Chapter 4
- Values of most companies changes very drastically (a billion shares of GE at $30 —> $30 billion, but if in few months it's trading at $60, it means entire company is valued at $60 billion. But internally, nothing much has changed). The stock prices change a lot but the underlying valuation of the company doesn't change much
- Why do the prices of all these businesses move around so much each year if the values
of their businesses can’t possibly change that much? —> No one correct answer. Who knows, maybe people go crazy on that stock. The important point is for us to know that people do short term trades as that helps long term investors
- Investing with a margin of safety - Benjamin Graham (buying shares trading at a large discount). Stock X is trading at $35 and I believe it's worth is $70. So, the margin of safety is high and I'll go ahead and buy
- How to figure the true value of a stock (i.e $70 for stock X)
Chapter 5
- Willing suspension of disbelief —> Believing for sake of enjoyment though you might feel that's not possible in real scenario (Harry Potter etc;)
- Earnings Yield —> Total profit (earnings)/total no of outstanding shares
- It’s hard to predict the future. If we can’t predict the future earnings of a business, then it’s hard to place a value on that business. If we can’t value a business, then even if Mr. Market goes crazy sometimes and offers us unbelievable bargain prices, we won’t recognize them.
- Buy stocks that has high ROC (return on capital i.e for X capital, how much the company is returning) and high Earnings Yield (or low P/E i.e for X shareprice, how much earnings you can get)
Chapter 6
- What would happen if we decided to only buy shares in good businesses (ones with high returns on capital) but only when they were available at bargain prices (priced to give us a high earnings yield)? —> Making lot of money
- Magic formula gave a returns of 30% for 17 yrs vs 135 of Market Average
Chapter 7
- IT AIN ’T THE THINGS WE DON ’ T KNOW that get us in trouble, It’s the things we know that ain’t so.” - Artemus Wand
- Magic Formula —> List the companies in ranking order having highest earning yield and highest ROC
- For magic formula to work, the company should be large (otherwise no factors to push the price higher)
- Magic formula on top 1000 companies - 22.9% (vs 11.7%), top 2500 companies - 23.7% (vs 12.4%), top 3500 companies - 30.8% (vs 13%). As you increase the companies, you will be looking at some small cap ones which might generate higher returns
Top 250 companies —> Group 1, next 250 companies —> Group 2 ...The average returns of groups also is monotonically reducing. So, a good metric to chose quality companies
Chapter 8