go away in fact, and that's something that happened as well at Twitter. So there are ways of capturing some signal from the overall noise and positive noise that the CEOs of companies are doing by looking at those sites like Glassdoor, like comparably, like customer guru for the customer sentiment. Alright, and then last but not least, there are other information sources and I've been asked a couple of days ago, buy from, I mean, by an investor from the US from Washington. What was my feeling about the supplemental information? But first, I will just want to come back to slides on the role of the rating agencies. I do consider that rating agencies are also an overall great source to have perspective about how they feel about the company. Of course, they really messed it up during the subprime crisis by providing very high ratings on instruments that were, nonetheless, that's the variant exposed to investors. And I think that for normal companies that have a standard balance sheet where the business is understandable. I like to look as well, or I consider that the rating agencies is not just only giving me information about what is the risk premium. If you remember when we were discussing solvency, debt to equity ratios, interest coverage ratios, what is the premium I need to add to my cost of capital expectations given the riskiness of the business. But also consider that it gives me also a sentiment about how these normally professional people think about the company. And I've put here again as a reminder, Moody's, S&P and Fitch, they are the ones like dB, ers, et cetera. She have other rating agencies, but the three big ones are the Moody as a p and Fitch. In fact, if you look at Mercedes, the example, you see in fact, what is interesting. And of course this comes back again to the long-term solvency conversation. I see that Mercedes Benz is categorized as an A2, which is investment-grade, upper medium grades. That's at least their perception. Alright, and then to close up this lesson, I just want to, so coming back to the question that I was asked by this investor from Washington a couple of days ago about what is my feeling about Morningstar in fact, because I sometimes speak about Morningstar and as already said, there is nothing I have no commercial link with with this company. I'm not a shareholder of this company. I pay my monthly subscription. That's the only paid subscription I pay every month. So just to be clear about the disclaimer here. So when, I mean, just taking a step back, we have been through this whole course or at least I have been sharing with your veterans Bradley, how or what are the tests that are used? I'm using between level one. So those are the, let's say the fundamental screens, level two, that's the price to book the dividend discount models that intrinsic value calculations on earnings and cash flows. And then on every three, I do look at customer sentiment and employee sentiment because for me it's important to know what is going on inside the company and how buyers feel about the company if there is or is that buyers would turn away from the company. And mourning science facts, which is one of the most known sites providing, let's say, financial information. They're going to share my perspective on Yahoo Finance. So in fact, I extracted for the example of Mercedes has a couple of elements here. So e.g. on the mornings. So when you go on the summary quotes page of a specific company, they provide you. In fact, I will just follow the numbers here on bullet point number one, they are providing information how they feel the company has a mode or not. So you may have companies that are listed having white mode and narrow mode, no mode. And then you have e.g. on bullet point number two, they provide are certain perspective on from which moment on what they call the five-star price, from which moment on they consider that the share price of the company is really super cheap. And here you see that former sit as they consider at current, let's say fundamentals and their analysis. I don't know how they have calculated this, but they consider that if the share price is below $70 a share, That's, the company is actually very cheap. This is what they call a five-star price. And they provide also you see here a fair value. So they are estimating that the fair value of one Mercedes Benz share is 117 and at the last clause is at 76 per cent. So they actually telling you according to them. So please do not take this now as a commitment, but according to them, That's currently Mercedes Benz. You can buy it at 34, 34 per cent discount. I need to be very transparent with you. I mean, you have heard previously in the course that I've bought Mercedes adds a little bit below 53, are around 53 a share. So I've did the latest IV calculations and indeed it's telling me that it's around 120-130. So I can understand from where they're coming from in terms of fair value, but I did myself my calculation, looking at the latest financial statement. What is interesting as well is that they are providing a price to book as well. You see that Here's mentioning that the price to book of Mercedes is 087. They provide the price to earnings, which is five dot 14. They are providing the interest coverage ratio as well, which we're seeing is 48 times. So it means that, I mean, it's like a triple a according to the interest coverage ratio. So the risk premium TV and it is nearly zero. They also on six, calculate the debt to equity, which is showing zero dot 99 here. And they also provides a calculation on profitability on invested capital. They're calculating it as of December 31, 2022 at 870 1%, which is basically our ROIC tests. So you see in fact that a lot of the tasks that we were looking into, their providing the measures for that also already my points and then we'll make a comment at the very end of the day. But let me just make the pointer on Yahoo Finance. Yahoo Finance is also public website. You have a lot of inflammation. You see that they provide also an undervaluation price or for Mercedes, they are saying that the below 72 is cheap. They provide price to book unadjusted as well. You see that their price to book is 086, so it's not the same number as Morningstar. They do provide trailing price to earnings. So that's like trailing 12 month. That's a sliding window time period of 5008, where if you recall, Morningstar was calculating four dots, five dots, 14. So it's pretty close with zero.06 of difference. And they provide up to equity as well. Yes, it's no, sorry, it's not the debt to equity they are providing. In fact here also on management effectiveness, they're providing some sense of profitability, but they're not providing the profitability on invested capital, e.g. that's a shortcoming of the Yo findings website. So now maybe you're thinking, Well, why do I need to use the companion sheet? Why do I need to read the financial statements if those guys actually giving me what I need, which is represented in level one, level two. And my point is the following. As a series value investor, I want you to be able to calculate and understand what you have calculated and potentially using tools like Yahoo Finance mornings or as conformation. But I believe that series and vessels, they do their homework, sorry, I do believe it's too easy just to rely on an external source. And by the way, they are clearly putting a disclaimer that they're not responsible for what they are actually calculating. But I must say they are pretty accurate. For mornings. I must say it's pretty accurate infant, I cannot say the contrary, and I do use it also when I have to make a big investment decision. I also have at the very end, after having done my level 12.3 tasks, I have a quick look at Morningstar. If they are far away from my assumptions on that. Alright, so this is wrapping up chapter number five. So as said, we are discussing that's on top of the level one, level two tasks. You have things that you have to look into which go a little bit beyond. Which is in fact a base on what Philip Fischer called the scuttlebutt methods, customer sentiment and then pre employee sentiment. So if you are coming back on this slide, so I tried to show you how you can cover 1.2. Now you may ask what about supplies and competition on supplies already told you, I have not found any website. We're actually suppliers are providing feedback about their buyers in that sentence. So I don't know e.g. what is the feeling of the Mercedes-Benz suppliers versus Mercedes would be interesting. But the very end of the day, it's more important to be able to monitor how customers and employees feel about the company now, but competition, and of course, when we speak about competition, we're moving into the strategic area. Here. We, I mean, for those who are aware, we are going to be, we should be discussing Michael Porter and mintzberg, the value stick, pass live ratio analysis, those kind of things. I need to be very transparent here and it's not about me now making promotion of another course, but having a perspective at competition is something that is not easy. And you would need really to invest time to understand what is competition doing? What are the differentiators that unique selling points between one and the other company for that, in fact, very quick. Let's say I'm pointing here to cause that also I'm teaching a university that is called masterclass and entrepreneurship and strategic management. When fact, I have a full chapter why I'm discussing how to make a strategic assessment of a company. I'm actually also, you see here also the logo of Starbucks. When I'm actually using all those tools, the past, let the variety of the portal and actually explaining to you how to make a strategic assessment of Starbucks, e.g. so that's something that would really take us too far. And this other value investing training at the very end of the day and it's not now to be considered as a shortcut. Of course, competition is important. I will not say the contrary, but the most important here are the customers and the employees before competition. And you actually have people that say, we don't even want to look at competition, as long as we're able to delight our customers and delight our employees and our products are good and our services are good. And now post-sales service is also good. I mean, profitability will be there. In fact, I believe that's a little bit a true short-term perspective on things I believe that you need to know also. I mean, when I was running the businesses I was responsible for, I was looking at competition as well, but of course I was spending more time on customers and employees versus competition. Last but not least, that's the last slide for this lecture. So I wanted to also to share with you what is Warren Buffett's perspective on the scuttlebutt method. And actually in the 990s eight Berkshire Hathaway annual shareholder meeting, he was asked by a person if he's using Philip Fischer scuttlebutt method and I'm just reading, so that's a quote from Warren Buffet was saying, and then I will summarize. So he was saying basically that I believe that as you're acquiring knowledge about industries in general companies specifically, that there really isn't anything like first doing some reading about them and getting out and talking to competitors, customers, suppliers, employees, current employees and whatever it may be, you will learn a lot, but it should be the last 20 or ten per cent. I mean, you don't want to get too impressed by that because you really want to start with the business by you think the economics are good. Quote from Warren Buffett in 1998. So basically what, what does this mean? So he's not saying that the scuttlebutt method, it's not interesting. He's saying indeed, I mean, at that time probably he didn't. I mean, Glassdoor and comparably did not even exist. So indeed he was taking a little bit the same productivity Fisher go and talk to the customers, go and talk to the supplier's go and talk to the employees and the competitors. But what is important here, and that's why also, I've put the comparably glossed or let's say, tools for capturing some sense of employee and customer sentiment as level of three at the very end, it's really the cherry on the cake. I mean, you should not start with this. You should start with level one fundamental screens. And if the company passes those filters, then you go into the intrinsic value calculation with what we have been discussing. And only at the very end you spent a little bit of time just to confirm a good investment decision by also having a perception if employees and customers are happy about the company. That's basically what Warren Buffett is saying here. He's saying that you should spend the last 20 to ten per cent on scuttled button methods. And I'm fully agreeing with him on that. That's why also this course is I mean, the whole substance of the course is about the level one, level two tasks and a little bit of the level of three. But I think it's good that you have this perspective. What are those level 3.5. Just by browsing on the internet, you can find some very interesting information. Alright, wrapping up here. And the next lecture actually will be the dominant conclusion lecture. So we add the ends of all the tasks and I will be wrapping up all my thoughts in the next closing lecture. Thank you. 25. Conclusion & final assignment: All right, well investors, welcome back. So you have reached the conclusion of the Auto Value Investing, which has been actually the first training I've published on various educational platforms with the most important one being Demi. And first of all, I would like to congratulate you and thanking you for having taken time to or to give me the time to walk you through how I perceive value investing. And I hope that it was an interesting journey. I mean, let me just take a couple of minutes just to conclude on the out of value investing training. The first thing is, I mean, you can contact me, and I will provide you the contact information. You have access to Q&A as well. So you can contact me and do your own valuation, and I would recommend you pick one of the following brands, BMW, Coca Cola Marks of Disney TNT. You can also use another one I had today student who did a valuation of Google and asked me to have a check if he did the evaluation in correct way or if there were any mistakes in it. And by the way, I must say he did it in a very good way, in fact. Um, so, of course, when we speak about doing the valuation, I'm expecting from you that you follow the methodology that I have been extensively discussing with you over those. I think the course is now around 15 hours and that you do the level one test, level two test, and the level three test. One important thing, I mean, this is a lecture that I've been updating in May 2024. So we are May 8, 2024 when I've been re recording this lecture, a year ago, when I redid the re recording of the whole Ato V investing training, actually, I would give you access to an Excel file. The problem with the Excel file is, okay, I mean, it was worth something to be able to calculate the intrinsic value. But you had to do a lot of things manually, downloading the financial reports, extracting the information, extracting those variables. So you had 19 variables to fill out. That's not very, let's say, straightforward. And I do remember, by the way, and maybe some of you have seen my emails in early 2023. I think was April 2023 when I re recorded the whole the Auto Val investing training, that there were some glitches in the Excel file. So I I had not changed the Excel file since 2020, and I wanted to do a better improved version 2023. And I ended up actually having to do six iterations because, yeah, Excel is great, but it follows what you ask the model to do. And I mean, if you errors in the formulas. Obviously, it's not correct. So on top of that, and I've already been mentioning this, and by the way, in the next lecture, which is the bonus lecture, I'm showing you a full valuation with a tool that we have been developing since November 2023 that we just launched May 1, 2024, which is a custom GPT for those who know chat GPT. So this is called Vine Value Investing Next Generation. So it's a custom GPT. Specifically trained and fine tuned for value investors. And instead of using the Excel file, so I have decided to remove the EXL file because it's just too risky and there is too manual work involved in it. And we created after six months of development, this tool that actually allows you and we have created, first of all, this tool for ourselves. So I give you the example just a couple of seconds ago that I had today a student from Israel that asked me to check the valuation that he did on a company. And it took me two, three prompts, and I'm showing this to you in the next lecture. It took me two, three prompts just to check if the person had done a correct valuation of the company. While if you would be 1.5 years ago, it would take you probably like an hour to do the calculations, the intrinsic valuation and to the level one, level two, and the level three tests because it was not consolidated, you had to go on different websites, et cetera. Today, everything is consolidated in this tool that is called Vinch value investing Next Generation, and it is available as a custom GPT on the Open AI I would say store, which is accessible if you have a HGPDPlus subscription. Some people may not like that, but that's the condition to be able to use any custom GPTs, not just our Custom GPT, but for the time being, OpenI has decided that in order to access those custom GPTs because they are powered by the latest OpenAI HGPDPlus model, which is HGPT four, you need to have a HCPD plus subscription. So sharing in the next lecture, I'm showing you how to do full valuation with this, but I promise you, and as said, I'm really insisting on this. We did this for ourselves, first of all, so we are five people involved in this project for the time being, maybe the team will grow. But we really did it already for ourselves because I had enough of my L file, and it took me too much time for every company to do a so I would say, even a filtering mechanism on my investment universe with Morningstar, even though I like Morningstar, but it was just much time to do this. And then for every intrinsic valuation, I really had to download the financial reports or go on Morningstar and extract the values. So you're going to see in the next lecture, which is the Appendix one bonus lecture, you're going to see how easy it is actually to do a Level one, Level two and Level three. So the methodology that I've taught you in this chorus how you can actually do this in a very, very productive and efficient way, and you will not lose a lot of time by using Vinch doing this. So I hope it will be of value for you. So that's just one thing. So that's just to mention that, yes, I've been re recording this in May 2024. I've decided to remove the Axl file because it was just too risky and it was just taking too much time for the people to do this. Now you have a tool that you can actually just prompt. It's an AI tool and you can actually do various variations of an intrinsic valuation and ask questions about value investing theory, but also it has at the moment of starting when we launched it, May 1, 2024, it had 1,100 plus companies and around 1 million data points, including level three information like brand NPS and ENPS. So, so I recommend you to go into the next lecture and take a couple of minutes. I think it's a ten minute lecture that you see how evaluation is done with VNG, in fact. So I think I mean, just to wrap up, I don't want to controle about VNG. VN is just a tool that will help you in your investment journey. I think what is really key, and I hope that you will have understood that what is really key as a value investor is that you don't act as a speculator, but you really act as a business owner, and that when you buy companies, as I was explaining when I was speaking, for example, about Blue Chip companies, that there are companies that I do like, but they are just too expensive. So I have to wait patience being one of the potent attributes that you need to have in the mindset of a value investor, I need to wait until the market Mr. Market is giving me the company at a very undervalued price. So and at a certain point in time, maybe you have to when the market is overvaluing the company. So I told you that to me is like when it is 15% to 20% above intrinsic value that I tend then to throw out and to take in sort to realize the capital gains on the share price. And while this so during the period of time between the moment, I purchased the company and remember that I said that you can never perfectly time the bottom of a curve of a share price versus the moment where you sell the company, while during that period of time, I want to have passive income through return to shareholders, which is at least cash dividends or share buybacks, if you remember what we were discussing in the fundamental screen. So I think this graph really summarizes everything that I'm trying that I try to teach you in the add of value investing. So this is, for me, like, and actually, I mean, I cannot turn the camera around because otherwise you will not see me. But here, in fact, I have the exact I do have the exact one pager on my desk here, and I have here the top 100 best global brands of 2023, and I have here my three level test, my methodology that I always keep in mind so that I avoid becoming arrogant when I'm very successful investing into the stock market, that I always keep in mind, what is my method? What is my methodology? So I really recommend you maybe for you. I know that some people have been doing this. I had an investor from Dubai who told me, I like this one page. I've printed out the one pager, and actually, I have hang it above my screen so I can see it all the time that I do not forget how I should behave when investing to the stock market. And as I said, I mean, remember that being a good value investor and just being a good investor and not speculator requires practice. It requires reading and understanding accounting data because it's the lingo, it's the vocabulary of business. You need to be able to know what the value is of what you are buying or what you are potentially selling. To have a repeatable investment process. I think that's really, very, very, very important. You remember I said a certain in time that it happened to me more than ten, 15 years ago that I became arrogant because of, let's say, the successes that I had investing into the stock market, which allow me today. So I've moved now to Spain since two years Rough cuff, and I'm actively retired at the age of 50. I'm now nearly 52. So this is thanks to passive income through dividends and through value investing. So I'm very thankful for that. I think it's important that you keep always in mind what is the right mind that you need to have. And this is something that I repeat to myself. What is the mindset, and I stick to this mindset, and I stick to this repeatable investment process. So, of course, and I think that could be kind of my concluding message. One course of whatever 14 or 15 hours can never be exhaustive. And for that reason, I mean, this course, the first time with the first version that has become public has been written in 2020. I think it was August 2020. And in the meantime, I've written more advanced courses about how to read financial statements, those type of things. And, of course, what we are now trying to do as well is to integrate all that knowledge into Vin as a tool to make it as easy to you to have this 247 advisor or let's say, support agent that can help you instead of having to send me an email, of course, you can send me emails. I always tend to answer very quickly within one to three days, except if I'm on business travel. But I think it's important that you have also an AI agent that kind of concentrates this knowledge, and that's really the whole idea of this Vingch project. So remember that so as I said, that one course cannot be exhaustive. There are other courses that are more advanced courses than the Auto Valley investing, but I believe that the Auto Valley investing is giving you already a very good layer. And I mean having now given even conferences, public conferences about this course, to bankers, to investors, I have received a lot of feedback over the last four years that indeed it looks I mean, people like to see a very structured approach that I have versus value investing, including the Level three, where even some investment bankers told me that something that is not covered very often, in fact, actually by banks as well. Remember as well, and be humble to yourself that you will do mistakes when you invest your real money. What is important is that the mistakes do not wipe you out. So please, again, that's really my recommendation. Do not take up debt to accelerate your wealth because it may really jeopardize actually whole, let's say, investment process and the whole investment that you did over maybe a couple of years, a couple of months. So learn from it, iterate from it, and of course, you may adapt your investment process. This is just, I would say, as I said, I'm just giving you how I'm doing it. I hope it's useful for you, but of course, you need to make your own choices. I do not invest into biotech. I do not invest into banks. I do not invest into insurance, but maybe you feel super comfortable investing into insurance companies because you're coming out of that area. Again, I mean, you have to I'm not saying that this is now the Holy Grail, but it gives you some kind of baseline on at least how I invest since now, I think it's now 25 years, and, I mean, I have not been wiped out by following this repeatable investment process. So again, thanks so much for having taken the time and the patience for going through this course. I mean, you can follow me on LinkedIn. You can follow me on the website, three sixqua capital.com. You can also follow me, of course, on Ving GPT, as now this is a new project that exists since May 1, 2024. And we do have also YouTube channel, but you can always contact me either through Q&A sections of this course or you send me an email in case you have questions or things that are not clear. And I have seen over the last four years that a lot of students have taken the opportunity either to post Q&A questions. There are a lot of Q&A questions on the learning platforms, or otherwise, they send me a private email or sometimes they just come to webinar, and in the webinars, they happen every quarter, at least. So their people can also suggest topics that I will then cover during the webinar if it is not confidential. That, thanks again. And yeah, I would say, do not forget, maybe, to do at least the next lecture, which is about seeing how Ving does a full valuation. Now, just by prompting by providing a couple of prompts to Ving in fact. And I think I mean, with that, you will gain a lot of time on the valuation of companies and your investment process. So thanks again and talk to you very soon. 26. Case study : Procter & Gamble (PG) - full valuation with Vinge: We'll come back, Val investor. So after the conclusion lecture, this is a bonus lecture, supplemental lecture where I wanted to share, actually, and this is May 2024, an update that we did. So maybe some of you who did the training in the past are aware that there was an Excel file where you could actually you had to manually fill in all the necessary elements to be able to provide and to perform an intrinsic valuation. What we did in the meantime, after the announcement or an announcement that OpenAI did in November 2023, so which would actually allow people to create their own custom GPTs on top of OpenAI's CHA GPT plus. So we have actually created over the last six months a custom GPT. So it's an AI tool for value investors that has been fine tuned by us, which has around 100 pages of knowledge. It knows exactly. It has the content of the value investing. It knows exactly what the level one level two level three analysis is, and it has around at the moment that we launch it, we launched it May 1, so it's a week ago that we launched it. So it has rough cut 1 million data points for the level one, level two, level three to be able to perform those analysis. So what I want to show you here is how a full valuation process would look like, actually, with Ving. So the first thing, I mean, I mean, here, it's when I was prompting the model. So I was interested in prompt and gamble and Mondale. So the first thing is I'm asking winch. And again, there is a specific training on Demi about how to use Vinch if you're interested, that really goes deeper into understanding Vinch, how to prompt correctly Vine. The risk where hallucinations can happen or what a bad prompt is. So here I'm asking Vinch to check if it knows Proc Dan gamble if it has the company in its investment universe. So it answers, yes, I do have it, and it's part of the industry household and personal products. And now I'm just very straightforward asking Winch instead of doing this manually myself, just perform a level one analysis for the company. So for Proc Dan gamble. The data points are updated on a weekly basis, so you don't need to download the financial reports. You don't need the Morningstar subscription. You just go there or Yahoo Finance website consultation, just go in there. You ask inch, perform a level one analysis, and it provides you. You see it here. The mode, the price to earnings, didn't yield, divident payout ratio. The profitability ratios like return on assets, return on invested capital, the debt to equity. And what is interesting, it provides you also an interpretation and analysis of those results. So what is important here to say or to highlight or to call out and just look at the price to earnings ratio, you see that the price to earnings ratio for Proctor is above 22. And actually, inch is mentioning that it's a little bit higher versus the 15 or ten that we are searching as a value investor for that specific fundamental screen. We are here on the level one fundamental screens. How does Ving know that? Because we have trained inch? So Ving has been trained with the content of the value investing, so it knows how to perform a level one test, but it knows what a good or bad dividend payout ratio is 30 to 70%. It knows what a good RIC is eight to 10%. It knows as well what a cheap price to earnings ratio or what a cheap price to book ratios, what a good debt to equity ratio. So it has been fine tuned by us. So that's why it already is mentioned that 22 is maybe a little bit high versus the 15 or ten on the PE ratio that we are looking for. So here I mean, what is interesting, compared to websites like Yahoo Finance Morningstar, they do not really provide you an interpretation. Vinch because we have Fine Tunit is providing interpretation on those ratios. Now we are asking because we are not only interested in Proct and gamble, we're interested in Mondiz, which is not necessarily competitor, but they are very close, let's say, serving similar type of customer segments. So we're asking Ving to perform a level one analysis on Mondiz and to compare it with the previous level one analysis of Proctor. We don't like is that too much tax for us, so the results are there, but we would like actually to have this in a more comprehensive way. So we're asking Ving provide us the results and structure the results in a comprehensive table and provide the results side by side. And actually, you prompt the model, you see it here, and Vin is actually indeed showing both companies with level one ratios side by side, in fact, and then also providing some type of assessment of so comparing both companies together. Now, something that we also, of course, interested in Level one as value investors, we want to have consistency on the ROIC. So we are asking Vinch actually, not just to tell us how was the RIC evolution over time for both companies, but even showing this to us in a graph format. This is what you see here, and you see actually how and this is something you can even download the GPAC file. That's something I mean, that's the power of Open AI. You can do this. And so you can actually use this GPAC, for example, in a presentation if you'd be student, for example. One of the things that when we discuss, so that's for the level one part. One of the things when we discuss the level two part is that, I mean, in the Excel file, you have to decide what are the default values for your cost of capital, for your growth rates. And one of the things that we wanted to have because I often receive that question from students and from other value investors is so the default value would be between 6% and 7%. And what we wanted to have in order to make Winch much more productive than this Excel file, is that actually we have fueled, we have trained VNC on various costs of capitals for the I think it has around 150 industries, and every company, so when we launched VNG, it had 1,100 plus companies. So every company is classified in one specific industry of those, let's say, 150 200 industries, and every industry has its own cost of capital, and this is updated on a yearly basis. So it's using Aswadmodarn's public database of cost of capital. So here you see that prop and gamble. So you can not only use a default, cost of capital of 7% in VNG, but you can actually adapt the calculation and ask Vinch so either you tell Vinch the percentage that you want to use or here I've shown you here in this example that I'm asking Ving to use the appropriate cost of capital for both companies given the industries that they are in. So this is actually what you see here. It comes out, it comes out actually with ProctnGamble with a result of rough cut, 7% cost of capital, so 69 or 97. And for Mondes a cost of capital of 53 rough cut. And now, so that's now the cost of capital conversation. What is the starting point for this? And now we are asking Vin actually to perform the level two analysis, which is calculate as the IV, discounted cash flow and discounted future earnings per share. And it will actually calculate and will provide you so both values for both companies and compare it with the latest share price. So I think that's really fantastic. Just have to prompt this. And not later than today, so we are May it's eighth, yes, 8 May 2024, Wednesday. It's nearly 7:00 P.M. Malaga time in Spain. And not later than today, I had a student who did the closing assignment and asked me, can you check if my calculations are correct? So he was still using the old XL file that has a lot of risk, a lot of glitches. I remember when I did the latest update, 2023, I had to do six iterations because I changed the formulas and there were errors in it. So I had to apologize a couple of times before coming up really with a good version of the Excel file. But at the end, you still have to do the manual work of retrieving the information, right? So here, the advantage is that when this student asked me this afternoon, I think it was a student from Israel to check if his calculation was correct, I mean, with one or two prompts. So level one analysis of the company and level two analysis of the company, done, actually. So it took me like what, 30 seconds to have the information. I think that's really the beauty and why we have created inch. I, first of all, we have created it for us as value investors. So I'm not alone in this project. We are five people in this project with other value investors because we really believe this increases the productivity and the investment journey by being able to have those data points by being able to automate level one level two and level three analysis. So you saw level one, you saw Level two now. And here you see as well that you can actually for Vinch specifically ask Winch what are the assumption that you're using per default? Of course, if you're giving an explicit indication or information or instruction to inch, it will use I mean, that will override the default assumptions. But you could just ask Vinch perform a level two analysis on this company, whatever Mondels and it will use per default, 30 years without terminal value, 3% growth rate for over 30 years and 7% cost of capital. Here, I just wanted to show you through this prompt that first of all, it's transparently explaining what are the assumptions. But it's also showing you that on the discount rate, it has this time specifically not used the 7% default, but it has used the discount rate specifically retrieved for proctanGabl and Mondes. So just to show you that the model, I mean, you can interact with the model and play with it. So last but not least, of course, we have learned in the Auto val investing level one, level two, and level three, VNG has ten years of brand data points. It has net promoter score. It has employee net promoter score. So you can ask, actually, Vin GPT for the largest companies in the world to provide brand valuation, brand growth, net promoter score, employee promoter score, and those type of things. It has that information available, and here you see it concretely on the example of Proctor and Mondelez. We'll wrap up here. I mean, if you're interested about VNC, you can either go on our website, vingbt.com, or you have links directly to having access to the tool. As I said earlier, you will need a HGPTPlus subscription. That's the condition that Open AI has set for the time being. It's like this. We don't have the choice because it's using HGPTFour which is the most powerful model, and you can only have access to it if you have a HGPTPlus subscription. It's not a subscription with us, but it's a subscription with OpenAI, in fact. That's really that's mandatory requirement, and you don't have a choice for using any Custom GPT, not just VNC GPT, but any Custom GPT. And then on the website, you can also see the link to our discord community where we are also publishing things about VN release notes, if there are feature requests, those type of things. That's the place. So go on our discord community and provide feedback there. Things that you would like to see in the future development cycles of VNC of course. And then you will have also the link if you're on the Udemi platform, and listen to this video, you can directly see that in the courses that are published on Udemi there is a specific course on VNchR to go deep into how to use VNC versus just this very, very quick valuation that I did just showing you level one, level two, level three, in fact. So I hope that this was useful and that you see, as we see the value after six months of development by releasing VNch now since a week, and I hope that this will empower your value investment journey and give you access to something that was before, much more cumbersome to have access to that thanks for your attention and talk to you either in the next lectures, which are advanced lectures or hopefully in either a community channel or in one of the upcoming webinersTk you. 27. Case study : Evergrande : how to analyse its debt position: Welcome to the value investor channel. Hey Val Investors, welcome back to the very investor channel. In this week's episodes where there'll be speaking about the Chinese other grounded group. And more specifically, if the company would pass our debt and solvency tests. So as you may have heard and seen is about ever ground near, there were lately a lot exposing the pressed related to payment issues, specifically on bonds and more specifically their offshore bonds where they were missing a couple of deadlines. Before we go into the analysis of our Grundy. As always, usually financial disclaimer that this communists for informational and educational purposes only and it's not a direct offer or solicitation of an offer to buy or sell. So let's get started. So let's look for us who is of a grandness over grandly is actually the 120 seconds on the Fortunately with I found solace. It's a huge company which serves actually enriches involved in a major industry. So they're active in real estate, New Energy, autos, property services, and even have a theme park. So that is called African and very lands. And they're providing human health services and in a lot of other things. So they do employ around 200 thousand employees in China. And they are linked according to some statistics, to A3 dot-dot-dot 8 million jobs, and they create more than 3 million jobs every year. So if you look at their main revenue pillars, so obviously the property development and this is where the whole depth conversation comes from, is the biggest part of their revenues. So investment, property and property services, those also play some important role, but really, really more than 80 percent of their revenues are linked to property development. And specifically they are mostly present in the east of China. So the Shandong regions, Guangdong, Guangxi, Hunan, et cetera. So there are a lot present day in terms of property development, which other regions that are having most ever a residential projects for sale or that are actually scheduled for sale? The why why are we discussing today? So it's October 2021 way I were discussing this. So there is an issue happening in China and we'll come back to this when we speak about the Chinese government implementing the three red line principles. So that the average house price in China has been growing like crazy since now, half a decade. And it becomes less and less affordable for the people. And some people actually seeing as money is so cheap, which is indeed the case due to low interest rates, that there is a creation of a bubble. And some, actually, some people say actually that ever Grundy is the expression of these real estate bubble that may implodes and we'll have a domino effect on the financial markets. So before we move forward, one interesting point, just to refresh everybody's mind is about this bubble definition or what creates bubbles. So in fact, when we are looking at real estate bubbles and it was the same during the subprime crisis initially, what happened is there was a very rapid increase in the market product property until the process that are suitable in time, they become just or they reach unsustainable levels. And then obviously they're gonna be there's gonna be a decline, so they're gonna be corrected. And you can look into this specifically when you have a gap that builds up between the fair value, so the real value of the asset and the market value when that gap grows exponentially. We're very probably be in a bubble creation scenario. What, and in fact, the Chinese authorities, they, they saw this, they saw the levels of depth that we're growing. They saw the prices of land also that were rising incredibly high in China and also the sales of real estate sales that were booming. And in August 2020, the Chinese government in fact defined and impose three, let's say, three attributes that the real estate developers had to follow in case they would continue, they would like to continue to grow that depth. And three so it's called the three red lines guidance and the three red lines guns actually, and the three attributes later that they are linked to. First of all, that the liability to acid ratio from our balance sheet of the company. So for the real estate developers, the Chinese government is forcing them to have a liability to acid ratio excluding the advanced received. So advanced placement payments of the owners that is below 70 percent and that gearing ratio of less than 100%. That's a second attribute. And the third red line that real estate developers cannot cross is the cash to short-term depth of more than one time. So that's the ratio that they need to follow as well. What is interesting, what the Chinese government in fact has decided it's an imposed on this real estate developers is that if they are matching those three red line, so if their liability to asset ratio is indeed below 70 percent and then gearing ratio below 100 and the cash are short-term. Dhap is more than one time, so they have enough cash to support the short-term adapt so they can continue to grow that depth by 15 percent on an annual basis. And if they do not match one criteria, they can only grow the depth by 10 percent if they do not match two of those three criteria, that annual growth In depth of those real estate developers can only grow by 5%. And if they do not match the three criteria, which in fact is the case for ever granted. We're going to see that later on. They indeed are absolutely not allowed to growth, adapt so that the growth of the dapp is, can only be at 0%. And this is something that also UBS has been sharing an interesting documents in January 2000, 2001. If you look also at the, let's say the price of our Grundy have a grenade being quoted on the Hong Kong Stock Exchange. What was interesting to see is that in after oecus 2020, the share price was at around 28 Hong Kong dollars, and today it's at three. So the obviously the, let's say the speculators, I don't think those are investors, but the speculators, they saw that over ground. It was overpriced at 28 and there was a cell of that happened and the sell of continuous up to today. And so if you're interested, you can look on the Hong Kong Stock Exchange ever Grundy, the ticker is 33. 33. And you're going to see that between August 2020 where the stock was priced at around 28, It's no I mean, the stock price has been divided by ten. So what we are looking here is specifically analyzing the adapts. And for those who are interested, you can have access to a depth value investing course on Skillshare and Udemy platform that is called the art of value investing. But here we're going to look specifically at the upper grounded adapter. And we're going to look at a couple of interesting ratios that are part of our fundamental tasks. One being the low debt to equity and the other one being also how external rating agencies, what was their sentiment about the depth that is carried by other grounded in their balance sheets. So if we start with analyzing the debt to equity ratio already when looking at the annual and quarterly reports of ever Grundy, there is already one thing that is pretty interesting to see is that they are carrying bonds. Not only obviously, I mean, the stock listing on the Hong Kong Stock Exchange with a ticker 33. 33 is obviously listed. But you can already see from looking at the annual and quarterly report I've ever Grundy that they carry senior nodes. So Syria, a senior corporate obligations that are due short-term 2022 and 2023 at a massive cost interest rate of 11, 12, and 13 percent, which already kind of shows if you know how corporate bonds work, that the depth is considered as being very risky. So they need to pay off a high coupon in order to be able to put together a fresh money from those corporate obligations. And what is interesting as well, and there's an interesting analysis that has been done also by Bloomberg is that the amount in terms of millions of dollars that have a grand day has to pay. I mean, there is a lot that has to be paid between now, so end of 2021 and by end of 2023. So if you learn something that you need also to know is that there is in the adapt that ever ground is carrying, there is some onshore tab, so that is debt that is due and that has to be paid out to Chinese credit holders. And there is offshore depths and the option of depth. So this is where the credit tellers are outside of Shanna. What is interesting is what happens as ever Gandhi was short of cash over the last weeks, is that ever Grundy was able to cover and to pay out part of the coupons. That Would you, for the own short absolute to the Chinese credit told us, but some offshore creditors and they would not receive the money that they should have received later to bond coupons because actually there was not enough cash in the balance sheet. So as part of the assets of our Grundy and this obviously created a huge increased the fact that markets became very nervous about it. We'll, we'll have a grantee be able to pay off already the coupons and the payments that are due array now short-term, not even looking at what is the amount of coupons that have to be paid out in 2022 up to 2023. So as value investors, we obviously, and this one of a very interesting ratio that we look. The debt to equity, debt to equity analyses the liabilities. And when you have a look at the balance sheet of F0 grand day, and I've been looking at the consolidated balance sheets of ever granted until end of June 2021. So those those are unaudited figures because it's an intermediate quarterly reports. So half your report, what you can calculate is that ever Grundy is carrying a total amount of liabilities at 2 0, 1 dot 966534. So it's two billions of yuan RMB is, while the equity is only at 411041. And so there is clearly an issue if you would do the calculation between the amount of liabilities and equities, you divide 19, 6, 6 by 4, 11. You, you see that the debt to equity ratio is at 386%, so at three dot-dot-dot 86 percent and even the nuts depth. I mean, there is a problem. Let's be very clear. There is a problem in the amount of adapted that of a ground-up carries towards compared to total equity. And we as value investors, we tend to like to buy into companies where the debt to equity is below 3. So already here, Let's be very clear. It's a fail in terms of debt to equity ratio for APHA Grundy. The second ratio, when we look at depth of companies in general as value investors, is what we call the interest coverage ratio. So the lower the ratio, the mother company is burdened by that expenses and less capital is available. And typically as value investors, and in general, not just the value investors, we tend to say that when interest coverage ratios are below 15 or lower, I mean, what the company generates in terms of profits is being nearly eaten up by the payment of interests. And with that, I mean, the company cannot grow. The company does not have any capital that remains available to be able to expand what they do. So so it's an issue, it's an issue. And if you look at ever granted specifically, again, looking at the consolidated statement of income ending June 30th, 2020, 21, again, remember those are unaudited reports because it's not the annual reports. We see that EBIT or earnings before interest and tax divided by the interest expense. So it's at a 150. So the interest coverage ratio at 150 means that nearly the whole profit that is generated by F0 grand day is used to pay off and to make the payment of interests. So there's nothing nearly left in order to even pay out or reduce the amount of depth is just to cover the interests that are needed, which is pretty, pretty dramatic. Second ratio that is, investors would like to look into is your operating profit before interest. And they are indeed also VM. I mean, if you would add the operating profits and you would add it indeed, with a new divide it by the interest paid. You're going to see you're going to be iteration of one that 73. So again, there is not enough profits generated by the company to cover. Or it's really, really very shorts to pay out what is, in terms of interests needed and what the company has to pay out to the credit totals. So that's pretty problematic here. So again, we would clearly classify the interest coverage ratio as a fail. So that's assigned for us that we would not invest into that company. One of the conversation that is coming up with ever Grundy is indeed, if something happens to have a grand day, that the depth cannot be paid back to those external credit hellos and you have understood there are some onshore, So some Chinese creditors and some offshore, so some external. So it is interesting to understand is who is exposed to the bonds of our ground there. And there has been an interesting articles about this, about who are either the domestic credit holders or the international credit totals. And in fact, there are a lot of banks like the Agricultural Bank of China, the ICC, That's the Construction Bank of China. But also some international banks that have a certain amount of exposure to the ground and bronze, like BlackRock, UBS, HSBC. So, so yes, what happens if ever grounded goes bankrupt? Those banks will be sitting on bonds where they will not see the money coming in because other credit told us because apocrine is just, they do not have the possibility to pay back those, those banks. That's something that we will have to continue to observe what is happening in the upcoming weeks. As you have. What I said earlier is that it's not just now that there are some coupons that are due, but there are many payments that are due between now and the end of 2022 and also into 2023. If one of the interesting tests that I wanted to make as well is also to analyze the three red lines that were defined by the Chinese government in August 2020. So the first one, which looks at the ratio between liabilities and the assets excluding prepayments. And you remember that the first red line asked are requested by the Chinese government is to be below 70 percent. And when you do the math, you see that on the amount of liabilities. If you remove indeed the prepayments, you're at 88%. So clearly the liability to assets is too high compared to the first red line of the Chinese government's already here you have one of the three, which is a fail wherever brand they will already not be able to grow the depth by 15 percent, just by missing already the first red line. They will already only be able to grow the depth by 10 percent, of course, another condition that the other two red lines are not crossed. Let's look now at the second red line. So the second red line is the net, net debt to equity. And so the nap that actually you remove cash. So you, you, let's say subtract cash from the liabilities because cash is available directly, It's very, very liquid asset. But even with that is by reducing the liabilities with restricted cash and cash and cash equivalence and dividing it by the equity, you are again at above 300 percent. And remember that the second red line defined by the Chinese government was asking that the net adapt. So the difference between a debt to equity and net debt to equity is that in that depth, you remove cash to reduce the amount of liabilities. But even here, a grander is at 300 percent, so way beyond the 100% that the Chinese government is asking. So consequence of that already, two out of three are not matched. So the level of growth that ever grown it can have in that depth is already at 5% and maximum because you already do not match two of the three red line attributes defined by the Chinese government. So clearly, again here it's a fail. And if we look at the third red line defined by the Chinese governments, so that's the cash to short-term debt. So obviously looking at short-term debt, you need to look at the current liabilities and removing indeed everything that is long-term liabilities. But even here, you see that the amount of cash, and even if I would add the restricted cash, the amount of cash that is available to cover the short-term debt is definitely by far not above 100%. So the ratio again here, it's a fail. So what does this mean concretely, is that ever Grundy is not allowed further to growth, to grow its depth. So we are here at 0% that will be allowed by the Chinese government. What is the consequence of that? Well, we're going to discuss this, but first of all, I mean, it's not just about every Grundy we need to look also at how the other real estate developers, they match those three red line criteria. And there has been an interesting article that was on, I think that the website was bonds evaluate.com where there wasn't analysis that was done and other Grundy in fact, was not the only one that wasn't matching the three red lines defined by the Chinese government August 2020. But they were in fact three companies who have a Grundy Greenland and select China. While other ones. In fact, what happened? And this is something that's and you see it in the presence of a grantee has started to do the I mean, what are the options that they have? They will probably have to sell off some assets at a discounted price to be able to collect fresh money, fresh cash, or maybe they going to ask to their equity holders to do recapitalization, to bring in fresh cash. Certainly increase the amount of equity available, but they do not have too much choices. And obviously you can imagine that selling assets, what we call a fire sales under emergency conditions. Obviously, if you are on the pressure, you going to give a higher discount when you're setting up your assets like flats, like a car, when there is an urgency and you need the money tomorrow, you will be, I don't know, giving a discount of 50 percent, 40%, 30 percent, but for sure you will not sell it at a premium price. So that's really what ever ground has really to do now is to either recapitalize and find new money, not through depth. So they have to look at the equity holders. If the equity holder, so the shareholders can, and otherwise we'll have to sell off assets. And it's kind of going into a partial liquidation scenario. So we already see that's on the the test of having a low debt to equity, which are fundamental screens that has value investors will look into already have a Grundy is clearly not matching this. So above three. And also when you add the three red lines that the Chinese government has, August 2020, I mean, it's three times a fail as well. What's interesting also to analyze as a value investor. And again, if you look at my training, that is called the art of value investing in my level three tasks, I like also to look at not only internal metrics, but also external metrics. And one of the metrics when looking at depth specifically what it is all hear about. Other Grundy is looking at. External rating agencies, what do they say about our grounding? And you remember that when you're looking at the annual reports of a grand day, they were already listing like in a 10 K 10 Q report in the US, they were already listing that there were senior nodes, do 2022 and 2023, that we're carrying a very, very high coupon rate at 11, 12, and 13 percent, which are huge amounts, which shows that the depth is risky. And it is interesting to see. And from the rating agencies, I like to look at Moody's. I like to look at Fitch as well. What is interesting to see is how Moody's and Fitch Rating have a great day. And until, let's say the summer of 2021, Moody's was rating the adapts. So the corporate obligations of ever Grundy as a B1. But it's very, very rapidly. Just a couple of months downgraded the credit rating of a grand day from B1. It's quickly went to B2, then to CA1, and then to see a. So they actually have in downgrading massively since now a couple of months, the, let's say credit within us of our ground there. Same for Fitch Finch was carrying still in September 2020, have a grand day with a rating of b plus. And then they downgrade it to be minus in June, CCC plus in July, and then CC in September. And by end of September, they even further downgraded the rating to a C. And just as a reminder, when we look at, so typically as I said earlier in the rating agencies, we do have a Standard and Poor's, Moody's and Fitch. And Moody's and Fitch tend to give those fingers available, let's say just by registering to their websites. So before the crisis and all this news and press coverage starting with ever ground day, the depth of our grand day wasn't ready in the category of high credit risk being rated B1 on Moody's and Fitch. So we were already not in, let's say investment grade bonds. And now actually, if you remember that depth a of a ground day by Moody's have been downgraded or has been downgraded from B1 to a CA. And for Fitch from a B plus to a, see, the category actually is a near default with possibility of recovery. So I mean, a further downgrade is that the company has to go into liquidation and the company goes bankrupt. So you see that the risk, as they see it, is extremely high, that the company is very, very close to default. One thing and it's not the purpose of discussing it here. But what could be discussed is why, why suddenly in just a couple of months, let's say in 34 months, adapt that was rated as high, credit risks suddenly went down to near defaults. So that's something that we could discuss. Why the rating agencies only did this over the last three months, but at least what? They did it and I wanted to give it the proof that since June 2021 for Fitch and again, more or less the same time period for Moody's. They indeed have been downgrading the depth of Afghani. But again, remember, if you would have invested into our Grundy, you were already with corporate bonds that were considered as high credit, so we were not in the investment grade. So here again, as a value investor and we like to have investment grades, corporate bonds so that the external rating agencies consider that it's a serious company that will have enough money to pay back the extra credit TO loss. We want to have at least a kind of triple B rating up to an a double or even triple a. So clearly here I have a grantee is also failing. If we look at this from the reading glasses of a value investor, has been failing on this task as well. So one of the things that I always like to do, and because I always believed that value investors, they make kind of a mystery what they have in their portfolio. I always like to also to benchmark and to compare my portfolio, my investment portfolio, with the cases that we're analyzing. And in this case we are analyzing our grand day. And so if remember, if you have been looking at my training or going onto my website, 36 square capital, this is my family fund that is being run where I expose what are the positions when I sell and buy things. So currently I still holds publicist, which is me, I communications, Nestle, diamond or BAs after non-unique and Telefonica, Microsoft and Kellogg's. So I have, you see a couple of seven European companies and to US companies. And you can see from, I mean, if you look at it from an investment grade perspective, all those companies are at least triple B, so considered with an adequate payment capacity to a strong payment capacity. And the resident one company, which is Microsoft, which has a triple a. So they have the highest quality in terms of corporate obligations. And obviously looking at the debt to equity at cash to short-term debt at liability, to assess the interest coverage ratio the companies that I have invested into, they match a lot of those criteria. We want to have as value investment terms of having a low debt to equity ratio. So below three at the cash to short-term them is pretty high that the liability to asset is below 70 percent, that the interest coverage ratio is way above 15, so that the profits that the company generates only a very, very small part is used for paying back debts and interest payments. So and this is a reason why on my nine companies that I currently carried my portfolio in October 2021, all of them match those criteria because I do follow obviously my own rules as a value investor. So if you compare now those ratios and this, what we have been discussing in this session, obviously you can refreshing everybody's mind you that the debt to equity of our ground is a three dot 86. The cash, the short-term DHAP is very low. Liability to asset is way beyond 70 percent interest coverage ratio is very close to one. So nearly all the profits of the company are being used to pay back just the interest payments of the credit of the US. And you have seen, and you have heard through the looking at Moody's and Fitch at the external credit rating agencies have been downgrading strongly of the last three to four months. The rating of the bonds, the corporate obligations of African day. So with that, thank you for having listened in. You can find an in-depth and invest in training called the artifact investing on Skillshare and Udemy platforms. And don't forget to subscribe to my channel and make sure to use the subscribe button below. Thank you.