ANNUAL REPORT THE 6-STEP FRAMEWORK FROM ASWATH DAMODARAN HOW TO READ AN IY Confirm the timing and currency © What period is covered? © What currency are they reporting in? Map the business mix © In which segment does the company operate? ‘© What does the geographic breakdown look like? Find the base inputs for valuation + From the Balance Sheet © How much debt does the company have? © Does the company have more current assets and current liabilities? Does the company have a lot of © goodwill on its balance sheet + From the Income Statement © Are revenues steadily increasing over time? © Does the company need a lot of COGS. to sell its products? © How much revenue is translated into net income? + From the Cash Flow Statement © Are most earnings translated into operating cash flow? © Does the company have a positive free cash flow (operating cash flow ~ CAPEX)? (S) Confirm The Units © Did the company manage to increase ‘© How many shares outstanding does the its cash position compared to last company have? © Does the company have preferred shares? © Are acquisitions paid with stocks? Cee it) © Corporate Governance © Do insiders get special privileges? BY COMPOUNDING © Does management have a lot of skin in quaury . . the game? www.compoundingquality.net (4) Keep digging In the footnotes look for © Does the company use a lot of SBCs? © When does the company's debt mature?HOW TO ANALYZE STOCKS DR ne ners (7 susiness MODEL + Do understand how th company makes (2. PROFITABILITY () “How mn ces companymake per SSR money? $100 in sales (profit margin)? + Does the business model look attractive to + Does the company translate most earnings. me? into free cash flow? 2. CAPABILITY OF MANAGEMENT 10. HISTORICAL GROWTH eee eee eee i 3. SUSTAINABLE COMPETITIVE “I. USAGE OF STOCK BASED ADVANTAGE COMPENSATION (SBCS) e@ tetera + Boos the company use SBCs to reward el aiale peer cae we + Are outstanding shares increasing or ee + Does the company have pricing power? X EEO \C sercange ) SN (Garmactveness oF Te e) (weamioox INDUSTRY + Does the future look bright? + Who are the main peers of the company? + Can the company grow its revenue and X J (Swan nix TA.) (GRUNT + Are there any potential Black Swans? = “a trade right now? + Is the company undervalued or overvalued? X (6 BALANCE SHEET + Does the company have a healthy balance X (14. OWNER’S EARNINGS ~ omer cas = EPS sion hide 0 JX shoot? yield + Has the company a lot of goodwill on ts «Dig the company grow iis owner's earnings balance sheet? by more than 10% per year? (15. HISTORICAL VALUE CREATION + Did the company create alt of shareholder ‘vale in the past? + Atwhich rte di the company compound {since its Po? (7. CAPITAL INTENSITY + How much capital does the company reed to operate? + Is the company investing @ latin future | rom growin APEX)? ‘8. CAPITAL ALLOCATION + How effcienty does management allocate capital? + Does the company have a high and robust ROIG? (5 © (@acempounding Parte saad) FULL COURSE + How to find attractive companies + How to analyze stocks tke @ Professional10 LESSON FROM THINKING FAST AND SLOW EXRee ened 1. Our brain uses two systems: System 4 and System 2 ‘System 1 is fast, intuitive and automatic. Itis prone to biases and errors such as overconfidence. ‘System 2 is slow, analytical, and deliberate. It is necessary for complex tasks requiring focused attention. 2. Irrationality Humans are not rational. We all make a lot of irrational mistakes, ‘90% of Americans think they can drive better than average and 70% think they are smarter than average. 3. The Halo Effect ‘The halo effect is a cognitive bias where your overall impression of a person influences your perception on their individual traits or qualities, If you like someone, you'll overestimate their capabilities and vice versa. 4. Sunk cost fallacy ‘The sunk cost fallacy appears when you keep investing in something even ifit's not worth it, simply because you've already invested resources in it. Think about choosing to finish a boring movie because you already paid for the ticket. 5. Hindsight bias ‘The tendency, after an event has occurred, to believe that ‘one would have predicted or expected the outcome. A good example is that after attending a baseball game, you might insist that you knew that the winning team ‘was going to win beforehand, X 05 © (@eeempouncing 6. Prospect theory The prospect theory suggests that people feel losses twice as hard as gains. Many people don't want wre to play aHeads or Tails 2 game where they can win $100 but risk losing “=~ $50, You should take this bet. — every single day. 7. Availal ity heuristic ‘The availability heuristic is a cognitive bias where you judge the likelihood of an event based on how easily it comes to mind. A good example is 9/11 which made people afraid of flying, 8. Confirmation bias People tend to seek out information that confirms their existing beliefs and ignore information that contradicts it. As an investor, always talk with people who have opposing views. It will be very insightful 9. Framing effect When the way information is presented influences your decisions and perceptions, we call it a framing effect. For example: studies have shown that 75% lean. meat is usually preferred over 25% fat meat, even though it's the same thing, 10. Anchoring effect The anchoring effect is a bias where you rely too heavily on the first piece of information you receive when making a decision. If you first see 2 car that costs $100k and then see a second one that costs $70k, you tend to see the second car as cheap. Oa neste smarts =i10 INVESTMENT TIPS FROM WARREN BUFFETT f — ____By comPounpiNe auatr ‘Today, Warren Buffett's net worth Is equal to more than $100 billion. More than 95% () of this wealth was created after his 65th birthday Do not borrow money to invest My partner Charlie Munger says there are only three ways a smart person can go broke: liquor, ladies and leverage ‘Only invest in what you understand. Boring companies are usually ‘great investments. Good investing is as watching paint dry Invest in companies with integer management The interests of management and sharoholders should be aligned. ‘Companies with skin in the game outperform the market Invest in robust companies with a healthy balanee sheet and high ‘margins which can grow their earnings attractively Every Investment strategy will underperform the market from time to timo, As an investor you are running a marathon, not a sprint ‘The best thing that can happen to investors who will still be buying shares in the next 10 years, is falling stock prices. Organic growth is the preferred growth source Compounding machines are companies which can reinvest their ‘earnings in organic growth for years or even decades Diversification only makes sense for those who don't know what they're doing Pricing power is crucial Pricing power is the best protection against inflation © BB © [GaCompounding) CRT TsTHE POWER OF COMPOUNDING BY COMPOUNDING QUALITY If you were to double $0.01 everyday for 30 days, you would have... Day 1 $0.01 Day 2 $0.02 Day 3 $0.04 Day 4 $0.08 Day5 $0.16 Day 6 $0.32 Day 7 $0.64 Day 8 $1.28 Day 9 $2.56 Day 10 $5.12 Day 11 Day 12 Day 13 Day 14 Day 15 Day 16 Day 17 Day 18 Day 19 Day 20 OD © Gacsnpeunaing © $10.24 $20.48 $40.96 $81.92 $163.84 $327.68 $655.36 $1,310.72 $2,621.44 $5,242.88 Day 21 $10,485.76 Day 22 $20,971.52 Day 23 $41,943.04 Day 24 $83,886.08 Day 25 $167,772.16 Day 26 $335,554.32 Day 27 $671,088.64 Day 28 $1,342,177.28 Day 29 $2,684,353.56 Day 30 $5,368,709.12 Rec eT Cs eT NeWHAT WILL PEOPLE REMEMBER ABOUT YOU Be ee ea Nobody will remember: oO Your salary e How “busy” you were e How many hours you worked oO How many Gucci bags you owned People will remember: e@ How you made them feel e The time you spent with them e If you kept your word e@ If they could count on you vern Reea2 You rely heavily on the first piece of information you receive. Example - First seeing an expensive watch makes others seem cheaper. DECISION-MAKING BIASES THAT HARM YOUR wi vot Ecard You value things more when you own them, Example - Trying to sell your house above market value because it's yours. ° You trust opinions from perceived authorities more. Example - Believing a product is good because a celebrity endorses it. You overestimate how much others agree with you. Example - Assuming all your friends will like your preferred restaurant. You judge things based on info readily available or easily recalled. You tend to follow popular opinions or trends. Se Example - Secing a type of car as unreliable due to a friend's issues with it You tend to follow popular opinions or trends, Example -Buying a certain phone because you see other people using it. You judge a person's character from an overall positive impression, coop Example - Thinking a candidate will doa GI job well because they're attractive. ® You mistakenly believe two unrelated things are connected, Example -Believing black cats cause bad luck. You favor information that confirms your existing beliefs. Example -Dismissing data that questions your favorite diet’s, effectiveness, ° You overestimate your ability when you know little about something, Example -Thinking you're an expert after reading one article on a subject. ® You focus more on negative events than positive ones, Example -Dwelling on one negative ‘comment in a sea of compliments, @ You judge a decision by its outcome, not the decision-making process. Example - Calling a bad investment. smart because it unexpectedly paid off. Weert clarinet eames =)10 Investment advisors might make decisions that benefit them more > than their clients They might trade a lot, even when it's not needed. JH Always remember that’s important WQS = to find advisors who truly care about your goals. LESSONS FROM THE PSYCHOLOGY OF HUMAN MISJUDGMENT A icone ee nad If someone gives you advice about a "hot" stock, be cautious Do your own research before buying anything ‘What works for one person might not work for you. ‘When everyone's talking about a stock, it's easy to feel like you should buy it too But just because it's popular doesn't mean it's a good invest ment It's better to base decisions on facts, not what's trending, Sometimes, people buy a stock just because its price went up, even if the company's not doing well. ‘And sometimes they sell a good stock when the price drops It's better to think carefully before making moves. SS People can get really excited about ‘a company or industry and invest too much init 2 This can be risky and lead to bad decisions It’s smarter to spread your investments out to stay safe. When a stock's value drops, it's tough to let it go But sometimes, it's better to sell and find something better Don't let emotions cloud your judgment. Just because a big-name investor likes a stock doesn't mean it's a sure thing Do your own research to understand the risks @ ° WC roarevsomeonesieo ve AO Sta you can't borrow their conviction. Sometimes, people don’t want to'se when things are going @ wrong Pay attention to signs and be i v " ready to make changes if needed Ignoring problems won't help Seeing others make money quickly can make you want the same But copying their strategy might not work for you It’s better to understand things well before investing. Feeling really confident can be good, but thinking you're always right can lead to mistakes Stay open to learning and don't let pride get in the way.EBITDA 101 |& o EBITDA stands for: © Earnings * Before * Interest © Taxes ‘+ Depreciation ‘* Amortization In other words, it shows you what the company earns before costs like interest, taxes, depreciation and amortization are subtracted EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization OR EBITDA = EBIT + Depreciation & Amortiziation 5 EBITDA margin = EBITDA / Revenue You want most revenue to be translated into EBITDA * Alot of companies also use the Adjusted EBITDA instead of EBITDA * Adjusted EBITDA removes one-time, irregular, and non-recurring items that distort EBITDA # This will result in a higher figure hod Piacente ‘= In general, free cash flow is a way more reliable metric than EBITDA * Free Cash Flow shows you what a company REALLY earns in cash after deducting all expenses. G Charlie Munger once said the following: “I think that, every time you see the word EBITDA, you should substitute the words bullshit earnings.” © The issue with EBITDA is that it removes real expenses * That's why | would never look at EBITDA to analyze a company TL Free Cash FlowLESSONS MCKINSEY Cerviiey ee!