Value Investing Vocabulary: Speak Like Warren Buffett
I’ve gathered a few key terms and concepts that you will need to speak like an knowledgeable value investor. Get these terms down before the next Berkshire Annual Meeting for good measure.
Book Value
- Represents the carrying value of an asset on a company’s balance sheet, and is calculated by netting the asset against accumulated depreciation
- Also the total value of assets shareholders would receive in the event of a company’s liquidation
- Used to indicate over/under valuation of a company when compared to the market value of company stock
Cash Flow
- Simply money moving (flowing) into and/or out of a business
- Positive cash flow implies that liquid assets are increasing, enabling the company with greater CAPEX capabilities (e.g. paying down debt, capital reinvestment, paying shareholder dividends)
Debt/Equity
- Used to measures a company’s debt amount relative to the value of its net assets
- Shows how a company is utilizing debt to leverage capital assets.
- High debt/equity indicates high risk financing though large debt agreements
Price-Earnings
- Measures a company’s current share price relative to per-share earnings (AKA price/earnings multiple)
- Represents the dollar amount an investor can expect to pay to receive a single dollar of a company’s earnings
Price-Earnings/Growth
- Calculated by taking a company’s price-earnings divided by the growth rate earnings (period specific)
- Can provide a better analysis of a company by being inclusive of the growth rate of the stock
Price/Book
- Used to compare a company’s market value to it’s book value (AKA price-equity ratio)
- Can indicate that company is undervalued by the market or could indicate that you’re overpaying for what would be the tangible value of the company in the event of a liquidation
Intrinsic Value
- Simple the perceived or calculated value of a company (inclusive of tangible and intangible factors, AKA true value)
- Can be calculated using both qualitative (fundamental) and quantitative (statistical) analysis
Economic Moat
- A company’s competitive advantages over its competitors
- Competitive advantages can be anything that allows a company to provide a good or service similar to it’s competition and outperform it’s competition financially
Margin of Safety
- Principle of investing where investors only purchase assets when the market price falls below it’s intrinsic value
- Both qualitative and quantitative factors are used to decide intrinsic value and the market price is used to determine the margin of safety a value investor needs before allocating capital.
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