The Art of Value Investing - Complete course

1. Introduction: Hello investors. Welcome to this training, the Outer Val Investing. This is now the third re recording of this training. We are March 2026, nearly April 2026. And I've been updating the whole training to bring in, let's say, the most recent updates, including updates on the methodology that I will show you already in the introduction lecture. So, first of all, so, my name is Kani Carrera. Why am I speaking about Val investing? Well, I've been since 1999 a Val investor with today more than $1 million in equity without debt. So this is fully owned equity. And also next to that, I have experience managing companies, including have been 12 years at Microsoft Luxembourg and eight years managing the business, so in charge of the country of Luxemburg for Microsoft. I'm also an independent board director since 2020, also certified by ISA. I have an MBA, and I continue also. I like to, let's say, share my knowledge with people, and I'm teaching as well at University of Luxembourg and ASCA School of Business in Malaga, Spain. And since November 2023, I'm the co founder of and CO vile.ai, which is an AI companion that actually I have created for myself. The team today of 12 people that we also make available to you as investors. And the tool I will introduce the tool. The tool is actually following exactly the value investing methodology that I'm showcasing and explaining here. So what has been the approach writing this course about value investing? So I've been reading more than 50 books, and you see some of them here in the back in my library. And I mean, this has taken me a lot of time to read those books, and I wanted to have a synthetic view and a list of tests that I could apply to my own investment process. Been listening, and that's not a joke to more than 60 years of annual Shallow meetings of Berkshire Hathaway. So Warren Buffett and Chalimonga I will speak about Warren Buffet and Chale Manga in the next lecture. And I wanted to extract the essence of those annual Shallow meetings that I've been listening to. You have to imagine those are more than 60 years, and each annual Shall meeting was around four to 5 hours in terms of podcast. Um, I also wanted to add I'm saying this lot of respect when we speak about Warren Buffett, and we'll come back to this again. I wanted to add something on top of what I learned from Ben Graham and Warren Buffett, which is adding making modes. So this really pricing power, competitive edge of company is making it more tangible and quantifiable. And beyond what Warren Buffett has always been saying that a mode that is observable a company that has a return on invested capital, which I will explain in this course, no worries about that. But Ron Buffett has always been saying that one way of looking at modes is when the company has profitability that is above, let's say, eight to 10% for many years in a row, that shows that the company has pricing power. So I wanted to have something on top of that, and I will show you this in the method. That's the third, let's say, pillar of the method. Also, I mean, in this course, I'm addressing challenges that I have been going through over the last 20 now 27 years were 2026. Things like, how do I choose the cost of capital when I calculate the intrinsic value of a company? Which growth rate shall I use? And of course, and again, I'm not here to promote the tool Vena AI, but honestly, we have created this tool also to make our investment process faster. I mean, for those who I mean, if you will be talking to the first students that have been taking this course in 2020, I was providing an Excel file, and in order to calculate the intrinsic value, which is the holy grail for any investor, what is the intrinsic value of a company? Um, actually, it would take 2 hours for one single company. Now it's not even one click. It's you have it in the user interface. So that's also why we have created Villa AI, and Vila AI actually follows exactly the method that I'm explaining here. So in terms of course content, there's going to be, let's say, five big chapters. The first one is the key financial concepts where we speak about money, how companies create value, what is investing, the risk versus return equation, which is very important. Then the investor mindset. Not walk you through all the points here but the investor mindset is really about what I have learned also from Warren Buffett, how you define your circle of competence, what is your investment universe? What are the five plus one habits that serious investor should have? And then, indeed, I will walk you through three big chapters which are really then, let's say, the foundation of this training, which is the very investing method, the level one, let's say, pillar, which is the fundamental analysis, you're going to see on the left hand side, if you see my mouse moving that I have added now in March 2026. A new chapter, which is reliability of financials. I will not go into the details of forensic accounting, but that's something that we want all of our let's say, student investors to be the first metric they look at. Are the company financials reliable or not? And you're going to see how easy it is to have a quick perspective on if the financials are reliable or not, because that's the very first thing. If your financial or not reliable, is just stay away from the company actually, or at least you will have to dig into the numbers. Why are the financial not reliable? Then the second pillar is going to be really the holy grail for any value investor. Serious investor is intrinsic valuation. I'm going to teach you the differences between relative valuation and absolute valuation, various methods that you're going to see like discounted cash, discounted future earnings, et cetera. And then the third one, that's really, let's say, my own piece of supplemental research, where I wanted to quantify modes, and we're going to look at brand valuation. We're going to look as well at employee information and customer sentiment as well. Of course, I mean, I will have a lot of examples that I will speak about so that it is not just theory, but you will be able to apply it as well. So what I believe makes a serious and good investor. And so in order to become a seasoned value investor, of course, you will need to navigate in the main financial data. That's a mouse. You will not have the choice about that. You will have to understand concepts like solvency and financial strength. You'll have to understand concepts like profitability, for example, those type of things. What is also important for a seasoned value investor, you will have to be able to estimate the relative and intrinsic valuation of a company and the margin of safety that the market is now giving you versus what the company is worth. Of course, now with a tool like Villares, it's going to be extremely easy to do that. It's just, I mean, let's say, opening the tool and you're going to have the value that will be appearing, in fact, and then you will be able to play around with it. Intention as well for season value investor is that on top of, let's say, the baseline, which is understanding financial data, estimating the intrinsic valuable company, being able to take rational decisions, and then it becomes a repeatable investment process. And then from there, you're going to be developing over the years a serious investor mindset. And as I'm always saying, I'm still around after 27 years. Without any debt, even our real estate now doesn't carry any debts. And I will speak about this, of course, in the investor mindset, how I feel about debt as well. One of the things that I always want also new investors to consider is you will have to accept that you're going to be making mistakes. What is important is that those mistakes are minor, that they don't wipe you out. That's really the most important thing. And the second thing is that you learn from it and that you have, let's say, an improvement process on looking back at the mistake that you made. And and I really speak and I will speak about this also, again, in the investor mindset, really investing real money into the stock market. This will train your muscle because I have had students who were playing with virtual portfolios, and the level of stress is just going to be different. But I will speak about this in the investor mindset in the second chapter. So, also, the course cannot be exhaustive. So this is the Auto value investing, and I've received. So this is a new slide that I've added now in March 2026. So I've received very often a question, What would be the typical sequence that I should do after taking the Auto Vale investing? Well, I would recommend you and you do, of course, whatever you want, but I would recommend you that. You start with the value investing, which is a very broad and general, let's say, training on value investing, you will have a clear method, or at least you will know what is my method, how I perform value investing. Then if you want to immediately practice it, I would strongly recommend you to take the value investing with Vina AI, which is a free course. You have access to that one. So just that you know a little bit how if you want to implement the method, how to indeed leverage a tool, for example, like VNA AR, but you're not obliged to use a tool like VN AI. But again, we have created this tool for ourselves, and I continue using this tool for my own investment process, right? So it's not a product that we created for other people. It's really a solution that we are creating for ourselves to make our and my own investment process much more productive and efficient. And if you want to become more, let's say, expert, more advanced, I would recommend you that you do the course, the out of reading financial statements. That is really going. If I go back to understanding financial data and financial reports, that's going to go deep into that, that would be one that I would recommend you, but just pay attention. It's an advanced course. In that course, I will be sharing a little bit my experience also as an independent board director and also as an investor who reads financial reports for more than 20 years. Last but not least, this is the most advanced course is really looking at forensic accounting metrics. So we'll show you as well in how to use those forensic accounting metrics, but we will speak specifically about the BiniJam score, which is a proxy for earnings, manipulation signals, and then the Altmanzisc which is a bankruptcy risk score, in fact. So there are specific trainings on forensic accounting. So, yeah, I mean, very briefly on Vinay. So Vin said we have credit for ourselves. We started this project in November 2023. I'm showing you here just a couple of screenshots. But today, in March 2026, it covers 60 stock exchanges. We have users all across the world, from Qatar, from Singapore, from China, from Argentina, from Colombia. From Europe, of course, as well, and from the US, the UK, et cetera. So we covered today 38,000 companies, 10,000 ETFs. We will be adding very soon crypto assets because that's a request that we have. And I'm not the crypto expert. I don't invest into crypto. I only invest into stocks, so into companies, but just nonetheless to tell you that we will have this. And really, the honest intention of Ville as an AI companion with user interface was really to address my personal challenges that I faced specifically when I started 1999, I was unequipped or I had seven subscriptions because I had very fragmented information. I had to pick the information from one website, from the other website. Then I had to go on a company or employee sentiment website. I was using Excel files, and Excel files, they do generate errors. I mean, you may make a mistake on the units that you're using, and then it completely makes a wrong calculation on the intrinsic value, for example. What I was missing when I started as a valid investor, I was missing the interpretation part of a lot of financial metrics, right? When you go on a lot of websites, you have all those financial metrics, but they don't help you interpret it. And this is something that we created. Vine, you can actually ask the tool, What is a price to earnings? What is good price to earnings? What is ROIC? How should what is a good dividend payout ratio, for example? So we really tried and there are more than I mean, there is a lot of curated knowledge we have written with my co founder Adriana more than 200 pages of own curated knowledge, plus we have added research papers, a couple of books, et cetera. So we really tried I wanted to have something like Warren Buffett in a tool that is available to me when I have to ask questions. That's a little bit the idea that we had by doing this, and I will not go nine to these details. Take the training value investing with Windle AI, where we'll speak about sensitivity analysis and how to Vinla will suggest growth rates and cost of capital, for example. The only last just wrapping up here about Vinlay. So Vinlay actually follows exactly the do value investing. So you see it here in the main screen. You see that I was mentioning that the method in this course is about fundamental analysis, valuation, and then quantifying modes and intangible metrics like employee sentiment. And customer sentiment and also brand valuation. So actually, Vinley has been created following exactly the method that I'm explaining here. So you're going to have clear elements on fundamentals valuation mode as it is laid down in this training. So this training is not about Vin. This training is about teaching you a value investing method and method that I've learned from Ben Graham, Warren Buffett and I've been adding stuff to that method with a level three mode and intangible metrics. So that's brand employee sentiment and customer sentiment. This is the end game. If I would recommend you if you allow me to summarize it like this, if there is one slide that you should keep in mind, it's really this slide. This slide actually summarizes everything what value investing is. So value investing has the following idea. You have the market. We will speak about Mr. Market in the intro, but you have the market, and you have a company. I'm speaking now about stocks. I'm not speaking about any other asset class. What the market what will happen to the market is that the market will be emotional. The market will go up, will go down. So it will give you every day, every 15 minutes, will give you a different price to buy a piece of that company. That company can be ProctanGamble, Coca Cola, Nike, Adidas, Samsung, Sony, I mean, those type of companies, I'm just taking out those examples. Is important for you as an investor, what is important for me as a van investor is, I want to buy the company when the market is giving me the company at 25 to 30% discount of its real worth. And the real worth is called the intrinsic value. That's what we're going to see in the Level two intrinsic valuation chapter. Do I calculate an intrinsic valuation? You're going to see differences between relative valuation and absolute valuation, various methods, discounted cash flow, discounted future earnings, even the dividend discount model, those type of things, so that I equip you to know how to calculate an intrinsic valuation of a company. So this slide actually summarize everything is what you want is that the market is giving you the company at, let's say, at 100, but the company is worth 130. This is actually where you will be able to make at a certain point in time. In my opinion, this is what happened to me over the last 27 years that I will start making money because actually, at a certain moment in time, if I have correctly, let's say, estimated the value of the company, the market will reflect this. It may take one year, two years, five years. That happens, right? I mean, I have had examples where it took the market six months. The last example I had was AmBev, which is a drink distribution company in Brazil. I think I bought it over the summer, something like eight dot $9 a share, and I sold it at 265 a couple of months later. And it even crossed $3 because the market became really so hot about the company, and now it's back at two dot seven. So this is a little bit the mechanism that I want you to explain that at least so first of all, that you have a repeatable investment process and that you know how to value a company. And then you will have to what is the market giving me today? Is it too expensive and maybe I have to wait or go and look at other opportunities. So that's the whole idea, and that's why I'm showing this slide. This slide actually summarizes what value investing is as a method. With that, thanks for your attention. I hope you will like the course and talk to you in the next lecture. Thank you. 2. The origins of value investing: All right, welcome back Investors. So second lecture after the intro. And in this closing lecture of the introduction part, I will just briefly explain to you the origins of Val investing. I could ask you the question, if you would you physically with me in the class if you know these three gentlemen? I know it's not very diverse. I'm sorry for that, but those are the three men that actually structured my thoughts around Val investing. So on the left hand side, you actually have Ben Graham. And in the middle and on the right, those are the owners of Berkshire haway. So in the middle is Warren Buffett and on the right, Choli Manga that unfortunately has passed away. I think it's one year now ago, two years ago. So first things first, Ben Graham is considered the father of value investing. So he wrote two very famous books called The Security Analysis Book with David Dodd and Intelligent Investor has been actually the book that I came across in 1999. In fact, when I said that I started investing into the stock market in 1999, it's not fully true. I started investing in 1990. I think it was 1996, if I'm not mistaken. But I didn't know exactly what I was doing. I was looking at the graphs and trying to predict the prices. And in 1999, I came across the book the Intelligent Investor. I have now three versions, if you look at my library behind me, even one in German. And actually, that has been the book that structured my thoughts. And that was like I think that Ben Graham has indeed understood how to invest into companies by looking at undervalued companies. So his main investment philosophy principles have been minimal debt. I mean, I'll speak about this in the investor mindset for me, it's zero debt, but he was okay to have minimal debt. Have a buy and hold strategy because sometimes you need to be patient until the market gives you the right price for a company. A fundamental analysis, really understanding the financials of the company, being a little bit diversified, I can really mention this because I get this question very often. If I diversify a lot or not, I tend to have always between, I would say eight and 13, 14 companies in my portfolio. That's kind of the average that I have I think now actually have 13 companies in my portfolio. Ben Graham also taught me and explained in his book, Intelligent Investor, that you should buy with the margin of safety and very often, you will have to have a contrarian mindset. And this is also how I was able to make money. I will teach, of course, you should not take an investment decision just based on one metric, for example, I was running a webinar yesterday for the launch of Vinla and I had an investor who was asking me, Well, then if this metric and this metric are okay, I can buy the company. I said, No, no, no, no. You need and I mean, with all respect, this investor didn't do the Ado Val investing training, but I had to repeat that investing investing your real money into a real company requires more than just looking at one or two metrics that are green. So this is what I will share with you here with this whole investment methodology, how actually I became financially independent. By using value investing methods. And the foundation of My investment method is actually coming from Ben Graham. And what is interesting. So coming back to this slide, so Warren Buffett in the middle is that Warren Buffett, who has been now for the last at least one to two decades, always in the top ten of the most wealthy people on Earth. So actually, Ben Graham has been the mentor of Warren Buffett. Warren Buffett has been studying with Ben Graham, who was a professor at Columbia University. And then Warren Buffett actually went and worked for Graham's company that was called Graham New En Corporation until Ben Graham retired, in fact. So then, indeed, Warren Bufftt and Cholie Monger structured a lot my investment methodology. I will explain to you now in the next slide, what is the different or what Warren Buffett and Choli Monge have added on top of what Ben Graham has been teaching Warren Buffett. And for that and putting you I've put you here the YouTube URL, if you're interested. The article 0R sorry, not the article, this interview with Charlie Monger, who has been with Warren Buffett, his partner for, I don't know, 50, 60 years. And so he was speaking on the BBC in 2012 in an interview, and I was really summarizing what are the main characteristics that if it is him or Warren Buffett use to invest into businesses. The first thing that Johnny Manga was mentioning is that you have to deal with a business that you understand. And I will be repeating this in the investor mindset in the second chapter. So you really need to understand what you're doing. That's the very first thing. The second thing and that's actually point number two, this is what Warren Buffett and Johnny Manga have added on top of Ben Graham's method. Is what Warren Buffett calls the mode, or Charlie Minga calls this the mode. But what is important is that if you understand which company you want to invest into, so you understand its business. You need also to make sure that you invest into a company that has a competitive advantage, a competitive mode or just a mode. What is the mode? I will repeat this during the course. A mode is the water around a castle, a medieval castle. The wider the mode, so the more water it is around the medieval castle, the more difficult it is to attack the castle. That's a principle of a mode. This is what Charlie Manga and Warren Buffett have been teaching me is that actually, and this is one of the reasons, and again, I will be speaking about this in the course, why I very often only invest into top hundred brands in the world. I currently have Nestle, Nike, Porsche, Ferrari, Louis Vuitan, Gucci, those type Nestle I think I forgot to mention. I mean, I have those strong brand companies because they do have a competitive advantage and a competitive advantage can be network or distribution channel like Coca Cola has or Amazon has, for example, but it can also be just that they have pricing power, which is something that ProctanGamble has. I will speak about all things, but just already elaborating that that's really what I did not find in the book the Intelligent Investor of Ben Graham, what I found actually listening to Warren Buffalo and Charlie Manga that they were actually teaching me. So not only you need to understand the business of the company, but the company need to make sure that it is strong, it has a strong competitive position, in fact. Third thing, and this is what brings me then also. And we have introduced this in inle as well is forensic accounting. So basically, you need to trust management. So what you don't want you don't want management to manipulate the numbers. And I will teach you. And that's actually the new lecture that I'm doing now in the re recording in 2026 of this course, I will make a short introduction to the Benish A score because that's the very first metric that you should look at before you invest your real money into real company is, are there any signals of earnings manipulation? Yes or no? And then finally, course, you need, and that was the slide that I was showing you at the end of the very first lecture, you need to have a margin of safety. So if the market is overpricing the company and the company so if the market is giving you a price of 200 and the company is worth 100, you don't have the margin of safety, right? And that's what Charlie Manga is saying here. No matter how fantastic the business is, it's not worth an infinite price. So as I was teaching you in the last slide of the first lecture, is what you need to have is at least 25% 30% below its intrinsic value. This is where the stock price or the share price should actually be. So if the share price is 100 and the intrinsic value is 150, that's already a good thing, right? Of course, it is more than just one metric to look at, but that's a good thing to have at least 25 to 30% margin of safety. Right. And one of the things and I was also wondering. And again, I mean, I continuously teach value investing. So now we are March 2026. I have more than 10,000 students across the world. This course actually is the best seller course on Demi. And one of the things that I realized is that why are not more people doing value investing? And it's very interesting what Charlie Monge is saying and Warren Buffett was saying the same, is that the professional classes, and you have some companies, even news companies like Bloomberg, CNBC, Mad Money with Jim Cram, et cetera, they cannot justify their existence on simple things like value investing. So as Charlie Mong and Warren Buffett, were always saying is that if those professors at financial education or yeah, financial education schools, what would they do for the rest of the semester if investing into stock markets would be so easy? And that's actually what value investing is about. Of course, you need to have a process. I'm going to be sharing here the process and everything that I learned from Ben Graham, Warren Buffett, and what I've been adding to this. Over those 27 years. But what is very clear I mean, it's common sense at a certain moment in time. So you don't need to look at graphs and trying to predict and trying to detect patterns on the graph, double show the single show, et cetera. So here, it's actually you are putting your money into real businesses, with real customers, with real employees, and so you want to be able to buy those companies at a discount price when the market is giving you this discount. That's basically the main thing, the main characteristic of value investing. And it's pretty easy as Warren and Charlie as been saying, is what would those people that sell their services, their news threats for very high prices? What would they do for the rights of Temasa? They need to justify the existence. So that's already everything for the introduction. We're going to go now into the key financial concepts, if you're interested. I mean, of course, you can skip the next two chapters. So the next chapter is going to be a key concept that I believe you have to understand related to money, inflation, how companies create value. We're going to the chapter after it is going to be about the investor mindset. But of course, if you want to skip those and go immediately into fundamental analysis, which is the first chapter of the value investing method, you can do that. But it's nonetheless important. At a certain in time, even for example, when we speak about intrinsic valuation, I will be using the concept of cost of capital, which is the concept that I will be explaining in the next chapter as well. So thanks for your attention. Talk to you in the next lecture. Thank you. 3. Money & cash circulatory system: Come back investors. So we are starting now the concepts around investing, and amongst the key concepts that I want to discuss with you, I'm going to start actually explaining to you how money works and also how companies create value, so what I call the cash circulatory system. So, the first thing that I want you to understand as an investor, before you invest into the stock market, even any type of asset, not just stocks, that the value of money changes over time. And I think the graph here on the right hand side that I took from Investopedia explains it in a very easy way. So it shows the cost or let's say, the change of pricing of a cup of coffee. Imagine it would be a Starbucks cup of coffee over time. So in 1970, you would have paid $0.25 for a cup of coffee while rough cut, let's say, 50 years later, the cup of coffee, you see that the price has been multiplied by nearly ten times. What is the reason for this? Well, the reason for this is called inflation, and it is something that I want you absolutely to understand so that you can set realistic, let's say, return expectations on your investments, any type of investment. This applies to real estate, to bonds, to any type of even a cash savings account. So the reason why I want you to understand inflation is and you will see this when I will speak about expected returns, what is the minimum return that you should at least expect and be able to generate from your investments? It has to be on an annual basis, at least inflation. Otherwise, you will be destroying wealth. What is the reason why is inflation happening? So what happens very often, there could be a crisis. We are now March 2026. There is a geopolitical crisis in the Middle East with the supply of oil and gas being disrupted with the situation currently between Iran, US, and Israel, and all the states in the Arab Gulf. So this will, for example, a shortage in supply will make prices increase. And automatically through that, inflation will go up. So I mean, if you're paying more for a gallon of gas or a liter of petrol at the gas station, of course, this will have an impact on inflation. So this will reduce the purchasing power of people because they have to spend more, for example, on oil or on gas. Be the same if there is a shortage on corn, for example, on wheat, the price of bread will go up. What happens sometimes as well is not just the increase of production costs that will go up, but it's just sometimes that the sellers of those products believe that users have more purchasing power, and they will actually increase the price of the products and services that they are selling. This also creates inflation, and by the way, on our YouTube channel, I had been making a video many years ago now or I think it's like two or three years ago, where I was speaking about consumer defensive stocks. And you will see I will bring this to inflation as well. So what happens with consumer defensive stocks, which are mostly companies that are active in health products in food and drinks as well, is that they over time generate growth by actually increasing the prices and not necessarily because their production prices increase. Just that it's a way for them to generate growth. And I always take the example of ProctanGamble. So I do shave with Gillette. So most of you, if women or men, you know Gillette, women will maybe use Venus glatte as a brand while men just use Gillette shaves. And so PcanGamble if you would look at their revenues, and this generates inflation for us as well. They from time to time just increase the prices because they believe that consumers have more pricing power. This is something that absolutely increases inflation as well. And this is one of the strengths of consumer defensive stocks is that they can on a regular basis, you're going to see in their financial repos that they will speak about revenue growth that is linked to pricing growth. This is just that they increase their prices on a regular basis. Things that you have to keep in mind as well in terms of inflation, and I often get this question, but what should we factor in as the average inflation over a longer period of time? The easy answer is 2%. Why? Because the US Federal Reserve and European central bank. I'm not sure about China Central Bank or Japan or India China national bank. How they manage this. Maybe I should get myself informed about that. But at least, what I can tell you is the two largest central banks in the world, which is the European and the US OL Reserve, specifically the US OL Reserve, they try to manage inflation by playing with a supply of money. And their target is, in fact, to be at around 2% for a period of around 30 years. Of course, the inflation will go up, will go down. You may have inflation at 5%. It may cool down and be even at 0%. So what will happen is that, indeed, those central banks are going to play amongst others with interest rates in order to be able to, let's say, to support a cooling market or actually to reduce a market that would be too hot where inflation would be too high and would actually have an impact on people. So just keep this in mind, keep in mind that in average over 30 year period, the average yearly inflation is going to be 2%. And that's something that will come back when I will explain to you what is the minimum, let's say, profit that you should generate on an annual basis from your investments. And why is this important? And I'm going to show this immediately here. And here I'm even just taking one note five inflation. If you are putting your money into a bank savings account and that bank savings account is generating zero dot 5% per year, that's what the bank is giving you. And inflation is at one dot 5%. Of course, in the first year, the difference is going to be minimum. But when you look over a ten year period, just look on the bullet 0.1 on the right hand side of this slide. You're going to see actually that your bank savings account over a period of ten years has increased by 5% because that's a compounding effect of zero dot five per year. But if you look at inflation, inflation will have reduced your purchasing power by 16%. So that's the one dot 5% compounded over a ten year period. So that's the one dot 16. So that means that your purchasing power that was won in year zero has now been reduced in year ten by 16%. And this is typically the example I was showing you in the previous slide with the cup of coffee. So, um so you have then to think that net net for you over this period of time, if you have left your money in a bank savings account that generates or that yields zero dot five per year, you will have actually destroyed 11%, which is the difference between inflation has been reducing my purchasing power by 16%. So prices have increased in average by 16% over the last ten years. My money has only been growing by 5%. So the difference between the two is that my purchasing power has decreased by 11%. This is basically why you have to understand inflation when you are trying to generate earnings from your assets. And you see in the examples below, of course, if you're able to generate 3% with one 5% inflation, your wealth would increase by 18%, 5%, you will see that your wealth will have increased by 47% compounding. And the one that is my benchmark is I try I can already share this here. I try to generate 7% on an annual basis. And I consider that there's going to be around 2% inflation. So I will be around, let's say, 65, 70% of wealth generation over a period of ten years. So just keep this in mind that inflation is important and the compounding effect of inflation is important to tell you what should be the minimum yield or let's say, profitability that your investments generate on a yearly basis. So of course, I mean, this is just summarizing visually. Of course, if you're keeping your money in a bank savings account, you're going to be destroying wealth over a long period of time. Of course, it's less risky. I will speak. I think it's in the next lecture about risk versus return, but you will be reducing your pricing power or let's say, your purchasing power. So the first preliminary conclusion that I can already make here is that if you want to increase your wealth, you need to avoid destroying wealth. And for that, your annual return of your investments, whatever type of asset can be real estate, can be bonds, can be Orex can be crypt or can be stocks, which is my, let's say, a competence. It has to be above annual inflation. And consider as a benchmark that annual inflation is going to be 2% because that's basically what US Federal Reserve and what the European Central Bank want to achieve over a long period of time, is that inflation is at 2%. That's the first thing how you have to understand money. The second thing is, what does it mean to invest? And I will try to explain this in an easy way. And this is a summary of a course at Harvard Business School, which was for me the first time many years ago that I was able to understand the circultor system of money. Basically, and you see this is basically like a balance sheet. So you have on the right hand side, the sources of capital, on the left side, the employment, the use of the sources of capital. This is how actually you generate what is a process of investing. You are trying to generate income by using capital. And in reality, now we make it simple here, there are just two sources of capital. One where you borrow money. You can borrow money from friends, from a bank, from any type of even a private lender. We are now March 2026. There is a private credit crisis in the US with private lenders. And so this is one source of capital. The other source of capital is when you self, you have the power have the cash. So this is more like acting as a shareholder. So you don't need to borrow money from a third party. You bring in the money or let's say, the capital yourself, and bringing in capital is not just bringing it through money, through cash, but it can be also bring in an asset like a computer, a car, a machine as a productive asset. So those are the two sources of capital. And what you want to achieve, and I'm explain this in the next slide. And let's consider that the typical way how in a company value is created is that you have those two sources of capital, either that the company borrows money from a lender, can be a bank, can be a private creditor, or the money comes in from the shareholders. And that cash, let's consider just in an easy way that the cash is coming in from those two sources of capital. That cash will be used and will be used to buy assets and buying assets if you are, for example, an airline company, you're going to buy airplanes with this capital, again, two sources of capital, lending money. So borrowing money from lenders or bringing it as shareholders. You're going to buy office space or manufacturing plant, new machines, cars, if you're a taxi driver company. So those are the type of things that you're going to be employing your capital in order to transform the capital into assets. And the hope that you have, this is my flow number three is that you're going to hope that those assets will generate a profit. Then what happens when the company has generated a profit from those assets from those productive assets, as we also say? Well, basically, the company and company management has three choices. Either they reinvest the profits generated, so the cash generated as profits, and they expand the amount of assets. They're going to buy new planes. They're going to buy more buildings, more office space. They're going to employ more employees as well, more people. They're going to add manufacturing plan. So that's flow number four. That's one choice that management has with the board of directors. The choice that they have in case the company has been raising money through debt holders so that they borrowed money from lenders. What they can do is just reduce the amount of debt because when you borrow money from lenders, you're going to or the company is going to be paying interest on it. And interest is something that will evaporate. I mean, this is cash that has just been used to buy assets, but you have a certain amount in time, first of all, to service the debt through interest. So that has a cost to the company. And secondly, you will at a certain point in time, have to reimburse the debt as well. So what I like as an investor to see is that the company management also reduces the debt burden and even the cost of servicing the debt, so reducing the amount of interest that are being spent on the outstanding debt. So that would be flow number five. Then flow number six, this happens more for very mature companies like the Unilevers, the Nikes, the Proc Dan Gamble, the Microsoft, is that the money, sorry, the company has excess cash. And so, I mean, so they continue to use flow number four, so they continue reinvesting cash into the company because sometimes you also have to replace old assets. If for example, the manufacturing plant exists in 30 years, you're going to have to let's say, update the manufacturing plan. So there's going to be a part of the money that will be used just to re update old assets, in fact. But sometimes when there is excess cash and the company has low debt, well, what happens very often is that the company just gives the money back under the form of cash dividends to the shareholders. So this is the cash returned to shareholders. Let's be very clear, in this value creation cycle, what is called also the cash circulatory system in companies, the options 456 are very often a combination. So you may have 40% of the profits. So when I speak about the profits, I'm speaking about flow number three here, the profits that the assets have been generated. Well, maybe 40% are going for being reinvested into the company, 30% are being returned to reduce the debt, and other 30% are returned to shareholders. For young startups, for young growth companies, the flows five and six do not exist. It will be 100% of the profits generated by the assets will flow into the process number four, which is reinvesting the money into the company to accelerate the growth of the company. And so always keep in mind that this is the type of judgment and arbitration that management, together with the board of directors has to do on behalf of the shareholders. Of course, sometimes shareholders, they will have to agree on a certain amount of elements as well, specifically on 45 and six. So this is what I wanted to share with you. So on top of understanding that money carries an element of inflation so that your annual returns should be at least at the level of inflation. Otherwise, you're going to be destroying wealth. When you think about what investing means, well, you understand how for a company or in general, even outside of a company, investing is you bring in capital. You have two sources of capital, you have debt capital and then really equity capital. And from there, you hope to generate an asset or let's say you transform this into an asset that will generate profits. And this is what investing actually means. And that profit should be above inflation. That, I hope that you understand how money works with inflation, of course, in a very quick way, and also the cash regulatory system, which is something that we will look as well. When we will be analyzing companies, for example, in the fundamental analysis, we're going to be looking at, for example, how companies are good or bad are generating profits, for example, from their assets. With that, thanks for your attention and talk to you in the next lecture. Thank you. 4. Risk vs Return: MAC investors. Next lecture in the chapter about key concepts related to the use of money, we already saw inflation and now an extremely important concept, which is the risk versus return equation. So as you saw in the previous lecture, the first preliminary conclusion that we could take based on inflation and let's say, the long term 2% that central banks try to achieve is that in order to increase your wealth, you should at least every year generate the yield, so the profitability of inflation. So if you are below, let's just take 2% as a benchmark. If you are leaving your money in a cash savings account at zero to 5%, of course, the risk will be zero. And this is exactly the lecture, I want to speak about risk versus return, but you will be destroying wealth over a long period of time, as you saw in the previous lecture. But as I already just mentioned, returns are not equal depending on the type of asset that you invest your money into. And I like to use this graph to explain, and this goes beyond investing into the stock market. This goes actually into the conversation of wherever you put your money, you have to adjust your return based on the risk profile of the asset. And when we speak about asset, you can see on the right hand side, if you would have $1,000, $10,000, $1 million or $100 million, you have various opportunities for you as an investor, where you can put your money into. It can be a corporate debt type of asset. So and corporate bond, as we call it, where maybe the yield is eight 5%, which is then probably a where the risk is nonetheless higher. Let's put it at 25% of default, for example, a bank savings account where we already saw that the yield is zero dot 5%, and the risk is not zero because the bank can go bankrupt. You saw this with financial institutions like Lehman Brothers, for example, but, of course, you cannot expect with a very low risk to have a very high return. That doesn't work. So this is, in fact, the most important thing that you have to understand after understanding inflation and that your purchasing power decreases over time because of inflation. That, in fact, your return has to make sense versus the risk that let's say, the risk has to be aligned with the type of asset that you're putting your money into. And I want to just I mean, I'm not a financial advisor. I'm just sharing my 27 years of value investing that allowed me to be financially independent. If you see advertisings where they say it's zero risk and you get a return of 7%, honestly, stay away from it. They have been cases, including Icelandic banks during the financial crisis, I think it was 2007, where they were claiming that on a cash savings account, they would give you like six 7%, and the risk would be zero on a cash savings account. So pay attention. Always think logically if you are investing into a startup, of course, your expected return should be maybe 35% per year, but the risk is going to be 95% because we know that startups, they disappear in average, I mean, 95 out of 100 startups disappear in the first five years. So Keith is in mind, and, of course, think about, okay, I mean, your money will have various opportunities where you can invest your money into, and this can be real estate assets, treasury notes from the US federal government, can be a company, which is a growth company, can be a startup, can be corporate obligation or banks this account. But just think that it tends to be logical, okay? So a return, an expected return of 30% cannot come with a risk of zero. And if you're investing or you want to put your money into a very low risk vehicle, your return is going to be very low as well. So keep always this correlation between the two in mind, and this is what I'm trying to share here with this risk versus return graph, in fact, or line. So when you think about now stock markets, actually, and when I speak about even publicly traded assets, you're going to have what is called primary market and secondary market. To make it simple here, will not go into the details of it. Primary market is private market. So those are assets that you don't have access to And so, for example, private equity, startups, everything that is related to venture capital. Those are assets that are not listed on the stock exchange. And then secondary market, those are already, let's say, second hand assets that have moved from the private market to the public market. So those are assets that become publicly listed. Have bonds that become publicly listed, which is a corporate debt. You can have the government who is, let's say, who wants to finance infrastructure, railways, a new airport, and they're going to actually be publishing a sovereign debt. So that's going to be on the secondary market. So that's going to be a public listed asset. And you can, of course, have the same with stocks. So my investment universe is clearly a secondary market. I don't invest into primary market. So just that you have heard, what is the difference between primary market and secondary market? Now, what is the expected return that you can have when you invest into stocks because the other value investing is about value investing into stock markets and into company shares. So I'm trying to summarize, and I'm going to show you also how Warren Buffett thinks about this. If I would have to make a precise calculation, what should be today in 2026, we end of March 2026? What should be my expected return if I put my money into the stock market today, let's say, for the next year, let's just keep it on an annual horizon perspective. There's going to be three variables in that equation. The first one is so what we want to calculate is the average expected return. So the three variables that we have to calculate, first of all, what is the overall inflation rate that we have? And I mean, you can go on I've put you the website at the bottom. I mean, you can even ask the US Federal Reserve. We have this in Ville when you can actually prompt the US Federal Reserve. So the US inflation rate at the latest available number was 260 8% on a yearly perspective. So that's one thing. So this is the speed at which your money will be eaten up by inflation, what we saw in the previous lecture. And then you could say, Well, if I want to so I have to consider this 260 8%, my money has to yield at least at an amount that is above that inflation. If you would invest if you would have a perfect vehicle and you would invest into the US economy, which could be reflected by the US gross domestic product, the US gross domestic product has generated last year around 5%, okay? So it means that if you would have a vehicle, and this vehicle would allow you to invest into the growth of the US economy minus inflation, you would be at rough cut two 7% of growth on top of the US inflation, which is okay, you will not be destroying wealth. Now, if I come back, I'm showing you the slide again. If I look now, if I'm investing into the stock market, where does the stock market sit and what should be the expected return of the stock market if I invest into shares of companies? Well, this is where you have to think about the equity risk premium. And one of my favorite, let's say, references that I use is from ASPA Damodaran from the New York University Stern School of Business, where, in fact, in March 2026, ASPA Damodaran, he calculates this with his students, and this is public information, and I really like what he is doing. I have a lot of respect for ASWAEmn so he has estimated that the current 12 trailing months equity risk premium. So that's the risk premium that you have to add because you invest into the stock market, because the risk. So coming back to this slide. So if you invest into the stock market, your risk will be more or less here, right? So if you look at the X axis, so it will not be zero risk because you never know you invest into a company, the company goes bankrupt. I will share this all with you when I will speak about fundamental analysis, how, for example, look at bankruptcy risk to try to reduce this risk. But technically speaking, you would be safer if you would invest into a sovereign debt, for example, of a AA listed government like the Luxemburgsh government. I think the US and now A, they have lost their A from the rating agencies. So if you would invest into A type of bond, for example, of the Luxemrig government, well, the risk is close to zero because it's a AA rated bond. And but at the same time, your return will be below 1% very probably. If you invest into companies like, and I'm going to show this to you like Coca Cola, ProctanGamble, Urban Outfitters, Microsoft, you have to expect a certain return on those type of investments, and it's going to be more risky than investing into a AA sovereign bond of the Luxemburgis government, for example. So this is what Aswat explains as being the equity risk premium. So this is the risk premium that you have to add on top of the US gross GDP minus inflation. So if I would do now in March 2026, the calculation, out and you see the calculation here in this slide, your expected return, if you invest into equities is seven not zero, 4% currently. So rough cut, it's 7%, actually. So this is what you should be expecting if you are investing into average stocks on the stock market. But I will now be a little bit more precise. You're going to see I'm going to be being a tiny more precise on this. I said, I mean, in Vinla and again, it's not about making the promotion of Vin, but we really created this tool for us because I want to be fast in making my investment decisions, but having a sound and serious investment process. So we have put actually into Vinla the cost of capital database that is public from AswatamolRn. So I've put you even the URL. You can go and see that database. So he is publishing per continent. And here we are using the global cost of capital by industry sector, and it's always updated in January, so start of the year. Just to give you a benchmark. As Wade Moran has been benchmarking 48,000 more than 48,000 companies across all sectors globally. And, of course, that includes financial sector because financial sector is a specific beast, how to make the valuation of that sector. And overall, it's 43,000 companies without financial sector that are being analyzed and kind of aggregated in this cost of capital. Um, database. So why is the cost of capital important? Because the cost of capital, if I come back to this slide, the cost of capital will tell us if you have a company like Coca Cola, where should it sit here on this graph, in fact. That's the whole intention of this cost of capital, which is kind of the expected return that you should have if you invest into company like Coca Cola. So I'll explain now this with four concrete examples. So the first thing, when you are in Vinla when you go here to the valuation screen in the analysis part and you take a company, you will actually see at the bottom that Vinla is fetching automatically. So it's searching automatically the cost of capital for the industry that the company is in. And this is extremely powerful. And again, this is, for me, being much more productive in my investment process, because if I invest into Coca Cola versus Microsoft, the expected return should be different. Why? And I could ask another question and maybe think about it. Is Coca Cola a higher risk investment versus Microsoft or is Microsoft a more risky investment than Coca Cola? Answer, you're going to get it in Vine. And this is based on Aswatamodorans database. I'm going to show you here four examples of four companies. You probably know those four companies. So the first one is a Tika KO, that is for Coca Cola, where, in fact, in the last year, in fact, the cost of capital for Coca Cola and let's say, the industry that Coca Cola was in, which is beverages, non alcoholic was of 730 9%. Urban outfitters, which is a brand very well known to youngsters. They love to shop and buy apparel from those shops of urban outfitters. So you see the industry's apparel retail. So the cost of capital is eight to 22%. So you see that here already, Vinley based on ASW Motorn database is telling you that urban outfitters is a little bit more risky investment than Coca Cola. Why? Because of the industry. Rock Dan Gamble, which is in household and personal products is considered that industry is considered at a cost of capital of 9.02%. And Microsoft, you see that if you would click in Vinley on Microsoft, it will do so this is what we call sensitivity analysis. It will tell you that software infrastructure has a current cost of capital of 11 80%. If you keep those figures 739-1180% in your mind, and you would put them actually into this risk versus return graph, you see that, and again, it's not now here, super precise, but I just want you to understand the logic. You see that investing. So I was mentioning, so just bring things together, that the average return on equity should be around 7%, right? Okay. But depending on the company that you're investing into, because zero the 70, 4% is a market average. If you're investing into a specific company, there you have, again, to risk adjust your investment. And you see, and this is where we want it to be leveraging the power of technology within Vinla Viney will tell you that Coca Cola has a 730 9%. So it will you see it's very close to the 70 4%. But you see that Microsoft because Microsoft is tech industry. The, the risk adjusted return is nearly 12%, even though Microsoft exists for more than 40 years, right? So this is the sensitivity analysis that Vin automatically doing for you, you can, of course, disagree to it and change, let's say, the value, if you want. But just telling you that this is why we created Vine to be able to at least do the sensitivity analysis and be able to tell you, Listen, if you're investing into this type of stock, what should be the cost of capital that you should be using based on the riskiness of the stock, meaning the company slash the industry that you are investing into. Just to be precise without going too much into the details, we don't have and it's very complicated to get the cost of capital per company. Um, so here we are taking the industry. The company is in as a proxy as a correct measure when we do the sensitivity analysis. But some companies, but I have not seen it very often. I remember Mercedes in one of the financial reports doing this. They were showing what is their cost of capital they use. But here we just use the industry as a valid proxy for the company. In fact, to adjust the cost of capital, which means to adjust the risk versus return expectations when you invest into those companies. And we have this, I mean, we are using, as you saw As Wa Moderns database. Now, what is the so based on that? What could be the also here the slide, that's the reason why I invest also into stocks. If you look over the last century, and I would take the big classes of assets. So stocks, cash, bonds, real estate, and gold. Okay? So I will not put crypto and those type of things in here. It's just too young for the time being. If you would look at the last century, and this is the reason why I invest into stocks, stocks has been the most performant asset class across all asset classes. Of course, it has to be risk adjusted. It's more risky to invest into stocks versus keeping your money in a cash savings account. And you see that if inflation over the last century in average was three 2%, this is globally speaking across the world. You see that cash has only yielded three 3%. So you see that actually you would not be very well off by investing into cash. Bonds very safe. So, I mean, bonds, just to explain here, bonds are here on the lower side of risks, but also at the same time on the lower side of returns. And this is exactly what you see here in the slide. Bonds have been at four or 3%. Real estate in average four 7%, a gold five 6%, and of course, it depends on the decade that you are looking into. But you see that stocks in average for the last century have been generating ten 3% of annual return. Another figure, and even Warren Buffett has been speaking about this, if you would, as an investor, not be interested in learning how to invest into the stock market and doing stock picking because I became a better business manager by being a value investor and vice versa. Because I was running companies, I better understood how to invest into the stock market. So I had the chance that both sides actually help me. But if you are not into understanding or even reading financial statements, I mean, you can look at the SP 500, which is like the 500 largest market caps in the US, and you could see what is the type of performance that you can get from SP 500. And just give me a couple of minutes that I explain the next slides about timing as well of the market before you run over and start investing into the SP 500, ETF, for example, or trackers. So the SP 500 has been generating rough cut 12% on a yearly basis for the last decade. This is a figure that is coming from the standards and Po website, but just keep one thing in mind. When you see this figure, so beware, please, when you read the figure of 12%, it means that you would have a perfect timing, and you would even not sell your SP 500. So if you would buy an SP 510 years ago, and you just Larry Run, would have generated 12% on a yearly basis for the last ten years. So we're looking here at the last decade. So let's say between 2015 or let's say, actually 2016, 2026, okay? Oh, but what you have to keep in mind is that an SP 500 will only generate in average 2% of dividends, right? So it will not generate a lot of passive income. I will cover why passive income is important for me in the upcoming lectures. So it means that if you want to, and this is something that people don't understand when they see or even when they hear that investing into the SP 500 generates 12% on a yearly basis for the last decade. What they don't realize is that in order to generate those 12%, they cannot touch that asset. So they just have to leave the asset run, in fact. And, of course, I mean, if you don't need the money, that's great because 12% is much, much higher than inflation. So you're going to be actually increasing your wealth in a very strong way. But what you have to be aware of is that you cannot time the market. And in order to generate those 12%, you cannot extract. You cannot do, let's say, selling those assets and take in capital gains because then, let's say, the stream of performance would then stop, in fact. One thing and this is an extract that is coming from a public conference I gave on the future of finos 2030, which's now what 1.5 years ago in front of a large crowd at a public event where also I was speaking and I was mentioning and reminding all of us and everybody in the room. So there were financial professionals in the room that what people, what humans, where they are irrational, is that they think they can perfectly time the market, and actually it's wrong. Even myself with 27 years of experience, I cannot perfectly time the market. So I know that I will never be buying new companies at the bottom of let's say, of the market, and I will not be able to sell companies at the peak. I was giving, I think in the intro lecture, the example of Ambev which was a company I bought around one dot 85, one dot $9. I sold it 265, and the market went up to 305, and then it came down to two dot seven. So even there, and I'm speaking here six months ago, I was unable to perfectly time the market, but nonetheless, I was happy to get dividends, passive income, plus buying at one dot nine in average and selling it at 265 a couple of months later. So just keep this in mind, also, when you look at the statistic of the SP 500 is that you will be unable to perfectly time the market. And actually, the official statistic, and there is a company in the US, which actually publishes a repot that is called the quantitative Analysis of investor behavior repot. And so the company I think is called Dalbar. They have been proving that over the last 20 years, the gas t ratio of humans, timing the market has been 55%. What is 55% is one out of two times, which means that it's nearly the same probability then taking a coin, flipping the coin, and then depending if it is one side or the other side of the coin that you decide to buy or to sell, actually, and to predict the direction where the market will be going. So if I bring this back to what should be your realistic long term expectations when you invest into stocks, so into real companies, and you buy shares of the companies, and even Warren Buffett has been confirming this. So he has been saying that rough cuts the average return that you can expect by investing into stocks is between 6% to 7% over a period of 30 years. Rough cut. That's basically what he's saying. This is where I want to set realistic expectations. And again, I mean, this is a quote from Warren Buffett many years ago. If I go back to the slide here and I just make and I prove you the mathematical calculation today, this is exactly also how and this is kind of the reverse calculation that Warren Buffett has been doing at that time, is that you're going to have the GDP of the US growth. Mine is inflation. Plus, you're going to add the equity risk premium, which is the risk that you want to be rewarded for because you invest into stocks and remember that stocks Ah, here in terms of risk versus return, they have higher risk than, for example, sovereign bonds or AAA corporate bonds, for example, or even a cash savings account. And this is Warren is saying, Warren says, Well, basically, if I consider that inflation is going to be around 2% and that the GDP growth will be around 3%, that at the very end of the day, if I add the risk premium to it so the equity risk premium, so it's good to be at 6% to 7% yearly. And what does that mean? So just to give you a sense, because a lot of people don't understand or don't realize from a quantitative perspective, what does it mean to generate 7% year over year, for, for example, ten years, you're going to be doubling your wealth because of the compounding effect. So this is like a snowball effect. If your assets generate 7% per year, you're able to keep that streak of performance for ten years, you're going to see actually that 7% compound it ten times will become two, so one dot 967. Only generating one dot 5% and you compound this over a ten year period, it is going to be 16%. So you understand that, and this is where also, I want you to be realistic is that if you believe that by investing into the stock market, you're going to earn 30% for the next ten years, and every year, this will not happen. I promise you're going to be taking very high risk or you're going to have unrealistic expectations. Me personally, I try to achieve 6-7% every year, and then having this compounding effect. In fact, for the last ten years, and now I'm doing this since 27 years, and I'm now 54-years-old. Five years ago, actually was able, thanks to Value investing, together with my family, to be financially totally independent. No debt, real estate assets that we fully own without debt and actually the dividends that our assets generate are paying our family budget on a yearly basis. And last thing before wrapping up the lectures, because I think it's important that you understand risk versus return. In Vina, what we have added as well in the valuation screen is that you can assess and I will explain what is the intrinsic value of Warren Buffet, Peter Lynch and Joel Greenblatt later on. Specifically, we're going to be focusing on Warren Buffett method. But just to show you a graph, what are those people have been exceptional. Have been, in fact, the performances of those people. And so, I mean, the ones that have inspired me are definitely Warren Buffett first. You see, Warren has been generating something like around let's say, 13% over nearly 60 years, which is just an incredible amount of wealth that he has generated. Peter Lynch has been generating as well around, let's say, 13% for a shorter period of time, where Joel Greenblood, for example, was able to generate over 20 year period around 30%, according to analysis that have been done. So I will not go into the details of it, but just to tell you, you will need to have realistic expectations on returns. These people here are exceptional. And I tell you, for me, this is the red line that I've put here. If I'm able to generate 7% for my family for 20, 30, 40 years, I think we're going to be okay, and this is what has happened until now with us, in fact. So that thanks for your attention. This was I hope that after the money and inflation understanding perspective of things that you understand also how to risk adjust your investments and be realistic about what you can expect from investing into the various classes of assets, including stocks, including then the equity risk premium or the stock risk premium that you have to add on top of that. So with that, thank you for your attention and talk to you in the next one where we will briefly speak about investment, stars and vehicles. Thank you. 5. Investment styles & classes of shares: Investors, next video, next lecture, a couple of things before you start investing that you need to pay attention to. We're going to be speaking, first of all, about investment styles, but also the type of vehicles that you may be exposed to. So first of all, let's speak about investment style. So actually, one thing that has to be also very clear. I mean, I mentioned in the intro that I'm a value investing, but there are different populations of investors. You have speculators, you have people who look at technical graphs and try to predict based on patterns what the stock movements will do, and they're going to look at for example, moving averages, those type of things. So I just kind of summarized here what you have in terms of investment techniques. I'm a fundamental investor, so I look at the finances of the company, but you have other ones which could be called technical analysts. So they look at graphs, for example. You have in terms of investment styles, you have people who like to have passive management of their investments like investing in ETF and the ETF is automatically adjusted by machine or other ones that prefer to have ETFs that are managed and our decisions are done by humans. Have also people who like to invest into private equity companies that are pre IPO, are the ones that invest into companies that just have listed that just have IPO on the stock market. You have people who want to invest into growth companies, are the ones who prefer to invest into mature companies. You also have sizes of companies that you can find on various stock markets. You have what we call micro cap, small cap, mid cap, large cap, and mega cap companies. Then you have various asset classes, like people who like to put their money into crypto, other ones into ETFs, other ones into closed end funds, other ones into stocks or Forex. So that's foreign exchange conversion rates and try to predict how the yen, for example, will move compared to the US dollar, for example, or euro versus the British pounds. As a value investing, coming back, like what is a little bit the end game of value investing, if I would have, just to pick, what are the attributes and I put them here is, I'm a fundamental analysist. I am an active investor, so I do stock picking. I invest into mature companies. I don't invest into growth companies, and the type of companies that I invest into, and I will explain this in the next slide is large and mega cap, and I only invest into stocks, nothing else, in fact. So this is little bit the attributes of my investment style. To speak about caps when we speak about micro small, mid large and mega caps, so mega caps are companies that have typically above 200 billion of market capitalization. What does market capitalization mean? You take the current share price of a company and you multiply by the number of shares, so a share is a portion of equity of the company. So you will never own 100% of Nvidia of Microsoft of Apple. So you have a portion of the balance sheet of the company. That's what a share actually represents a share. So that's why it's called shares. So it's a small piece of the company. And if you multiply the current share price by the number of shares that represent the whole company, it will tell you what is the current market cap. So for example, mega cap is above $200 billion. Large Cap is typically set between sorry, $10,200 billion, mid cap small cap. So it doesn't mean that large cap companies are more profitable than small cap, for example. So it really just depends on the type of let's say, even of industry or how fragmented or concentrated markets actually are. So for value investing, I mean, they have been very and I do know a couple of value investing who only invest into small cap companies. So those are small companies that have either a very niche product or just present, for example, in one, two, three countries, but are not global companies. I have to admit, and if you would look at my current portfolio, we are now March 2026, I tend to invest into very big global brands, as I already started to explain in the previous lectures. So I do like to invest to at least large two mega cap companies. Of course, if they are undervalued by the market and I feel that there's an opportunity to make money out of it. So just to tell a little bit on the risk versus return curve, what I was showing earlier in previous lectures, where basically, actually, if I would not just look at value investing, but me specifically as a value investing, I would even remove here from the red frame on the left hand side, the small cap public stocks, I'm just investing to large cap public stocks which are global companies. One of the things that is important, and I will explain to you as well, things that you have to pay attention to when you decide to invest, for example, into stocks. The first thing before sharing you examples of BMW, Alphabet, and Richmond about where I have seen people make mistakes or ask me questions. But first is one of the things that is for me and allowed me to gain my financial independence at the age of 49 is that I always consider that there are two ways of making money when investing into stocks. The first one is what I call passive income. And you will learn when I will look at the fundamental analysis, how you can read passive income, how healthy the passive income is. But passive income so earning dividends on a stock is and this only works for mature companies. Very often growth companies, if you remember, the cash secretory system, growth companies will not provide a return to shareholders. What they will do is they will actually keep the money and just grow the operations by reinjecting probably 100% of the money into new assets new markets or buying competition. But for mature companies like the Nestles, the Unilevers, the proctors and Gamble, et cetera, they earn so much money and they have probably low amounts of debt that they can afford to give a part of the profits back to the shareholder. So again, remember, in the cash circulatory system, my apologies, you have those three flows. Company generates profits from its assets. It sends money back to reinvest into its own operations, or reduces the debt or, in fact, provides a return to the shareholders. And very often, the return is either cash dividends or share buyback, so buying their own shares from the market, which will just decrease the amount of outstanding shares to explain it in an easy way. So I'm always saying, coming back here that there are two ways of making money on stock market when investing into stocks. The one is earning passive income, and the other one is when you sell the company at a much higher price than you bought it. This is called a capital gain. So I always consider and that's the reason why I don't invest into growth stocks that for me, there is a possibility when I invest. And again, this is not investment advice. I'm giving you. I'm just sharing how I do it. I want to earn actually in two ways. So I'm going to be I want to be rewarded for my patients while maybe the company remains undervalued. And as I told you, I cannot perfectly time the market. I cannot time the top of the market, and I cannot time the bottom of the market. And it happens that I buy a company and the stock continues to go down, I will then probably continue to do cost averaging, so buying more of the company if the fundamentals have not changed, and the market is just being emotional. But this is the two ways because if I just rely on capital gains to make money, it means that I will always have to sell and to find an opportunity after that to make even more money and grow my wealth. So it's going to be for me, at least in my investment stale, going to be a mix of the two, in fact, and I'm going to teach in the fundamental analysis how to look at the sustainability of passive income as well. And in the valuation part, so that's the chapter after the fundamental, I'll show you how to calculate intrinsic value. So and one of the things that I realize when investing into stocks that a lot of people or at least I have seen many people that they get this wrong because they maybe use a bank or broker and they are searching for Nike, and then they see Nike is an ADR stock and I'm going to show you a couple of examples. Or they look at BMW. That's my next slides. They look at BMW, and they get like four stocks. But which company are we talking about and which stock which asset should I buy? So one thing that is important is that every company or every even asset that you are buying, every securities that you are buying on stock markets carries an international securities identification number. That's a unique number that is also shown by the companies on the investor relations site so that you can clearly identify that you are talking about the shares of that specific company. I'm going to show this to you for examples. In the USA, it's also called QCP. That's a committee on Uniform security identification procedures. So they have also QCP number. And sometimes you have both. You have securities that have an ICN and a QCP. But the one that I really recommend you because, again, even Vine covers more than 60 markets and 38,000 stocks so that you look at the CI. So let me give you a concrete example. So the example that I want to talk about is about BMW. You all probably know this German car manufacturer. And I'm showing you a couple also of screens of Vin so that you get ws also about an important element, which is that let's imagine that you're interested about BMW and you like the company, you like their products. You like how customers feel about the company, the nice looking cars. And you want to invest. You want to buy a little bit of BMW. And I'm not doing now here the analysis, the fundamental, neither the intrinsic nor the mode analysis. So that will come later. I'm just trying to explain to you what you have to pay attention to. And a lot of people don't pay attention to those type of things. The first thing is, and I'm showing you even here on the screenshots of Vinla when you are searching for BMW, and this is the reality of investing into stock markets, you are actually you will receive four different tickers. Why is this? Because actually, BMW, so the car manufacturer is listed on three stock exchanges. They're listed on the Warsaw. So that's Poland stock exchange. And they have two different Shack classes that are listed on the Frankfurt's on the Xtra stock exchange. And then you have a company in India that is on the Mumbai Stock Exchange, that is called BMW Industries Limited, which has nothing to do with BMW, if I'm not mistaken, I have not searched this up, but I'm assuming it's not the same because they're categorized as an industrial conglomerate. And the same, I mean, if you search visually in Vinla or even you would ask Ville, do we have BMW in your Universe or in your companies? It will show you as well. Also, the AI agent will come up with the same results, so you're going to see four tickers. So if you want to buy the car manufacturer, which of those four do we need to buy? Well, probably the one in Mumbai already not. Then you can, of course, always decide to buy the one in Warsaw. But then you're going to say, Okay, no, I don't want to buy one in Warsa. I want to buy the main share, which is on the Frankfort Stock Exchange. But then you have an ambiguity problem, and this is what financial AI models also have to do. It's called disambiguation. Is telling people, when you speak about BMW, which company and which ICI, which unique securities identification number are you talking about? And then you're going to realize that well, actually, and of course, this is part of becoming a better investor that BMW has actually two types of shares. And I'm just focusing now, so if you allow me just to come back here. So if you type BMW in the search screen Vinla or you ask the Vinla AI agent, do you have BMW in your Universe? It will tell you, I have four tickers that carry the word BMW. This is what you see below. So it will ask you disambiguation. So tell me the one that you're really interested in, for example, to do perform fundamental analysis. So if I just look at the core, so really the car manufacturer on the Frankfort Stock Exchange, for BMW, they have two types of shares, but you're going to say, wait, why two types of shares? It's one single company? Well, yes, but you also have to know as an investor that companies can and I'm going to give you the example with alphabet, so the previously called Google Company, that companies can have multiple types of shares. And what is specific for BMW and you're going to see the consequences of it. BMW has two types of shares. Why? Because you have what is called a preferred share and an ordinary share. Ordinary share is also called a common share. Why do they have two types of shares? Because they are actually making a difference for shareholders, they are waiving, so they are removing their voting rights on the preferred shares because they are saying if you are buying ten shares of BMW, you will, in any case, not be able to, let's say, push the needle on decisions that are part of that are circulated to the annual shareholder meeting because you are just a0.00 0000 1% shareholder. I mean, it doesn't make sense that you would buy a common or ordinary share that has voting rights. But for very big shareholders that would maybe buy, I'm just saying now 10 million of shares of BMW, those shareholders probably want to have a say on decisions of the board of directors and of the executive management team, including CEO. BMW, this is not the case for every company, so a lot of companies only have one class of shares which carry voting rights. And even if you have one share, you can go to the annual General Assembly and participate in the voting. But of course, you're going to be such a small investor that it will not push the needle. It will not change the direction of a decision that needs to be approved or rejected by the annual during the annual shareholder meeting. But BMW has two types of shares. So you see that for ordinary shares and preferred shares of BMW, you see that the IC number is different. So if you would like to buy into BMW, you need to understand a little bit that why does the company have two types of shares, and which one do you want to buy? And there is a difference. Of course, there is difference on the voting rights. But what BMW does as well, if they're removing you a right as a shareholder, they need to remunerate and reward you for this. And if you would look at the cash dividends, so the tickers are BM w.de and BMW three.de for preferred shares. You would actually see that sorry, it's the other way around BMW dot E is the preferred share without voting rights, and BMW three dot EE is the one with voting rights. They actually providing a premium on the dividend yields and on the cash dividends. So they are giving you more money just to keep you silent and not have you vote at the annual shareholder meeting. That okay, not okay? You have to judge for yourself, but that's just the reality. So a non let's say, a non voting shareholder will receive a higher cash dividend than an owner of shares that carry the voting right. And you see here the prompt. I was asking Willis, show me the different history of Bmw dot E and BMW three dot E sit by sat in a markdown table. Another example that is important to understand as well, I'm giving you another example which is alphabet, so the conglomerate that owns Google amongst others and YouTube and all those companies Deep Mind, et cetera. It is very interesting if you would look at the financial report, and I really recommend you if you want to be a stock picker, that you train your eye on reading financial reports and develop your muscle. And by that, you will become even a better business manager if you're running a company or being part of a company. So Google so Alphabet, sorry, I should not say Google, but Alphabet has three classes of shares. They have two that are listed on the stock exchange that you see on the front page of a quarterly or annual report. So this is the front page what is called a 10Q that say, quarterly report that is published by Alphabet and is available through the US Securities and Exchange Commission website, amongst others, but also on the Investor Relations website of Alphabet. And also, of course, in the annual report that is called the 10K report. I will cover what those reports are I think it's the next lecture, I'm covering this. You're going to see that Google, sorry, Alphabet has two tickers. They have a ticker that is called Goog and another one that is called Google with an L suffixed. What are the differences? Well, the differences is, as well, that you have and you see on the right hand side, I prepared this graph that you have the Class A shares. So that's the Girl with an L. They do have voting rights, and the Class C shares, they don't have voting rights. So similar situation with BMW. But what is more interesting, and this is where by becoming an investor, you need to train your muscle on this is that Alphabet has a third class of shares that is not listed, that is only hold by the management and by the main shareholders, which is the Class B shares. Why is this important? Because they mentioned this in the report, but you need to read the reports. So they mention, and I was just taking the snapshot of 2022, that there are also Class B shares, and those Class B shares, you cannot buy them, except if you are part of the management of the company, which is very probably not the case. It's interesting when you would read this in the various reports of alphabets or Google as a conglomerate, as a tech conglomerate, you would see that Class B shares when you see the volumes on the right hand side, if you see my mouse moving here, you see that Class B shares are really a minority amount of shares. So if you would make the sum when I prepared the slides, 2023, I think I prepared them, and I mean, maybe the numbers have now changed, but the story has not changed. You had rough cut, let's say, around 13 million shares, nearly half half split it between Class A and Class C shares. And you had, like, let's consider less than 10% that are Class B shares. And those shares. So when you own 10% of company, you are a minority shareholder. What the founders of Google decided is that this is, of course, something that you can do as a founder of a company that those Class B shares have ten times more voting power than a class A share. And they have decided that Class C shares similar to BMW with a preferred has, that the Class C shares, which are called here ClassE but they could have been called preferred chairs as well. It's just a matter of terminology, but it's the same. Don't have voting rights. So at the very end, when you look, and these were the numbers of 2023 that were available in 2022, I would have to rerun the numbers, but the story is the same. This is where I want to train your eye is that, technically speaking, Class B shares, even though they only represent less than 10% of the total amount of equity of shares outstanding. Have more than 50% of voting rights, which means that management and founders of Google have not lost control on the company, which is something that I would do actually, as well. I can tell you, in the current company where we have incorporated Winley, it is like this, as well. So I mean, we don't have three types of shares, but we have two types of shares. We have with voting rights and without voting rights. Richmon has been a company. I had invested into, I remember, I bought a 57 and I was lucky after a couple of months, it went up to 93. I decided to sell it. In the meantime, it went up to 120 because the financials have evolved again. But I was happy to sell it at that time when it was overvalued by a couple of percent. It is interesting with Rigmas well, they have a pretty similar situation to alphabet, so to Google. And again, of course, you need to look at the latest reports. But technically speaking, what was said is that so there are two types of shares, Class A, Class B. Class A is freely available on the market, but they will never own more than 50% of the voting rights. So if you would buy Rich Ma even as a big shareholder, family. So it's the Rupot family from South Africa that owns this luxury conglomerate, that the family will actually still maintain the control of the company. So that's the type of thing. And again, I don't want to scare you here, but that's the type of thing when you think about what type of investor you are, what are the attributes? Are you? Are you looking at technical graphs? Are you a fundamental analyst or investor? Do you look at ETFs, at crypto, at stocks? Do you prefer smaller cap stocks, bigger CAP stocks? So you understood that I'm a stock picker. I like fundamental analysis. That's all about value investing. I will teach you in the upcoming so in three, four lectures, we'll start going into the fundamentals. But you need to understand a little bit because I recommend you to act as an owner of a company. When you buy even one single share, you have to think as an owner of a company that you need to also train a little bit your eye on when you are buying a company, what I was sharing here with BMW, which ticker is the one that you want to buy. So sometimes you need to also for yourself, make sure that there is no ambiguity in the type of ticker that you're investing into. With that, thanks for your attention. And in the next one, I will give a very short introduction about financial reports. Thanks for attention. Talk to you in the next one. 6. Balance sheet, income statement & cash flow statement: Mac investors next lecture, we are still in the key concepts, and one of the key concepts that is very important to understand is, in fact, looking at financial reports. So I don't have time to go into all the details of financial reports. I do have a specific training that is called the art of reading financial statements or reading financial reports. So here we'll try really to give you the main keys to understand the three main financial reports that are part of the financial statements of a company. So the key question that I could ask you is, what are the main tools to understand how the company creates value for its shareholders, its customers, its suppliers, its employees? And in fact, the main tools that allows us to observe how they create value is by looking at the financial statements. And in the financial statements, I will just speak about three. In most of the companies that are public list, you're going to see five financial statements. There is one which is related to equity, one that is specific as well for what is called comprehensive income. So those two we will skip. I will just focus on the three main ones, which is, first of all, the balance sheet. So the balance sheet, and I tend when I analyze companies to start looking at the balance sheet. The reason is that the balance sheet at any moment in time shows the creation and destruction of wealth for that specific company since day one. So you are not looking, and this one I'm trying to show you here, if I introduce the two other financial statements or reports, which is the income statement and the cash flow statement. So there are three, the balance sheet, the income statement and the cash flow statement. You will actually see, in fact, that the main difference between the balance sheet and the other statements is that the other statements are showing you, let's call it a performance over a period of time, in terms of income, in terms of cash, for example, cash collection, disruption or cash outflows. Balance sheet is not having a specific time period. It's from day one that the company has been credtd until the moment that you're looking at the company. So that's why before I invest into companies, I start actually by looking at the company by looking at the balance sheet, in fact, before I look at the cash flow statement and the income statements. I know, I mean, if you are a little bit fluent in investing into stocks, you may actually understand that most of the people, they look at the income statements and then they don't look too much at cash flow balance. Actually, my order, and I'm speaking extensively about this in the art of reading financial statements training, actually start with the balance sheet, then I look at the cash recepment and then only at the end, I look at the income statement. So, a little bit different. On the order, I look at financial statements. So this is an example. I'm going to give you two examples. I will be speaking, also, again, very brief. I don't have the time to go into the details of it about IFRS and USA GAAP standards. So IFRS is for listed companies across the world all countries, with the exception of India, China, US, and there are three other ones, all countries follow IFRS as an accounting standards. The US, they do follow US GAAP, and I will very, very briefly show you the differences. So you see here the logo. So we'll speak about two examples of companies, one which is NSL. So here a consolidated balance sheet of Nesl also observe that very often, and this is in IFRS, but it's the same in USA. You're going to have at least two consecutive years that you can have comparative measures between the previous year and the currently. So the current year that is being reported, if it is in the balance sheet, if it is in income ceil on the cash flow. That's why you see those two columns here. M and you see here, this is the income statement on the left hand side for NSL, which is a very big food conglomerate worldwide with headquarters in Switzerland. Then you see on the right hand side, the cash flow statement I will briefly walk you what are the differences between the two. Here you have the company Nike, which is a US company. Nike does not follow IFRS. They follow USA which is US generally accepted accounting principles. We'll also briefly explain to you the differences. You have here a consolidated balance sheet. Again, you're seeing two years, so two comparative years, and you have the statement of income and also consolidated statement of cash flows. Don't want to go too much into the details, but just be aware that those are typically the three that you should be actually looking into. Well, we have done in Ville as well, and that's something that I wanted to have for me also as an investor. Of course, you can look at the annual and quarterly statements, if it is balance sheet, cash flow statement, income statement. But there is something that I was very interested to create, first of all, for myself, Will is to have a side by side comparison. Be very often when you look at many financial tools, going to have five years or ten years of the balance sheet. Of course, we have this as well. In Vinla, you're going to have, for the time being, at least five years or five quarters. It doesn't matter. You're going to have both. But what I was missing in a lot of tools before we created Vinlay I want to have a side by side perspective. I want to be able to see the two sides of the balance sheet. This is what you see here in the Vinlay screen. So the assets under liabilities plus equity that I can directly compare, but also want to see in the same perspective, cash flow and income without having actually to click between screens. That's why we created this unique side by side view for those who like to read financial statements, I honestly believe that it helps looking at companies specifically at the three core financial statements which are balance sheet, as you have understood, income statement and cash flow statement. Now, what is the income statement? Very briefly. The income statement is capturing the economic activity of the company as easy as that. So everything that they have generated in terms of revenue will be captured or caught in the income statement. This is money that has been invoice to customers or is money that will be invoice to customers, but where the company has already incurred or generated the products, for example, the products, half for the time being not been collected yet from a cash perspective. I will explain the difference between income and cash. Then, of course, in the income statement, you can have additional reporting like pjography per customer segment, those type of things. So rough cut or in average, what the income statement or in summary not in average. In summary, what the income statement captures is the economic activity of the company. So this is what you see here, if I take the Nesli side by side with the Nike income statement, you see if you just follow the bullet points one and two, that Nestle has generated 91 billion Swiss francs because they report in millions of Swiss francs. So they have generated 91 billion of Swiss francs. Of sales or revenues, it's the same. And Nike, for example, in the year 2025, they have generated $46 billion of revenue. So that's the economic activity, but does not tell you yet what is the profitability of the company. Some people even call this a gross income. I have seen this sometimes. I prefer to call it revenue or sales, economic activity. When then you continue in the income statement, you just go down, you're going to see the line that is called net income. So you see, for example, that Nestle, so if you remember, they have generated 91 billion of revenues or of sales, and they have generated out of those 91 billion of economic activity, Rough cut 11 billion Swiss francs of profits, net income. Those are non cash profits. I will explain this in a couple of seconds. So you can see that from the economic activity, Nesl has been generating rough cut 12%. So the 12% is the 11 billion divided by the 91 billion. Nike side. So Nike had an economic activity in 2025 of 46 to $3 billion, and they have generated three dot two non cash profits. So again, if you make the math, it's going to be rough cut six 7%, in fact, of net income versus economic activity. So dividing 219/46309. A thing that is very important to me is looking at the cash flows. And why? Because you're going to see, you're going to cover this in a couple of seconds, cash is king, and I've learned this also from Ron Buffett, cash is king. So what is interesting in the cash flow statement, and how you're going to see the differences already. And, of course, maybe if you have never looked at a cash flow statement, I may be challenging a little bit your brain here between net income, which is non cash profits versus cash generation, which is, in fact, well, this is cash profit. So what is interesting for Nesli. You can see if you look at bullet point number one is that Nestle in that particular year, we're looking at the year 2024, was able to generate incremental 742 million of cash. So 742 millions of Swiss francs of cash. And when you look at Nike, Nike, in fact, even though just showing you here, has generated $32 billion of net income. The cash position, in fact, went down by $23 billion. How is this possible? So this is what I have to explain. From an accounting perspective, there are, in fact, two accounting methods. There is a non cash accounting method, which is also called an accrual method, and then there is a cash accounting method. What is rough cut the difference between the two, and why is this happening? Let me explain this to you with a very concrete example. Let's imagine you are a taxi company. So you drive users of, let's say, CSMAs from point A to point B. There are two ways how I mean, let's imagine you have this Mercedes car. There are two ways, in fact, how you can, let's say, account for this car. This car is going to be an asset. It sits in your balance sheet. But there are two ways of doing it. One is, in fact, that you're going to be renting the car, so you lease the car. What happens then is that there will, technically speaking, be no difference between the cash flow statement and the income statement. Why? Because you consider that This car, you will be leasing it during five years, and every year, you're going to account for a fifth or 20% of the leasing cost of the car, rough cut. So it means that your income statement follows exactly, so the cash flow statement. But what is a little bit more complicated to understand is when you buy the car, you're not leasing it. Well, at that moment in time, and let's consider that we have a five year span. This is what is called the useful life of an asset. Let's consider that this luxury car is worth 100,000 euros or US dollars and has a use for life, so a depreciation period of five years. Well, if you are buying so now we are not leasing the car, but if you are buying the car from a car dealer, you will I mean, before even you can drive the car and make this car available to your customers, you will have to pay upfront, you're going to have a cash outflow of 100,000 euros in year one. And this is, if you see my mouse moving, this is what I'm showing you here, in fact. So from a cash flow perspective, you're going to have in year one, a cash outflow here of 100 K. But from a revenue perspective, and there are even tax reasons for this, right? Because when you invest into a car, you're going to have indeed an immediate outflow of the total value of the car in year but that car has use for life of five years, and this is where, in fact, the income statement comes into account because the income scene will allow you to reflect the use for life for every asset. And if this car has use for life of five years, the income statement you will only incur you will only charge an expense, which is a fifth, which one divided by the useful life of this car in the income statement. And this is where you're going to have a difference, specifically here your one that you're going to have a higher cash outflow versus a lower non cash expense in the income statement. But this is very important. Numbers cannot be manipulated. At the end of the day, at the end of the five years period, the total amount here of 100 K, which has been a cash outflow in one will be exactly the sum of the five non cash expenses over the years one to years five, which is 20 K in year one, 20 K in year two, 20 K in year three, 20 K in year four and -20 K in year five. So the total amount over five years on non cash expenses will be the exact amount that you have spent on cash in year one. This is where there is a difference between the income statement and the cash flow statement. So it does not mean that it's problematic. But of course, if the company is destroying systematically cash year over year, the company is going to be ending up in trouble, or it has to increase the sources of capital. Okay? So this is why I tend to look and you're going to see this when we speak about intrinsic value. Of people consider that cash is king, so they're going to look at the capability of the company of transforming revenue not into non cash income, but into cash generation. So into increases in cash or cash collection, as it is called as well, because that is key, right? Giving you another maybe stupid example. If I'm sending you an invoice of $1 billion and you will never pay that invoice. I have a huge income statement because let's imagine I would recognize that revenue. That's now a little bit accounting, but I would recognize that revenue. But I will never have this cash inflow. So at the very end of the day, at a certain moment in time, the accountants or the statutory auditor will say, Candi, invoice in 2023, this invoice, but you are not collecting this invoice. So this invoice has, in fact, to be reverted. So you're going to have then a negative effect on the net income a couple of years later. In terms of cash, well, as you have Nava Cora collected the cash, there is no impact on the cash flow statement because cash cannot be manipulated, technically speaking. Okay? So that's something very important to consider. Now, as I said, cash is king. They're actually, and you're going to practice your eye with me on this. There's going to be three types of cash flows. You have the operating cash flow, you're going to have the investing cash flow, and you're going to have the financing cash flow. The ones that are very important, and this is often very often referred at, I'm taking an easy shortcut here as the free cash flow to the firm is the sum of operating cycle and investing cycle. And let's practice our eye, and then you will see how I bring this back to the value creation cycle. So I'm taking here the cash flow statement of Nike. So Nike, you see that the cash flow statement has three sections, has a first section, which is the operating cash flow, has a second section, which is the investing cash flow and the third section, which is a financing cash flow. And you're going to see in the Nestle one, it's the same. So you're going to see that Nestle has an operating cash flow, has an investing cash flow and has a financing cash flow. So typically, operating cash flow of a normal company has to be positive because if the company already from its operational cycle cannot generate a positive cash flow, this is already showing that the company is in big trouble. Then typically what the company does, and let me show you this through a cash circulatory system or value creation cycle that you have seen in a couple of lectures before. I'm taking here the example of Nesli, okay? So Nesl has a balance sheet has 139 1,000 million of Swiss francs of assets. So Rough cut, they have a balance sheet that has a size of her 139 billion of Swiss francs. Okay? And when you look at that, you can see that the operating cash flow was 166 billion. So if you make even the math between the operating cash flow and the total amount of assets, you see that Nesli was able to generate rough cut to 12% profits, cash generation of its company assets, which is very decent, let's be very honest about it. And then if you remember this cash circulatory system, the company has three choices with the operating cash flow. Either it re injects money into and making the size of the company bigger. So this is what Nestle has been doing. They have reinjected eight or 6 billion into the company, and so this is going to be the investing cash flow, for example, buying raw materials, buying a new factory, buying new offices, buying new cars, buying whatever. Okay, so buying new assets can also be just keeping it as cash in the company as well, by the way, or buying securities, for example. Then what the company has as a second choice is reducing the amount of debt that the company has. What the company did, in fact, is they in this specific year, they have not reduced the amount of debt. They have actually increased the amount of debt by rough cut 5 billion. And then that's flow number four, if I remember, then flow. So we have sorry, flow number five. So we have flow three, which is operating cash flow. Then reinjection of money. I'm reinvesting money into my assets. So that's flow number four. Flow number five is I decrease, typically the debt. In this case, Nestle has increased the debt, so they have added 5 billion. We can discuss. We'll see this later on we speak about the debt to equity ratio that was good or bad. And then the last flow, which is the flow number six, that's actually what is called also the free cash flow to equity holders or just, let's say, the return to shareholders. There are two ways of giving a return to shareholders, paying out dividends. So in that year, Nestle has, in fact, returned 78 billion from the 16 billion, which is rough cut half of the operating cash flow to shareholders, and also they have bought so they have spent cash to buy back shares from the market. We're going to see this. This is a way how to generate passive income, as well. The company, and there are some tax conversations around this. But when the company, in fact, instead of sending you the money through SHAC, so through cash dividend, they're going to actually buy back shares from the market, and through that, normally, mechanically, the share price will increase because the amount of outstanding shares is going to be reduced. You're going to see this later on, but just mentioned this here. What is also interesting to know is that those three statements, so balance sheet income statement and cash flow statement, they're linked together. A lot of people don't understand. As a lot of people don't understand, the balance sheet looks at the creation of wealth since day one or destruction of wealth since day one, where income and cash flow you look at the period can be a month, can be a quarter, can be a semester, can be a year. Right? So there's really a timing difference between the two. But on top of that, they are linked together. Why? Because everything has to flow back to the balance sheet. So everything that happened in the cash flow and everything that happened in the income statement has somehow to come back into the balance sheet. Two examples here. And again, if you really want to go into the details, take the case, the out of reading financial statements. I really go into depth, how to read, what type of categories of assets and debt and equity exist in a financial statement. This really not the purpose of doing this now here. For example, if you look at the cash flow statement, you remember the cash flow statement is over a certain period of time. So it was for the year that ended May 31, 2025 for this is Nike. Nike, you can see that they had at the beginning of the year when you see here in the blue one, a $98 billion position, and it went down to seven dot four because they destroyed two dot three or they consumed, they burned two dot 3 billion of the cash position. Well, if you look at the balance sheet, the same bullet point number one, you see the variation here. So the cash flow statement, what is happening in terms of cash increase or decreases will have an effect on the cash position in the balance sheet as easy as that. The same, for example, if the company is buying new buildings, this is a little bit more tricky because there is going to be let's, let's say, movements, if you remember the thing with the car, that maybe they're going to be spending 430 million on property plan and equipment, which is typically those, let's say, tangible assets, physical assets can be building a car, those type of things. But so in the balance sheet, you're going to have then the net movements, right? But here, you see that indeed rough cut that there was a negative effect, in fact, on the property plan and equipment buy. So they have less physical or tangible assets in the balance sheet. And here you see one of the effects. This is the cash that they spent, and this is let's say, the net amount. But you're going to see actually that and it's going to be the same in the income statement, that all the movements that you go to have, they will have an impact, in fact, on the balance sheet. Why? Because the balance sheet collects everything since day one in terms of creation of value and destruction of value of a company. Last thing, again, I don't want to go too much into the details, but if you're interested, please do this out of reading financial statements course. So the main difference to understand when you look at an IFRS and the USGAP type of financial repots is that IFRS follows a different order than USA, right? So in USA you're going to have, for example, in the assets, you're going to have the very highly liquid or even the cash items, and then you're going to have less liquid and then really the intangible non physical assets, long term assets at the end. In IFRS, it's the other way around. You're going to have, for example, the cash position is going to be at the bottom, and you start with the intangible assets. And it's going to be the same on the liability side of the two sources of capital. In IFRS, you start with equity and you finish with debt. In UAE it's going to be the other way around. It's going to be debt first, and then equity. So without going too much into the details, but at least I think there is one thing that is important is that you understand this thing is that balance sheet, you look at the creation of wealth since day one of the company at any moment in time, while the income and cash flow statement shows you the performance in terms of non cash profits or cash collection over a period of time, can be a month, can be 12.5 weeks, can be a year. And those results have to come back into the balance sheet because the balance sheet collects everything since day one that the company has created or destroyed in terms of wealth. I hope that this was useful. And in the last chapter of the key concepts, I will just briefly explain to you the things that I would recommend you to look at, which are, for example, things like investor relations and annual repos, as well. And then we'll really start going to the fundamentals. We first, we will cover the mindset, and then we're going to go into the fundamentals, then valuation, and then the mode. Thank you for attention, talk to you in the next one. 7. Investor relations & annual reports: Mac Investors, welcome to the last lecture of the Key Concepts chapter. In this lecture, I will be introducing you to investor relations and also financial reports and that you understand the differences between countries and how that influences also the type of information updates that you can get from the companies that you will be investing into. The first thing and so we'll not go into the details here, but I just want already start a little bit because the next chapter will be about the mindset. Give you a first tip on mindset, how you should act. You should act actually as a business owner when you invest into a company, because as I'm always saying, companies are real businesses with real management, real employees, real customers. So even if you just own ten shares, 100 shares, 100,000 shares, or 10 million shares of a company, you should always consider yourself as an owner of the company and thinking like a shareholder, what would be your expectations from management, in fact? One of the things that I strongly recommend is that you reduce yourself to the Iveceration newsletters of the companies that you are invested into. This is something that indeed that I do as well. When I'm a shareholder for, let's say, a certain period of time, that indeed I want to get automatic updates into my mailbox of everything that is related to the company. So that's the first thing to do. Then one thing that I also have seen over the years teaching, let's say, corporate finance, how to invest into stock markets that people do not always understand are the reporting frequency differences between countries, and through that, the markets and the companies that are listed on this market. So I'll make it short here without going too much of the details, but I think it's important that you understand that. The first thing is, I mean, the country, of course, and I see this in Viln as well, where we have most of our users either having companies in their watchlist or in their portfolio is indeed the US. The US market is the most liquid market compared to other very big markets. But I want to give you here an overview of I'll call it like the four, five largest stock markets across the world. If I speak about countries. I'm going to start with US, India, and Japan because they have similar, let's say, reporting frequencies. So if it is in the US, India or Japan, companies, of course, report once per year their audited financial statements with a statutory auditor. And so every quarter, they do publish updated financial statements as well. The difference is that every quarter, those financial statements are unaudited. So it's just the CEO and CFO kind of signing off those reports, which, of course, brings in a certain amount of, let's say, inherent risk because they have not been controlled by an external party. This is where, of course, we are expecting that CEO and CFO, they are not manipulating the quarterly statements. On the annual audited one, investors get a supplemental, let's say, guarantee or safeguard, because statutory auditors like the KPMGs, Deloit Pricewaterhouse, et cetera, DOs, they're going to be, in fact, signing off the accounts as well. US India, Japan is once per year an audited financial statement, and every quarter, an unaudited financial report, which is going to be a little bit smaller than the annual audited one. In the US, you're going to very often hear the term ten K and ten Q. So ten K, that's the SEC, let's say, filing standard reports for annual audited reports, and ten Q will be the one for quarterly. In Japan, they have their own names. I cannot speak Japanese, but just to show you a little bit that, of course, there are differences how those reports are even identified in the various countries. The Europe and China is working differently. Well, kind of. First of all, of course, they have to publish once per year audited financial reports. There is a matter of trust in those markets as well. So, indeed, in Europe and China, every year, you're going to get annual audited report. Of course, and again, it's going to be the same type of statutory auditors, the Arns and Youngs the Deloits, Price Waterhouse, et cetera. What is different between Europe, China versus US India, Japan is that in Europe, you will not get every quarter, an unaudited financial report. You will only get a sales update. So they're going to tell you the revenues by geography, by product segments, typically for the first and the third quarter. And mid year, you're going to have and we're going to have as investors, we will have a half year of semesteral unaudited, half year report, where you're going to have also the financial statements, but unaudited. In Europe and China, at least for the time being, we are April 2026. You will not have every quarter, an unaudited financial report. US India and Japan are requiring this. And there is a small, let's say, nuance that I want to share with you as well. So you have non US headquartered companies that are nonetheless listed on the New York Stock Exchange, for example, on the NASDAQ, that can happen. And these are called FPIs. So foreign companies that are listed in US markets. And so those companies, they do have, because they're listed on US markets, they do have indeed statutory obligations or statutory reporting obligations. And so for those who would be interested, the US SEC, so the Securities and Exchange Commission is obliging foreign publicly listed companies in the US that they file once per year a 20 F report. So it's not a ten K that they will be finding, but a 20 dash F report. That's the US SEC terminology. But it's not because they're listed in the US that they will then fall under the obligation of filing an quarterly unaudited financial report. So the US AEC is okay that they file just once per year a 20 F report. And, of course, these companies, if it would be European company, they have to comply with the local European regulations, which is then coming back to a half year unaudited financial update, so with financial statements, and then a ir quarter and third quarter sales update. That's a typical type of rhythm that you will find. So without going too much into the details, so I want to just add one supplemental layer that you need to understand, which is related to the fact that in most, let's say, developed stock markets and countries which have regulators, what is expected on top of the typical annual report, here see an example of the first page of a McDonald report from you remember, that was 2016, the ten Q report for the US, which is a quarterly one, in the US, you have also, and you're going to have similar things as well in other countries. But in the US, it's called an eight K report. So an eight K report is a material event that cannot wait until the next quarterly update to be communicated to existing shareholders. What are those let's say, material events? For example, change of CEO, change of board of director members. There would be, I don't know, buying or selling subsidiary, for example. So when we speak about materiality, I will not go into the A value investing training into the details of materiality means but there's going to be elements that have to be disclosed. So another one would be they change the statutory auditor. I mean, that's something that is important. Why would a company change a statutory auditor that has to be reported within a certain delay things like two days after the event has happened, they have to make it public speaking about public listed companies in the US, so they will do what is called this eight K filing, and there's going to be various types of items, in fact, that will then identify what is the nature of the event that is material that has to be communicated to the shareholders. You're going to see in other countries going to be the same. But, of course, here, let's say, the financial markets regulator and oversight authority will play a role in structuring the delays, what type of events have to be reported. So this is why you have always to think when you invest into countries where you don't know how the regulator works, you may have different expectations from what maybe you use if you are investing into US stock markets. I have to be honest, for the time being and it has not changed. I have always been investing into US and European markets. I nearly invest into Japanese markets. China, I did not. For whatever reason, that's just my personal style of investing. We speak about this in the mindset and circle of competence. But I have now with nearly 27 years of investing experience, I have a certain, let's say, rhythm, how I expect companies to report how the markets worked specifically for US and Europe. So just wanted to share this with you. Um, so yeah, so this is an example of an eight K form. So you see if you see my mouse moving here, you see that it's prefixed eight K report, but this is for the United States. So depending again on the geography, you may have different reporting obligations and even formats. So that's basically what I wanted to share with you in the key concepts. So I hope that this was giving you a good introduction on how to think about money, inflation, the risk versus return equion is very important. Different styles of investing and vehicle. First introduction to financial reports, specifically the difference between balance sheet income statement and cash flowstement. And they also the importance of non cash profits and cash profits. And then just to wrap up the whole chapter that you understand a little bit, how the rhythm is and the frequency of companies that are listed on stock markets across various geographies. So thanks for your attention. And in the next chapter, I will covering, in fact, the mindset. So what are things that you have to pay attention to in terms of mindset as a serious investor? Thank you for attention, talk to you in the next one. 8. Circle of competence & investment universe: We connect investors. So next chapter, we are discussing very imp, it will be a short chapter before we go into the fundamentals, the valuation and the mode, explanations. So making it practical how to invest into companies. I just want to frame the type of mindset that you need to have as a serious investor. So the first thing is, I'll speak about circle of competent and investment Universe. So one of the things that I strongly recommend it's also something if you remember what Johnny Mong and Warren Buffett, I mean, first of all, I've been learning this from them as well, is that you cannot be good at everything. I mean, I have a tech background. I've been managing tech companies for many years. So I believe I understand the tech industry. Doesn't mean for that that I will invest into tech markets. I will explain that a little bit later. At least, what is sure is that I will refrain from investing into industries, markets or verticals or sectors that I don't understand. Examples for me, and, of course, you have to make your own choices. I don't understand Pharma. I don't understand biotech. I don't understand banks, and I cannot analyze their balance sheets. So insurance companies is the same. So those are, let's say, businesses. Of course, I mean, I'm saying this. I don't understand them to be able to, um own such a company in my portfolio. Of course, I understand how a bank works, but I don't understand the type of assets that they carry in the balance sheet. For me, at least, and even with the new regulations that provide a certain substance in terms of equity that banks have that they are obliged to have, like the Basel two Basel three regulations, I still do not feel okay to invest into banks. Same with insurance companies. I don't know the type of exposure that they have from a risk perspective on their product because, I mean, they are not obliged to report all those things. Pharma, a lot of people have been even when I was giving classes, so in person, they were asking, But Pharma, I mean, I mean, we have been exposed to vaccine, et cetera. I said, Yeah, but I don't understand. I'm not a biologist. I don't understand this type of business. I don't know how patterns work in pharma industry. And I am unable with my very low knowledge on, let's say, everything that was related to pharma industry. I cannot predict which company will have the right pattern and which patent will be successful. So I don't understand those things. So that's why I just stay away from that. So you will never have me invest into biotech or pharma or insurance or banks, for example. So, and that's something that I would strongly recommend you that when you think about investing and becoming a business owner by becoming a shareholder of companies on the stock market, is that you think, would I be able or do I understand that business? I'm not saying that this is set in stone. I mean, over the last 27 years, for example, 25 years ago, I didn't understand the luxury business, but I have been reading a lot. I will speak about the six habits, which is educating yourself permanently. But I was absolutely not into the luxury industry and many times, now I have invested into luxury companies. So I think what you have to consider is, do you really understand the business and the dynamics that actually structure a specific industry, and segmentation attributes can be growth versus value stocks, can be size of capitalization. Some people are very good in their circle of competence, investing to small cap companies versus big cap. Industry and vertical. So I have like food industry, cars, luxury. Those are sports apparel. Those are the type of companies, for example, that I invest into, but I don't invest asset into pharma, biotech, insurance, banks, those type of things because I don't understand those businesses. Then geographical markets in the previous lecture, I was mentioning that at least for the time being, for the last 27 years now, I have been always invested into US and European markets. I even never invested into UK markets has been France, Germany, the Netherlands, Spain, Italy, as well, the US, obviously, but never Japan, never China. I nearly invested into Japan a couple of years ago. At the end, I decided to put my money into a market that I understood a little bit better. And then of course, the circle of competence includes the instruments, the asset classes. I'm a pure stock investor, but maybe some of you want to invest into ETFs or into crypto. Even though I have to be honest as well, I do not consider crypto to be an investment. I think it's more speculation. But okay, that's my position. So you have to understand those businesses. And I'm not considering myself a crypto expert on not even being crypto fluent, and it's going to be the same on Forex on sovereign bonds, those type of thing. So I believe that I'm a little bit fluent on stock market investing, and that's what I'm actually sharing here. And I'm thinking as a business owner, but I invest into companies where I do understand their businesses. So it will not be any type of company. So as I already mentioned, my investment zone is typically large cap. So I really invest into very, very big brands. I mean, we are now April 2026. And again, it's not solicitation for you now to go and buy, but just sharing transparently. I mean, if I just look back at all the big brands that I have and I have still in my portfolio, I mean, if I speak now what I have in my portfolio, you're going to have things like Louis Vuitan, Porsche Ferrari, Kering, which are the owners of Gucci Valencia Alexana McQueen, Um, I would love to invest into Hermes, for example, I had Richmond, luxury group who owned Van Cleve and Arb and Carter, for example, and a lot of luxury men's watches. I sold them with a very nice profit after a couple of months. So I had Mercedes. My children have BMW in their portfolio. Those are businesses that we are more or less able to understand. Food industry, I have been always invested into food industry. I have had Mondes, Proc Dan Gamble, Nestle, Danon, Unilever, as well. So all those, if it is food or let's say, consumer products and household products, those are easy to understand Um, because I'm always saying people, they have to eat that whatever, even if COVID happens, people will have to eat, so they will be able to always continue selling their products, as long as they don't mess it up, I speak about those companies. So that's a little bit the type of companies I invest into, but that's my investment Universe, my circle of competence. You have to decide what is yours. Why do I invest into these into, let's say, strong brands? And I look, I mean, if you would look at Vin, we do have, so the top hundred of the global brands for the last 13 years as data points available in Vine. So one of the things that I like, in fact, about investing to strong brands, well, first of all, it has never wiped me out. That's the first thing. But it has been proven that strong brands are actually overperforming markets, including SP 500 performance. And that's one of the reasons why I have always been invested into those companies. And as I said already earlier, I cannot perfectly time the market. So if I look, for example, now at Porsche, which is a big position I have in my portfolio, I'm negative on that position for the time being, but I will be patient, and during my patience, I will be rewarded with cash dividends from the company. And there are other companies. For example, I was mentioning Richmond that I think it was like 2017. I don't remember exactly. I bought the company at 57 Swiss Francs. So Richmond are the owners of Van Cleve and Archel and Cartier and other men's luxury watches. And six months later, I sold them at 93 Swiss Francs plus dividends that I received over those six months period. I had the same with Amba, for example. That's a brewer or brewing distributor in Brazil. Even with my kids, we bought the company at one dot nine, and a couple of months later, the company was at two dot six. I will explain you how to see those things. And again, you will have to make your choices, but those are the type of things that it happens. And it happens that and we'll speak about this in this chapter that markets become actually emotional. But I'm just telling you, the first thing in the right mindset as a serious investor is that you develop your circle of competence. What are the attributes that you will be investing into in terms of companies? Just to finish and to wrap up here, a lot of people, in fact, ask me why I don't invest into tech companies? Because I do have a tech background. It's because for me, tech companies, if I look at investing, and as even myself, I cannot perfectly time the market, it has happened to me that I have been invested for nine years in a company or another company, I have been invested for five years. And then, of course, sometimes it happens that there is a market turnaround and the market has been emotional about a company, and after six months, I'm ready exiting the company. But I believe that tech companies, the future is so uncertain related to things like, for example, quantum computing. And on AI, it's another conversation. If you would follow me on social media, you would understand a little bit my current position, which is the reason why I do have SAP. I believe that an ERP system like SAP will not be disrupted by AI. But maybe other consumer tech products, like indeed Office RA 65, they're going to be definitely impacted by AI. So I think that sometimes people, they just mix everything up. But okay, that's just my position on things. So, but that's the reason why I don't invest into tech. I do understand the tech business. I've been more than 20 years working in the tech industry, and even now, I mean, together with Adriana, we have created Ville, and that's a Fin tech. But still, I don't invest into tech companies. I invest into more traditional things, and I'll try always to have very strong brands in my portfolio whenever I can. And then one thing that I tend to consider that a lot of people fail to consider is the following. If you are just investing into growth stocks, the only way that you will be able to make money and extract money to reinvest that money is when you will be selling those stocks, which means that there is a timing element to this. What I try to do, and this is what I'm trying to share here in this training is that me being a value investor is that I just look at Warren Buffet. Warren Buffett has 400 million of Coca Cola shares since decades. He is not selling that position. Why? Because he's getting an incredible amount of cash dividends from Coca Cola every year. So why would he sell this, right? So that's one of the things where a lot of people don't understand or misunderstand that making money on stock markets is not just about buying and then trying to sell higher. There is also a way to cover, in fact, let's say, your annual returns by having a mix of, okay, sometimes you will have to sell when the market will overvalue the company. But it's also very interesting to earn cash dividends and to build up this snowball effect. And from the cash dividends, you're going to be, if you don't need the money reinvesting those cash dividends and actually Snowball will become bigger and bigger and bigger over the years. And that's actually one of the things that a lot of people underestimate is the compounding capabilities of dividends that are reinvested. And I will teach you in the fundamentals how to look at dividends, how to look at healthy dividends as well, because there are some elements that you have to look into. But I just want to keep you I want you to keep those two things in mind that the way of making money as a value investor, there are two ways. One is, of course, like growth investors, you buy cheap and you sell when the company is overvalued, and I will teach you how at least I look at undervaluation of companies. But the second one that is very often forgotten, specifically today, Um, is the power of compounding of cash dividends. Well, so that's for the first lecture in the mindset. In the next one, I will cover the five co habits that you need to have as a serious investor. Thank you for your attention. 9. The 6 core habits: Mac Investors next lecture in the mindset chapter. So I will share with you the five core habits that serious investor needs to carry along his or her investment journey. So if I summarize the main habits that a serious investor needs to have, it's those five on top of what I already just shared, which is the circle of competence. So understanding in which businesses and industries maybe or type of companies you're investing into. The first one is courage. I mean, it's very clear when I started more than 25 years ago, that it really stressed me pushing on this bottom to say, I go to transfer, whatever, at that time, 10,000, $2,000 of my cash or my savings account into a real company and knowing what would happen with that money. And even as a young, let's say, worker, of course, that was a real stress. But what I really recommend is that as a high performance sports athlete that you start with money that even you would be willing to accept to completely lose. So you should not be depending on that money. And not all my recommendation is don't play around with, let's say, fake or virtual portfolios. Play with here, I'm going to use the term play, invest into real companies. But in order to develop your muscle, invest first with amounts that you feel comfortable with. So don't invest your whole family wealth if you have never invested into stock market. So the question I often get is, what is the minimum that I should invest? And I would say, Well, I believe that because you're going to have fees, depending on the type of broker that you're going to choose, you're going to have brokers that don't charge you a lot, where maybe a $5,000 transaction will just cost you, let's say, $80. But if you're just investing $200 and you have $80 of fees, I mean, in order to um at least break even, you need the let's say your investment to grow to $280 because you need to cover the cost, and you're going to have costs also for selling this. So probably a $200 investment with $80 of fees, you will need at least your $200 to double just to be break even. So what I tend to recommend to people who have never started is try at least to start with maybe 2000 $3,000. Again, it has to be a small portion of your wealth. And invest and I will share with you teach you how to invest afterwards when we speak about fundamentals, valuation and mode, but that the cost, the fees that your broker, your bank will take on a $2,000 investment or 2000 your investment will be below 100. So it means that maybe you maybe even the cash dividends after one year already, in fact, covering the fees when you bought those shares. That's the first thing, but really is you need to have courage and start investing into real and putting real money into the stock market if you feel comfortable with that. So that's the first thing. Second thing is being humble, right? So I always say that you should never, and it happened to me that I became arrogant. It's now nearly, let's say, 15 years ago, where I felt that I could be smarter than the market. And I didn't respect one of my fundamental roots because I became arrogant and I went into my comfort zone. It's really important that you are humble always when you invest and specifically that you remain humble when you are really having very nice performances. Examples that I gave you, I bought Richeon 57 Swiss Franc, sold 93 Swiss Francs after six months. The same with Ambev Ambev I bought it, I think 19, something like this. I sold it 260 after a couple of months, right? So sometimes you're going to have humbling experiences as well, where, for example, I had bought telephonica and I had to do cost averaging during nine years after nine years, really being able to, of course, I was receiving dividends, but being able to hit a profit that was really nice, I have to say. So always be humble when you invest real money into stock market. So don't become aggressive, don't become arrogant. That's the second thing. The third thing, I mean, if there would be one I would really recommend you to keep in mind is this third one is avoid borrowing money, which means avoid taking up debt from the bank, for example, or from the broker to invest into stock markets. Why? Because and I have had investors and students who came to me, even on this platform like demi and Skillshare, who said, I lost my shirt because I've been speculating. On top of that, I raised money through debt in order to accelerate or to compensate for losses. And I have been wiped out. So that's really something, and maybe it will take you longer. I have to be very honest. It will take you longer to build up your wealth, but at least it's just your money and not somebody else's money. So pay attention to those things, and I would strongly recommend that you never raise debt in order to grow your wealth. And if you're just able to add $500 whatever, every quarter into stock market, well, so shall be it right. But just pay attention that you are not being wiped out because as I said, you cannot perfectly time the market. And if you're raising debt, maybe the stock price will go down, and you're going to have a call of the bank that will oblige you to sell shares at the wrong moment. So that's the type of thing that you want to avoid that the bank is making what is called a margin call. Discipline is the fourth one. Very important. So being disciplined is that you need to have your investment process, and part of the investment process is knowing what is your circle of competence amongst others, and then I will share my investment process with fundamentals valuation and mode. And I think that sticking to a discipline process will give you a frame that allows you to perform well, like a sports athlete and become more and more, let's say, fluent and efficient in the whole investment thinking process as well. So, um, you'll also avoid that you start speculating because it's going to be real money. And, of course, without depth, that's really my strong recommendation. Always remain humble but also remain disciplined. So have a repeatable process that you go through without any emotions and trying to be factual because I don't I don't have the time to speak about biases, but humans tend to become biased at a certain amount in time. And this is where the repeatable process will help you to at least reduce this type of biases. And patients. So don't go for the quick buck, as they say in the US, or don't think that it will always be easy. So as I told you, I had sometimes, let's say, opportunities where after six months I doubled the wealth, and I had let's say, the longest holding I had was Telephona Spanish Telco Company, where I sticked nine years with this company. Second longest was Mercedes, where I was invested with them for six years, for example, but they were paying out nice dividends. Then I had other ones like BSF, which is the largest chemical industry or company industry in the world. Also there, I think I was at least four or five years with them. So yeah, so if you think that investing tomorrow will allow you to double that amount in a week later, it will be luck, right? So always keep in mind that you will have to be patient. And when I say patient is consider that it takes the market sometimes two, three, four years until, I will give you the data point, so that until the market actually comes back. So this is something that I learned also from Charlie Manga, and I have to say when COVID happened a couple of years ago, we had the Russian Ukraine situation. We have now the geopolitical situation between US Israel and Iran, and I will not go into geopolitics here. Right? I'm a very peaceful person. So, of course, I don't like I mean, there are wars across the world, but unfortunately, it looks like we cannot avoid those type of things. The point is that geopolitics will also drive markets. And I mean, we are April 2026. It's just a couple of days ago that the ceasefire on the Strait of Ormos has been announced between Iran and the US. And, of course, markets, so first of all, markets went down when the first let's say bombs were striking Tehran. And then, with that ceasefire announcement, a couple of days ago, markets went crazy up with plus seven plus 8% on many stocks for within a day. So so one of the things that you have to learn is that if you're not willing because you will not be able to time the market perfectly, if you're not willing to see your portfolio go down by 50%, stay away from it. I think, honestly, the mistake that a lot of people do, and this is even sometimes taught in courses is what is called a stop loss, is that sometimes because people have not analyzed the fundamentals of the company, they don't understand the business. They just see the price going down by -20% because obviously, nobody can time perfectly the market. Otherwise, we would have already a lot of people who would be able to be perfect investors. Is that people then exit, but people are exiting, in fact, too early, and sometimes they also so they're exiting on losses, and they're also exiting on gains too early. And I have to even say even on gains, it happened to me as well, in fact. So so you have to consider that if you become a stock market investor, and you understand the business that you're investing into. You think as a business owner, without debt, Investing small pieces of your wealth to build up your muscle that if you are not willing to see the market because there is a geopolitical conversation that just happened that you cannot control, but the company that you have invested into has not changed, and the market is going down by 10%, 20%. And this makes you nervous, and then you would have to sell. Well, that's probably a mistake, and you should then not invest into stock markets, right? Because I'm always saying, if there is geopolitical situation and the market is overly reacting and stock price goes down by 20%. If the fundamentals, I will teach you this. If the fundamentals have not changed, it's maybe an opportunity to buy a fantastic company at a very cheap price. But you need to be able to screen the fundamentals, and that's what I'm trying to share here with you in this training. And this is where Mr. Market comes into play. And this was a persona so it's a fictive persona that Benjamin Graham created in his book in 1949 called Intelligent Investor. So what Ben Graham was speaking about or when he was referring to Mr. Market, he was saying that basically Mr. Market has traits which are being very emotional, not factual. One day, Mr. Market is super excited. He's going to give you companies at very high prices. And the day after maybe because of geopolitics and nuclear accidents, COVID virus, that suddenly the whole world collapses, and markets then go down by minus ten -20%. So you will have to deal with Mr. Market and Mr. Market, and story has repeated many times. I'm going to give you the stats. So this is where we speak about bull and bear markets. And I'm just taking here the SP 500 as an average measure. So when I look at Bull and bear markets, you have here until June 2025 a statistic where you see that across the last, let's say, even century, we have seen bull and bear markets. What is a bull market? The market is, in fact, growing a lot. And you see that bull market periods, they depends. They may last for a couple of years. So of course, we had seen between 19 Rough cut 2087 and the year 2000 before the Internet bubble collapsed. We had a bull run of 12 years with plus 841% in average on the SSP 500 Index. And what are bear markets? So bear markets are, in fact, the market comes down by more than 20%. And we have regularly bear markets. This happens. And again, now, a couple of days ago with the geopolitical situation that nobody was expecting between the US, Israel and Iran and the Middle East, we have had also market correction. So what is a market correction is at least a -10% correction of the market, and a bear market is -20%. So if you think that as I very often hear, this time is different. So in the sense that, yeah, the market is collapsing, it will not come back or the other way around, that the market is growing like crazy and it will not collapse this time. That's wrong. History has taught us and has told us that there's going to be always at a certain amount of time let's say, an event, something that will happen that will push markets up and push markets down. So if you are not willing to deal with this and you will not be able to perfectly time the market, you don't invest into stock markets. But this is where the opportunity lies when everybody is selling, this is actually where I tried to buy I did it a couple of weeks ago when just to set the context, anthropic, so the AI company in the US had been announcing something. So everybody became super nervous about, let's say, tech related companies. And I actually bought into some companies where it was total nonsense why the market was pushing down the value of the companies. And very, very quickly, after just a week later, I was already making plus 20% on some purchases because what the market was reacting on is they were not understanding what anthropic and their AI component was versus than punishing some companies that had nothing to do with, let's say, AI related impacts that we are seeing currently. So you will always have bull and bear markets. You need to be prepared for it. One of the things that I do as well in order to be always prepared for it, I always have more or less 10% of my wealth that is ready in cash. So so that if at a certain time, there is a market correction or bear market happening that if the company fundamentals have not changed, that, in fact, then I will be buying more when everybody is selling. So that's a little bit of contrary mindset that I do have sometimes. And then I will add the six habit. The six habit is what the six habit is being able to read and grow your education and your knowledge about things. For example, Warren Buffett, he always mentioned that he was spending 80% of his time reading, reading financial reports. One of the things that I learned as well is that I tried to read facts, not opinions because opinions, well, nobody and there's something I learned from Warren Buffett. Nobody knows exactly what who's right or wrong, and you're going to hear 1,000 different opinions. I think where it is important is to read facts, facts about an industry, facts about a company, and to build up your own mindsets, knowledge, and muscle about an industry or a company. That's definitely something. Even me personally, every quarter, I read financial reports of the companies I have invested into. This trains my muscle as well. I mean, you may see behind here in the video I have been reading tons and tons of books over the last 27 years. I'm a bookworm, I have to be honest. But this actually has always helped me to develop my muscle also as a value investor and even as a business manager of companies. One of the videos I would recommend you to watch is this video. I've put you the link on YouTube video from Peter Lynch where and I've put you even the minutes between minutes 1504 and 18 50, he's explaining the typical, let's say, emotional things and mistakes that people do. And I think it's very relevant. Still nearly, it's more than 30 years after I still see that people, indeed, they invest into companies because they have been reading an opinion of somebody in the newspaper or their neighbor or their, I don't know, the postman, with all respect for postmen, was saying, Did you invest into Nvidia, for example? And they have no clue. They don't understand the business, but as everybody is talking about it, they think that they should also. So what is called the fear of missing out to form or they should then invest into that company as well. Not understanding the fundamentals of the company, not understanding the industry of the company. I'm not saying that Invidia is a bad investment. I'm just saying that if you invest into Invidia, which is currently one of the most hot stocks, you need to understand why you would invest today. Do you understand the business? Do you understand the dynamics and what could actually completely kill the business of that company? So that's a little bit the mindset that Peter Lynch is explaining in this video. I was at the New York Economic circle, if I remember, well in 1994. So I strongly recommend that you watch this video. It's a very nice video and specifically the parts 1504-1850. Right. So just wanted to tell you that I mean, I have been writing this course. The first version of this course was written in 2019, had been published August 2020. And at that time, I was speaking about the same things that bull and bear markets happen. And even after the first publication of this course, it happened again. Look at 2020. So Peter Lynch is right that story repeats. And in average, you're going to have a market correction every two years, and you're going to have average, a bull market every four years, sorry, a bear market every four years. This will happen in average, but nobody can exactly predict it. Even the US Federal Reserve, if you would listen to them, they're going to say we may be able to predict interest rates three months in advance, but beyond that, and I tell you, they have thousands of mathematicians. Beyond that, they cannot predict how interest rates will look like in six, 12 months in advance, because there are elements that they don't control. So those are these external systemic events that they cannot know who is going to push a button or what will happen. 2020, we had COVID. Look at what happens. So everybody panicked, and you had a first wave, a second wave, a third wave, a fourth wave of people selling, selling, selling, selling to cover their losses. And actually, and I remember because I was discussing this with my wife, I did the other way around. So I waited for the second, third wave because it always goes in waves, a first, a second, and then a third. So I cannot perfectly predict the bottom, I promise you. But at least, after the second, maybe after the second wave, I do a first purchase. Then I wait. Then maybe if there is a third wave, I do, again, cost averaging, but it happened during COVID. Let's be very honest. 2022 with the Russian Ukraine situation happened again. Now with the geopolitical situation in Middle East happens again. So, and the AI conversations, the private credit conversation in the US, there's going to be events. You don't know where they will come from, but there will be events that will happen that will make Mr. Market, as Ben Graham was mentioning it, will make Mr. Market very depressive. And that's something that you have to factor in. I believe, honestly, and after 27 years that with the right attitude, value investing is, in fact, something pretty simple and easy, but you need to have that frame, that mindset as a business owner when you invest into these companies with the attribute that I was telling you in the mindset that you need to have. It is, first of all, the circle of competence, but then courage, being humble, no leverage, so no debt. So being able to read and to develop your knowledge in the companies that you are investing into or at least the markets and industries that you're investing into. That thanks for your attention. In the next chapter, we will in fact be going now into the first pillar, which is a fundamental pillar, how to analyze how companies, in fact, do are they somehow solid and I will teach you like the main elements related to fundamental screening before then we go into variation and mode. Thank you for your attention. Talk to you in the next one. 10. Reliability of Financials: Mac Investors, welcome to this lecture. This lecture will be the start of the chapter around fundamental screens. So just to set the scene where we stand, so we'll discuss the key concepts and money fundamentals. I shared with you over, I think, two, three lectures, the investor mindset, and now we are really going to the value investing method that I've been applying for the last 27 years. I'll start with the fundamental screen. So this is the first of the three pillars that I will be sharing with you and showing how I apply what are fundamental screens and how I apply them to my value investing process. What we're going to be seeing just very quickly, I'll start with a new one. We are April 2026. I'm re recording again. I think it's the fourth time I'm recording this course. Speaking about reliability of financial, starting with that. But before doing that, so you're going to see that we're going to be looking at reliability. I'll be discussing Blue Chip companies, how to look at earnings consistency, solvency and financial strength of a company, as well. And we'll already look at relative valuation methods as a first fundamental screen to be able to separate good from bad companies. So let's go into it. And just one last reminder in Vinla. So again, this course is really about value investing. It's not about promoting VN, but we created Vinla for us to make our investment process much faster. You're going to have actually, we will be following, if I go back here, in fact, to level one, level two, level three. So level one being fundamental screens, level two, intrinsic evaluation level three mode. You see here, in fact, if you see my mouse moving, I'm exactly and we have created in exactly according to the method that I'm applying here in this training. So you're going to see that the fundamental screens will be immediately available in the fundamental screen inside Ville with traffic lights. You can send even a prompt to the AI engine, and actually, you don't even have to write the prompt. The AI engine will write the prompt for you and here see what the prompt is being sent the AI engine, which says perform a fundamental analysis of the company I have selected. So again, just by clicking, it interacts with AI. And then even what you have now since April thousand 26, you even have a side by side comparison between companies. So you can just select a couple of companies, and you're going to see side by side. You see they all have traffic lights very easy, in my opinion, at least for me as an investor, to compare. Here the example is I'm comparing ou Vuitan carrying with Hermes and Burberry. So four luxury companies that are listed on stock exchanges, three in Paris and one in London, in fact. Let's go into reliability of financials. So the very first thing, and that's actually something that we decided to change, even in Vinla because I will speak about the Danish Ascore, which is a pretty advanced, I would say. And when I'm giving even public conferences, I tend to ask my audience, who has ever heard about the Benish M score? And I ask the audience to raise the hand. And I promise you, more than 95%, even in finance, professional audiences have never heard about the Benish MScore. The very first thing that I want to teach you is that before you even think about investing into a company, the very first thing, the very first check that you have to do is checking if there are any signals of earnings manipulation, meaning turning it the other way around, do the financials look reliable, yes or no? If they don't look reliable, well, maybe there are so many companies on the market, maybe you better stay away from that company. Instead of becoming a shell of them. Again, I'm not just it's my touch not to give an adviser, but just to share with you honestly how I do look at companies. And we have actually added into Vet the reliability of financials, and this lecture is a new one. I was not teaching this before, but we decided in a couple of months that we want to educate all our investors, all our students that the first thing they have to look into is checking the reliability of financials. So I was mentioning the Benish MScore. Where does this term come from? And actually, this is Professor Benish. He is a professor of accounting at Indiana University. And when he was teaching at Duke University, he found so he was teaching accounting at MBA classes. And he found that it was very difficult to engage MBA students in accounting matters and accounting topics. But still, and that's something that I learned from Warren Buffett, accounting is the vocabulary of investor, so you need to be a minimum fluent in accounting terms if you want to become a serious investor. So what he did, he created like a proxy, like a shortcut. When I use the term proxy, I mean a shortcut by that, related to, let's say, compounding or calculating a couple of metrics that would allow to give in a very easy way a metric to his MBA students in accounting to detect if there would be signals of earnings manipulation, yes or no. And this basically where the whole idea of the Benish score M stands for manipulation came from. So I have a specific course on the Benj score. We're not go into the details of it, but this is the formula of the Benish Score. And again, I mean, in the course, I have a specific course on Benish score, let's say, variables where I really go deep into it. So if you want to know a little bit how the Benish score works, so those eight variables that rely on financial statements. So it relies on the balance sheet. It relies on the cash flow statement on the income statement. Based on those three financial reports, the formula calculates, in fact, score, the famous Benish score. And if the score is below minus 178, like, for example, a minus two minus two at five, minus three, the company is in the safe zone, and the calculation is done over a year over year calculation. So it's comparing, for example, 2025 versus 2024 financial reports. If the value is between zero and minus 178, the company is in the scrutiny zone. So that means that you have if you're really interested to invest into that company, you need to understand where the signals are coming from. I will show you how we really try to make this very efficient also in Vinla. And then if it is above zero, there is a high likelihood of manipulation of the financials of the company, which is, for me, a red signal. So still, if you wanted to invest into a company that has a BanisEScore above zero, so like plus 05 or one, you really should be good actually at understanding what is going on with the company. So that requires a minimum accounting understanding. Why is Benish Emsco interesting? And again, I'm not going to the details of it, but some of you may recall the Enron scandal a couple of years ago, so the company has been wiped out, including Arthur Anderson, which was the statutory auditor. And in fact, there was an interesting study done by the accounting department of Acra in Ghana, where they were showing, and I'm giving you the reference. They were showing that, in fact, looking at the Benish AMSCOe would have allowed to see that something was going on at Enron. So, as I'm always saying the Beni MSce is a proxy. It doesn't give you a proof that there is earnings manipulation, but at least gives you signals that something is not correct. To make it simple, in the fundamentals, in Winley, that's the very first thing that you have to look into is check the reliability of the financials. And here you see for hiatots and again, I'm not saying that hiottas are manipulating the earnings. Just based on the Benish AM score, the current earnings. So based on the annual report 2025 and comparing it with the annual report 2024, it's actually flagging red. So it has a Benish AM score of 072. So if I come back here, 072 is in the high likelihood of manipulation. It's not a proof, but it's a likelihood. What we did further in inle and this is I honestly believe, and I'm saying there's a lot of humility. This is unique. What we did is we have a specific forensic accounting screen where you're going to see the eight sub variables. I don't want to go into the details of it because this is pretty advanced. Do the Benish AM score training if you really want to understand what those eight variables are, the minimum that you have to do as if you are a beginner or intermediate investor is just check the aggregated Benish score. So this variable. If this is green, I think you can continue then analyzing the company. But if it is flagging red, like, for example, iota teles, you will need to look at the eight values or the eight variables that create the aggregated Benish score. And what you can see, in fact, here on the so we have separated between the variables that are real direct earnings manipulation signals, not approved but signals, and other ones which are more what I call earnings management variables. So with a traffic glass, you will immediately see where the issues are, then if you're interested in analyzing deeper the company, it will allow you, in fact, to go deeper. So here, for example, if you would be interested investing into hyatt hotels, currently, we are April 2026, based on the latest annual report of 2025, you would need to look at the accruals versus total assets and why, in fact, the earnings are relying a lot on accruals, which means that that is cash that has not been collected yet, which is a way of manipulating earnings. It's not approved, but it's a way of doing it. That's again what I wanted to share with you on reliability of financials, giving you a first insight that the very first thing rule before even thinking about putting your money into a company is, are the earnings reliable yes or no, or are there any signals of potential earnings manipulation? If that is the case, you will have to investigate or you just walk away and you go to another company where maybe the Benish AMScOe is green. Hope that this was useful. Again, it's an intro lecture to forensic accounting with the Benish AMSCOe. I cannot, and I don't want to go into the details of it, but just as a fundamental screen, check the reliability of financials. With that, thanks for your attention, talk to you in the next one. 11. Blue Chip Companies: Mac Investors, welcome to a new lecture. So we are still in Chapter number three, speaking about the fundamental screens. I've introduced a new lecture, just a couple the previous lecture, which is reliability of financials, which is something new that was not existing in this training. So now I'm re recording it by April thousand 26. And the next fundamental screen, I'm going to share again here, my method is looking at Blue Chip Companies. And I will also justify why me as an investor, actually this is one of my fundamental screens. First of all, what is a Blue Chip company? Maybe you have never heard about what a Blue Chip company is. So Blue Chip, the Blue Chip term comes, in fact, from the poker, from the card game, where Blue Chips are considered to be the chips that have the highest value as easy as that. And in the investing, let's say, vocabulary, we consider that Blue Chip Companies are the companies that are the highest or the companies that are carrying the highest value. So there's and you will see what it means, in fact, in terms of highest value. So today we're April 2026, probably Nvidia, for example, will be considered a Blue Chip company. I have no doubt about that. You may have companies like Prop Dan Gamble that will be considered the Blue Chip company, Google, so Alphabet, because that's the name of the company. Meta platform. So those are probably, let's say, common Blue Chip companies that you would hear also, that would be covered a lot also in the press. What is the reason why I invest into Blue Chip Companies? So this is all about modes, in fact, and I will speak about modes and what modes are, but just to explain to you the reason and giving you a quantitative element why I do invest into Blue Chip Companies. So it has been proven, and Interbrand has also a graph about this. Brand Z is confirming the same that the largest or let's say, the most known from a brand perspective, companies in the world, if you are investing into them, you have higher chances of being able to overperform the market. It's as easy as that, and they are tangible elements. So when people don't want to become stock pickers, what they do, they sometimes invest into an MSCI, which is an ETF with around, I think it's 600 stocks that represents the overall biggest companies across the world. Some people invest into SP 500. That's also something that Warren Buffett said, If you're not into investing into specific companies, just invest into the SP 500 ETF, and probably you're going to be performing in a pretty good way. And remember that the SP 500 has generated a little bit more than 10% for the last decade. But again, time is something that you have to consider but I have been discussing already a couple of lectures ago that that performance is only applicable if you time the market perfectly, but you will never be able to time the market perfectly. Please remember that. Brand Z is, in fact, in brand management company, so they assess the largest brands in the world. Interbrand is doing the same. We do have Interbrand information in a in Vinla as well. So it has been shown that I mean, brand investing into very big brands will not protect you from financial crisis consequences or from even the consequence of the pandemic. But the recovery time will be this has been proven and has been shorter for strong companies and also the downturn, so how much you lost in terms of value if you had invested and there is a crisis happening is going to be smaller compared to maybe less strong companies. So just to give you an element, so quantitative element, why I invest into Blue Chip company? So I was speaking about mode, and how can you determine that a company is a Blue Chip company. So normally Blue Chip Companies can be easily observed. And I'm not saying that any Blue Chip company is the right company to invest into. So again, that's going to be something that you're going to hear me being repeating this many times. It's not because a company is a Blue Chip company that first of all, it is cheap and that the earnings are not manipulated. You may have Blue Chip Companies where the earnings are shaky, in fact, right? So again, I'm just telling you that this is a little bit my investment universe. I tend only to look at Blue Chip Companies. So Blue Chip Companies can be easily observed. First things first is, for example, just look and speak with your friends and family. What are the drinks or the food that they love? What type of smartphones? I mean, when I'm teaching at business school, I've been teaching at ASCA, which is one of the best French business schools as well, and also University of Luxembourg. When I discuss with my students, for example, about the switching costs, which is a way how you can observe modes, and you can also observe Blue Chip Companies. So I'm always taking example. I have an iPhone, so this is my iPhone. I tell my students, Okay, you have an iPhone, as well. How much do I need to pay you to switch to Android? And I'm pushing them to put me a price tag next to that. And there's going to be some students who are going to say, Yeah, maybe 4,000 euros, they're going to be switching from my iPhone to Android, but other ones are locked in in the ecosystem of Apple, which is my case. And even for 10,000, I would not switch to Android, maybe for 100,000. So the switching cost would be very high if a competitor would need to buy market share from Apple, for example. Those are ways you can, in fact, observe beyond blue chips that you can, in fact, even observe modes. And I will speak about modes in a couple of seconds. For example, ask, maybe you have kids, what type of brands do they love to purchase? Maybe they love to purchase Adidas, or they love to purchase vans, or they love to purchase Zara clothes. I have no clue, but those are the type holly ster, for example. Those are the type of things where you go it's easy to observe this, right? The type of pasta that you are buying all the time. If you are a pasta lover, you probably uh, not every brand is a good brand for you. So you will potentially be buying always the same brand because you like the brand, you expect certain results from buying that product, and probably you less sensitive to price fluctuations on the product. So that's the type of thing. I'm always taking the last example of shaving so I shave with Gillette, which is Proc Dan Gamble. I even owned Gillette, also Proc Dan Gamble in my portfolio cup just a couple of weeks ago. And that's the same. So I tried Wilkinson Sword, was unhappy with the results. So now I just test it once, and since I mean, I'm shaving what now? 35 years, at least. And I never went back to Wilkinson Sword, and I would not do it again. So I stick to Gillette, whatever the price is. So that's something that is easily observable. If somebody would ask me, which brand do you use to shave, I would say, I shave with Gillette, and that's it. And they would ask me, what's the cost of, for example, five shaves of Gilatte I would say, Honestly, I don't know, and I don't care because I just want that brand, and I'm willing to pay any price just to have that convenience of being able to shave well with Gillette. With mineral water, for example, when we were in Luxembourg before I moved to Spain, we had a specific brand of water that we were buying, which was Ivan, which so it's part of Danuno company. Now in Spain, we have one, which is fond Vella. We tried various brands, but we want to buy font Valla and that's it. And we don't look even at the price of it. So those are so Blue Chip Companies are easily observable and very often, if they're not messing it up, they're going to carry elements of modes. And what is a mode, in fact? So a mode is and this is you can run these questions through your friends or your famili like how resistant will they be to change? And this is an example I was telling you about my students at University of Luxembourg and also at ESCA School of Management, where I'm asking them, how much do I need to pay you that you switch from Apple to Android? And of course, I mean, it will depend from every student. That's basically the mode. So what is the mode? That's why I've put this Japanese castle here. A moat is the water that surrounds a castle. The wider the mode, the more difficult it is to attack the castle. That's the whole principle that Warren Buffett has been teaching me how to look at modes, right? And if you have modes can come from cost advantages, if you look at Ryanair EasyJet, they have a mode, but it's a mode on being extremely efficient on turning around their assets, or turning around the airplanes much faster than other companies. They are cheaper and they have very clear options. Probably even they are more fuel efficient than other companies. And they address a specific segment of customers, which maybe other companies they try to mix between first class business class, economy plus and economy, which EasyJet and Rana probably does not have. I'm pretty sure that they don't have Frost class in business class. So modes are observable, right? And very often, when the modes are observable, you're going to have the customers of those companies that will be resistant switching to other companies. That's something that is very, very, very observable. This is something that allows actually those companies to charge higher prices, which means that their profitability is kind of protected. And if there is inflation, they're going to charge even higher prices to their customers because they know that customers, and I'm looking at Procter & Gamble, Gillette, Gillette if the Gillette shaves increased by 7% and I'm paying I'm just saying now, let's say, maybe ten euros for five shaves, and now it becomes ten dot three I mean, I don't care about this or 107. I don't care. I will be paying for this, right? And I'm willing to pay for this because I want to have my expected results from shaving with Gillette and not going for another brand. So that's really the whole idea of modes. So here, I've put somehow together all the companies that either now or in the past, I was invested into and I took, I mean, I could have updated with the 2025 Interbrand, global brands. This is a little bit an older slide. But the dots have been updated. As I said, we are April 2026. So I have had all types of companies. So Mercedes, I still have Nike in my portfolio. I have Louis Voutan uh, Gucci with carrying Nestle, I still have. I had Pampers, Gillette, which was pork and Gamble. I sold it very quickly at a very nice profit when the market became depressed a couple of months ago. I had three Kelloggs as well. At a certain amount time. I had ABF, which also distributors of Corona, I remember, well in South America, at least in Brazil. So a lot of those companies, Porsche, for example, I do have Porsche currently in my portfolio since more last two years. If I would sell now my Porsche position, I want to be very honest, I would be losing money, but I'm not doing it. What I'm doing is I mean, if the market is becoming depressed overall and not directly related to Porsche, I'm going to be buying more of Porsche, and I'm hoping that at a certain moment in time, that the market and Porsche will come back as a very strong brand. So that's the type of companies that I, in fact, invest into. Last but not least, I mean, when I will go into the third pillar, which is speaking about modes and intangible metrics, I will mention I will really go a little bit deeper into what are the type of metrics that you can find in Vinla related to modes. But indeed, I will be sharing with you that there's going to be brand information. There's going to be Casman employee satisfaction, and you can even ask Vin. You see it here on the right hand side, asking the Vina AI agent. To show, for example, the top 20 brands, Vinla has, I mean, we have loaded Vinley with this type of information. So this is one of the reasons why I invest into Blue Chip Companies. So it's actually this one. That for the time being, and I'm doing this now for 27 years, that if the market is cheap, again, not every even here a top hundred company is now cheap. But if it becomes cheap and the financials are reliable and I'm going to tell you more about this as I develop and I go through intrinsic value, if there is an opportunity to buy, well, chances are high that I'm going to buy a company out of this investment universe. Remember, when I was speaking about the mindset that I like to buy companies that are in my circle of competence, and investment universe. So, for example, you would have here, and I'm saying there's a lot of respect companies like JP Morgan. I'm pretty sure that there are other, let's say, financials, Citibank, for example, is here. HSBC, I will not invest into those companies. I don't understand financial service industry. AXA probably is also somewhere here. I would expect the big insurance company from France or Visa. I will not be investing into those companies, right? But that's my investment universe. But generally speaking, the first set of my investment universe will be like the top hundred brands in the world. And then out of those top hundred, I will exclude everything that is biotech, everything that is pharma, everything that is tech as well, finance and insurance companies as well. But then for the rest, I'll try to understand the business of the companies and see if there is a cheap opportunity to buy those companies at a very nice price. Rona, so thank you for your attention. In the next one, we'll be speaking about earnings consistency. Thank you very much, talk to you in the next one. 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.