BUFFET BOOKS

Value Investing: Investor is holding on to an asset, and this asset increases in value over
time even though he did not put in any time and effort.

Value: the net income is inversely proportional to the return, which means that the less you
pay for the net income of the company, the higher your returns are.

Equity: The term ‘Equity’ simply means the total assets minus the total liabilities. If the company
closed its doors and liquidated (a fancy way of saying they’re going out of business), the equity would
be the money that would be left after the company collected all their payments and paid all their debts.
If you died today, the money your family would get would be your equity. (Total equity/shares
outstanding)

EPS: This is probably the most important number to understand. This is the earnings per 1 share or the
profit for 1 share. To calculate this number, divide the company’s total net income by the common
shares outstanding. (Profit per share)(Book value and dividends comes from EPS)

Diluted EPS: Diluted EPS is very similar to EPS. The difference occurs when companies
reward employees with stocks. More stocks mean that the ownership, including the earnings
becomes diluted. Therefore, Diluted EPS is therefore a more accurate measure to use than
normal EPS. It is calculated as: Net income / Diluted average shares.

P/E Ratio: This ratio is a comparison between the price you pay to buy a stock and the profit you may
receive from 1 share in 1 year

P/BV ratio: This ratio represents the current market price divided by a company’s book value. This
ratio is a comparison of what you might pay for a company compared to its value if the company
liquidated (or terminated). A P/BV = 1 means that every dollar you spend purchasing the company also
has 1 dollar of equity already in the business.

 Lesser the p/BV ratio the more the safety

 Look for P/E less than 15 & P/BV less than 1.5
 Always see P/E x P/BV <22.5

BOND: when interest rates go up bond rates go down vice versa.

Inflation: increase in value of goods, buy spending more .So interest rates are increased to
allow less borrowing, which will leads to less spending and decrease in prices due to less
spending

Recession: caused due to increased deflation.

 A Stock must be managed by Vigilant leaders

 A stock must have long term prospects.
  A stock must be stable and understandable.
 A stock must be undervalued.

Debt to Equity Ratio: Sometimes known as (Debt/Ratio). This key ratio is comparing the
debt to the equity in the company. Warren Buffett prefers a company with a debt to equity
ratio that is below .5. In other word for every $10 in equity the company should only have
$5 in debt.

Debit/Equity<0.5 is must
Current ratio >1.5 (total current assets/total current liabilities)

To be checked at interim (then annually)

Total current liabilities: it means that the money company going to spend in next
12months

Total current assets: That Company will convert into cash into next 12 months and that’s
good

Always total current labiality should be lower than total current assets

 A stock must have long term prospects: this means the company should
survive the future.

Capital Gains: The profit you make from selling a stock that was bought at a lower price.
One example of this is if you bought a stock at 10 and sold it at $30 you would
pay taxes on the $20 profit. If the tax rate is 15%, you pay $3 in taxes.

The longer you hold, the less tax u pay (include day trading)

 A stock must be stable and understandable: The company 10 year equity

and liability graph should be mostly linear and predictable. So, that we can predict
future aspects.
 Always purchase assets that will increase your cash flow next month

CASH FLOW STATEMENT

Operating Activities (Look for a high positive number): This is the most important
number to look for. This is the cash that is produced by the company’s operations, and
without that, the cash flow from investing and financing activities cannot be healthy. While the
net income is a key number and is also included in the calculation of operating activities,
many other factors influence how much cash the company is actually making. If you see a
high positive cash flow from you operating cash it is typically a positive of a healthy business.

Investing Activities (Look for a negative number): All companies need cash to reinvest
in the business. It might be for new machines, cars or property. Often companies also invest in
common stock or bonds, and all of that is too finance by the investing activities. If you see
that the cash flow from investing activities is positive, this would imply that the company has
sold income producing assets. While that may nice in the short run to obtain more cash, this
would most often be followed by a decline in in later earnings. Therefore you want investing
activities to show a negative cash flow.

Financing Activities (Look for a negative number): Financing activities includes

handling of debt and relationship to the investors, and is a neat number to investigate for
management’s financial discipline. If you see that this number is positive it would typically
imply that the company has obtained more debt, or in some cases that it has issued more
shares. While this extra cash can be very useful in some cases, it can also be a sign of trouble.
An increase in debt means higher interest payment in the long run, and common stock issue
dilute the investor’s ownership of the company. A negative number on the other hand indicate
that debt has been repaid, common stock has been bought back (increasing investors’
ownership of the company), or dividend has been paid out to the shareholders.

 Operating Activities (Look for a high positive number)

 Investing Activities (Look for a negative number)

 Financing Activities (Look for a negative number)

Return on Equity (ROE): A snapshot of the companies’ ability to reinvest shareholders

capital. The higher ROE the better and as a rule of thumb a sustainable ROE of at least 7-8%
can be recommended. Equity is the same as book value per share, so in other words ROE tells
the investor how good the company is at growing the book value, and thereby the intrinsic
value, of the company.

ROE=Net income/Shareholder’s equity (EPS/BV)

 Remind yourself that traders only determine the price of the stock, not the value.

 Stock volume can be an indicator for when to buy stocks or adjust your portfolio
in general.