THE 4 PILLARS OF INVESTING Fundamentals Module 3

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The 4 Pillars of Investing,A transcription of,FUNDAMENTALS. MODULE 1 2 3 4, This is two corporate financial statements On this side we ve got the Apple computer the iMac. the iPhone the iTunes the iTV everything And then you got Blockbuster video who is a victim. of obsolescence risk So let s see how this plays out and how looking at a corporate financial. statement and some corporate fundamental analysis can help us find value or identify risk or. stability as we go to purchase stocks So Apple computers 86 billion in assets at the end of 2010. Now why am I doing this a while back So you can see some growth watch this 86 billion now. that represents all the stuff they have that they can use to make money Now it also costs them. some money to make some money but generating that income from the assets 26 billion the. last quarter That s an unbelievable amount of revenue Of course it costs them some money They. gotta pay employees too right They have expenses as well They have assets produce the money. but they gotta spend some to make that cash too so 21 billion to make all that stuff That s 6. billion within a quarter Who only needs a small portion of that to keep them happy 6 billion. I d take it So that s really cool, Now another thing they did is remember how we talked about an example would be a corporate. bond and they have debt they take on because they want to grow fast right They want to grow. really really fast And sure 6 billion isn t bad but you could grow a lot faster if you borrowed. 32 So they have 32 billion in liabilities and some of that s just for growth some of it s for. other things But that s an interesting thing because you know there are some gurus who I like. they re entertaining I m not going to mention any names like Suze Orman and Dave Ramsey I m. not going to mention names like that who always say Debt is the devil don t go into debt debt s. bad cut up your credit cards and don t go into debt and wah wah wah Listen the United States is. abusing their debt Apple is using their debt Don t abuse it use it. In fact the reason Apple and some of these companies grow so fast is why They re using debt to. grow They re using debt More powerful to just leverage the money than it is to pay things out of. earnings You will not grow fast So I don t care if I want to grow stock like Apple and they have. The 4 Pillars of Investing Fundamentals Module 3,Tanner Training LLC All rights reserved. some debt as long as they re using the debt to grow and not to pay for liabilities as long as their. programs are solvent They re looking like they re solvent to me with 6 billion coming in each. quarter Whatever they re doing is working Why don t they pay off all the debt Well then they d. only have 50 million I mean they ve got a net worth of 54 billion they re only going to have. 54 billion in assets and you cannot generate 26 billion out of 54 billion in assets That s why. they re using some leverage So they re doing pretty well. Blockbuster 1 1 billion so not very big Apple s the biggest market capital of all the US. companies They generated 736 million so darn near isn t that interesting They re generating. almost as much revenue here as they have assets The problem is they spend a lot more to get. it wait a minute they only brought in 736 million but they spent 789 well yeah they got. employees they got all these you know all these Blockbuster videos you see they take up a lot. of space and there s rent and leases to pay all kinds of stuff employees and fees and franchise. stuff to pay So lots of stuff going out there 53 million How long is your business going to last. They re insolvent, So what is the pattern See that s why I want to show you quarter four of 2010 What s the.
pattern Insolvent then what Do you remember Delinquent or default and then bankruptcy. So whenever you see a company start to go delinquent what is likely to happen Policy plus. demographics equals the future Well think about this I go out I m a big Apple fan I m on an. Apple right now I don t know if you are you re probably on some computer right And so I buy. Apple TV haven t been to Blockbuster since I bought my Apple TV I m not gonna go stand in line. and get a DVD that s insane I m downloading my movies I m not going to pay a late fee from. Blockbuster because I forgot to it s a pain in the butt to drop that off I just download a rental. from Apple on iTunes for three days or however long and boom I m set I got a month to watch it. Once I watch it I don t need it anymore don t need to take it back. So that s called obsolescence risk When we do the risk one we ll revisit this But Blockbuster is a. victim of obsolescence risk Apple TV is chewing them up Netflix chewing them up I don t want. to go to the video store Going to the video store is old DVDs nah we re downloading things. That s the new way DVD hey buddy obsolescence risk down here in the corner don t you know. what this is about Liability is 1 16 billion that s about a 400 million difference right there and. so they re in the hole So they don t have any equity These guys got 54 billion in equity these. guys got nothing They re minus So this is called insolvent and it leads to delinquency. Now could they have turned it around Yes Could these guys falter Yes But we re not talking. about what s gonna happen we re talking about not what could happen we re talking about. what is most likely to happen We don t have a crystal ball but we have fundamental analysis. The 4 Pillars of Investing Fundamentals Module 3,Tanner Training LLC All rights reserved. What s interesting is some people don t look at value they only look at price And they don t. understand the difference between price and value It s one of the dangers of consumers trying. to be investors e quadrant guys trying to act like i quadrant guys Check this out At the end of. 2010 Apple s 300 Well now they re pushing 4 why Value they re earning money People want. to buy things they re earning money 6 cents now a lot of people are buying this trading means. there are buyers and sellers so some people saw this trying to get rid of it Some people just saw. the price Said Oh it s Blockbuster let s buy them it s cheap What do I have to lose Well I ll. tell you what you gotta lose all your money all 6 cents the whole thing So Blockbuster has since. this time gone bankrupt And that s a great lesson, The penny stock guy is usually a penny because of something like this or because they haven t. made any money or it s all potential or you re hoping for a turn around and you re gambling. you re going with luck You re not getting any value back only potential only hope I d rather go. with what s likely So you ve gotta make your own decisions I can t tell you what to do But you. can learn with a corporate fundamental analysis is Let s talk more about it Let s talk about value. Let s talk about what we get, So part of what we do with fundamental analysis is we try to figure out the strength of an. entity and how valuable it is So we have this term here called valuation in other words how. are we going to put a value on something Well you know we put a price on things by supply. and demand that s how we price a company I mean when you re gonna buy something you re. competing with everybody else that wants it too So based on how many people want it they re. going to be able to charge more That s called supply and demand and that s price That s what you. pay You re paying what the supply and demand is You re competing with other people We study. this with something called technical analysis in our next lesson next time but right now we re on. value what people receive, The problem with a lot of people who want to be investors is they re so caught up with price. that they aren t interested in value They think that Wal Mart has low prices But it might not. be the best value You buy the Bic pen and it costs you a few cents but then it leaks all over your. nice shirt where the Montblanc baby that s looking good Not only that people know you re in. business you re serious You got the Montblac going So earnings is a big deal Well how much. are you going to pay for earnings Picture this if what I receive when I buy stock is a share of. the earnings picture it as a box that spits out money a machine that spits out money How much. money does it spit out That s going to determine what people are going to pay is going to be. determined by how much money it makes right So usually the more money it makes the more. they ll pay for the stock Of course they issue different types of stock and different numbers of. The 4 Pillars of Investing Fundamentals Module 3,Tanner Training LLC All rights reserved.
shares Why is one worth 300 a share do they earn that much more Not necessarily So we need. to learn a few things here about earnings and we do that by looking at the income statement the. balance sheet and some relationships between some of the stuff. So let s check it out I m going to teach my kid about earnings the same way you re probably. teaching yours You can learn it in a book you can learn it by having Daddy teach you But the best. way to learn about earnings is let s go earn something let s start a business So just like you we. gotta do the lemonade stand right So introducing Tanner Brothers ice cold lemonade there it. is soon to be world famous I m sure Owner number one five years old Owner number two only. three years old Do they know how to add A little bit Do they know how to multiply Not really. Do they know how to divide and do ratios Not even close They re only five and three and they. got their dad s genetics so let s hope they do better than I did But Dad was a venture capitalist. We got a cash box and put some federal reserve notes cash inside and they said Oh this is our. cash I said No it isn t We re going to the store And they had to take the cash out twenty of em. and buy lemons and sugar Probably have to say some taxes too those were the costs Then they. had their inventory was set and they hired an intern because they couldn t afford an employee. so they went cheap Hired an intern called their Mom she was sharp high quality cookies high. quality lemonade here And so they started selling man gotta go out and sell Number one skill of. an entrepreneur raising capital venture capitalists and then selling inventory Number one skill. of an entrepreneur raising capital selling inventory baby. And so they had some revenue that they understood some costs that they understood and they. saw the cash pot got bigger again So they re working on it but you and I can do a little bit of math. here that s 30 in earnings So on a Saturday we know we can make 30 and that s what we know. we can do So that s cool Got sixty glasses of lemonade that s awesome Now this pizza is owned. by two people and it s cut into a hundred different slices So if we have one pizza and it s cut into. a hundred slices and each of them have half the pizza that means one guy gets fifty slices the. other guy gets fifty slices Another word for slices is we re gonna share and share like How many. shares do you have Fifty how many shares do you have Fifty Senior Partner has the tiebreaker. and the voting rights in the LLC, So here s their 30 per share They have 100 shares so what do we have to do We have to divide. or split right We have to split that 30 up 100 ways So if that 30 was the pizza and we cut the. pizza in 100 different slices we split or another word is what to divide So we take 30 and we. divide it by 100 or in other words we split it in a hundred pieces we get 30 cents Each piece of. the pizza represents 30 cents here So that s earnings per share So here s the question If you re. a by stander and they re willing to share this company with you in other words they re willing. The 4 Pillars of Investing Fundamentals Module 3,Tanner Training LLC All rights reserved. to let you buy some of these shares You know each share you get is gonna make you 30 cents. That means every Saturday you ll make 30 cents for every share you buy in from this company. right Every Saturday you make 30 cents So how much will you pay to make 30 cents You re a. stock owner you don t have to do any of the work you re a stock owner You simply buy in this. company It s 30 cents to you every Saturday it looks like That s pretty cool isn t it. So we ve gotta figure out how much we re gonna pay if we re going to have those earnings coming. our way There s only 100 shares lot of people are going to want to buy into this baby lot of. people So we need a price to earnings ratio And I hate that word ratio because that means. more fractions So what did I say Debt to GDP ratio it s just relationship So this is just saying. hey what s the relationship between the price of the stock and the earnings that the company. produces What s the relationship between how much people are willing to pay and then receive. Well our earnings for each share were 30 cents so how much are investors willing to pay for every. dollar this business is earning, Well let s take a look at it We got the stock price here which is 3 it looks like We got the earnings. per share which is 30 cents And so if we say we take the stock price and we see what they re. willing pay 3 to get 30 cents Well that s a PE ratio of 10 So a PE ratio of 10 simply means. someone s going to pay 10 for every dollar that the company earns That makes sense right now. right 30 cents gets you three so a dollar it s going to be about 10 So that makes sense right. T Tr LL A eserved This is two corporate financial statements On this side we ve got the Apple computer the iMac the iPhone the iTunes the iTV everything And then you got Blockbuster video who is a victim of obsolescence risk So let s see how this plays out and how looking at a corporate financial statement and some corporate fundamental analysis can help us find value or identify

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