If you look at a company’s balance sheet, book value is the difference between the company’s assets and its liabilities — it is the company’s equity.

Book value in today’s economy is even less relevant for most companies. The value that you don’t see on Apple’s balance sheet is that sparkle in Apple customers’ eyes when they use the company’s products. That sparkle is the intangible good that Apple created by building (often) revolutionary products.

Apparent catalyst absence creates undervaluation. Wall Street’s short-term orientation causes undervalued stocks lacking near-term catalysts to get dumped.

DCF is a foundational concept of the valuation of a company or any asset that generates or will generate cash flows in the future.

A dollar in seven years is worth less than a dollar in your pocket today. So you need to discount all these cash flows at an appropriate rate back into today’s dollars. This tells you how much the cow is worth.

A company’s fair value is a range of values, which may change as facts and our view of the future change.

A good company becomes a good stock at a certain price, not at every price. If tomorrow it started trading at $500 (100 times my approximate EPS estimates) it would still be a great company, just not a great stock.

In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random.

At one times book, we basically bought Svenska at its liquidation value and paid nothing for the company’s future ability to grow, its superior return on capital, its unique culture, etc.

The worst-case scenario sets our floor. If we think the company is worth $50 in a disaster and $100 in the most probable scenario, we don’t want to pay much more than $50. This is our margin of safety.

Their assets (loans) and liabilities (customer deposits and borrowings) must be marked to market (values) quarterly, and thus book value becomes a useful metric.

When you hear or read about ‘the market’ being up or down, this is usually a reference to the S&P 500 market-capitalization-weighted index. The equal-weighted index, where the Mag 7 have only a 1.4% weight, has underperformed SPY by 27% since January 2023.

P/Es mean-revert from above-average through average to below-average levels.

P/E compression acts like gravity pulling stocks downward, while earnings growth provides counteracting force.

The P/E expansion represents a powerful tailwind during bull markets but creates headwinds during subsequent periods when expansion stops.

Statistical cheapness is often easy to see: A company that trades at 7 times last year’s earnings is considered cheap, but it may or may not be undervalued.

Stock returns mathematically depend on two factors: earnings growth and changes in valuation (Price/Earnings ratios). Adding dividend returns captures all variables responsible for total stock returns.

You have ongoing cash flows (from the milk) and one final, large cash payment, which is the terminal value (the asset value at a distant point in the future, at the petting zoo moment).

Statistical cheapness is often easy to see: A company that trades at 7 times last year’s earnings is considered cheap, but it may or may not be undervalued.

When I bought those stocks, I set valuation targets. When they approached the targets, I quickly reviewed their fundamentals. They had not changed much. The decision was obvious: sell.