Concepts to always rem:

Miscellaneous:
1) Companies where costs are reducing may not be able to hold on to it due to
competitive pressures. Automatic increase in margins cannot be assumed
2) Check for how RE has been used in the last 5 years – whether invested in the
business or debt decline or dividend or
3) Check for Return on incremental earnings and return on economic profits
4) Look at headwinds/ tailwinds which have depressed/boosted firm earnings
5) Investment expenses depressing earnings
6) Stable sales growth/ margins/ RM costs/ other expenses/ Net margin/ FA & WC
intensity
7) Reinvestment rate, FCF as a % of sales
8) Fragilities – asset light then forward integration, low margins then risk of losses,
9) Change in market cap vs RE
10) Sales/FA is lower than historical – new capex is more expensive than historical
11) When market is valuing stock high or low – don’t just write it off- ask if im missing
something? Like in MLL
12) Type of business – high capital or low capital requirements?
13) Value added depends on both amount of IC and ROIC. If amount of IC required is
low, how much value can be added?
14) Look at rating reports to understand unlisted competitors
15) If there is a moat check if management is investing in own business – further what is
management doing to widen the moat or the reverse
16) Always imagine the picture of competitors attacking the moat relentlessly – will
make you reason out why moat will last
17) Will moat give pricing power and returns forever? Classify into wide/ deep moat

Business Related:
1) Cos with old assets that are expanding into new assets at todays inflated prices will
have lower ROICs. Further, cos with depreciation at cos will be lower than actual
maintenance expenses, so earnings will be overstated
2) All ratios like ROE, ROIC on beginning equity, IC
3) Important to recognize presence of tailwinds or headwinds the business is facing.
Sometimes the business will be lucky and finally returns will revert to the mean
4) Some businesses can get away with mistakes unlike others which would kill the
business. See the past of business to find out what has killed other peers in the same
business
5) If a management is talking about capex to improve efficiencies in a comm business,
be wary of others doing the same
6) Inflation doesn’t result in profits, as every dollar of sales requires higher receivables,
inventor etc resulting in no additional profits for the investor
7) Comm cycles go through up – expansion – down – bankrupt
8) A strict negative for co diluting shares below intrinsic value
9) At 95% of American businesses, capital expenditures that over time roughly
approximate depreciation are a necessity and are every bit as real an expense as
labor or utility costs. Depreciation is a real expense
10) When a new sector is emerging, its difficult to pick up the co which will be successful
11) If only one variable is key to a decision, and the variable has a 90% chance of going
your way, the chance for a successful outcome is obviously 90%. But if ten
independent variables need to break favorably for a successful result, and each has a
90% probability of success, the likelihood of having a winner is only 35%
12) Second order thinking involves range of likely outcomes, probability, which one do I
think will occur, whats the consensus view etc?
13) Everything is cylical. Credit cycle is one of the biggest reason for swings in the
economy
14) we understand the necessary condition to add value for growth: The firm must be
able to grow residual earnings and that involves either increasing profitability (the
rate-of-return) or growing a balance sheet that will add residual earnings despite
constant or even declining profitability
15) The guiding principle of business value creation is a refreshingly simple construct:
companies that grow and earn a return on capital that exceeds their cost of capital
create value
16) Most often in mature companies, a low ROIC indicates a flawed business model or
unattractive industry structure. Don't fall for the trap that growth will lead to scale
economies that automatically increase a company's return on capital. It almost never
happens for mature businesses
17) Whether a company can sustain a given level of ROIC depends on the length of the
life cycles of its businesses and products, the length of time its competitive
advantages can persist, and its potential for renewing businesses and products
18) Rates of ROIC tend to remain fairly stable—especially compared with rates of
growth, discussed in the next chapter. Industry rankings by median ROIC are stable
over time, with only a few industries making a clear aggregate shift upward or
downward, typically reflecting structural changes, such as the widespread
consolidation in the defense industry over the past two decades. Individual
companies' ROICs gradually tend toward their industry medians over time but are
fairly persistent
19) Both high and low performers demonstrate significant stability in their performance.
Companies with high or low ROICs are most likely to stay in the same grouping (a 58
percent probability for those with ROIC of 5 to 15 percent, and an 83 percent
probability for those with ROIC above 25 percent)
20) Sustaining high growth presents major challenges to companies. Given the natural
life cycle of products, the only way to achieve consistently high growth is to
consistently find new product markets and enter them successfully in time to enjoy
their more profitable high-growth phase. Companies growing faster than 20 percent
(in real terms) typically grew at only 8 percent within five years and at 5 percent
within 10 years
21) Comparing the decay of growth to that of ROIC shown in the previous chapter, we
see that although companies' rates of ROIC generally remain fairly stable over time—
top companies still outperform bottom companies by more than 10 percentage
points after 15 years—rates of growth do not. Of the companies reporting less than
 5 percent revenue growth from 2000 to 2003, 44 percent continued to report
growth below 5 percent 10 years later. High-growth companies don't fare much
better: of the companies growing faster than 15 percent from 2000 to 2003, 37
percent grew at real rates below 5 percent 10 years later. Only 26 percent of high-
growth companies maintained better than 15 percent real growth 10 years later,
some of which was driven by the recovery from the recession, as well as by
increasing commodity prices and acquisitions
22) In order for economies of scale to be worth something and have implications for the
valuation of a particular company, they must be combined with customer (demand)
advantages that provide the company with a predominant share of the market in
question. By themselves, economies of scale aren't sufficient to produce meaningful
competitive advantages
23) So in general, returns on capital are what we call “mean-reverting.” In other words,
companies with high returns see them dwindle as competition moves in, and
companies with low returns see them improve as either they move into new lines of
business or their competitors leave the playing field

Behavioral:
1) Always rem if you are going to be net purchaser of stocks, you prefer prices falling
2) The rear-view mirror is one thing; the windshield is another. People remember the
recent past better than the distant past, and they informally generalize from a few
cases that are memorable rather than incorporate the full body of data into their
analysis. As a consequence, people assume that companies that have performed well
over the prior year or two are good bets for the future and expect that companies
that have disappointed will continue to perform poorly. We predict by extrapolation.
A more thorough examination of the correlation of past performance with future
return would reveal just the opposite: over a two- or three-year period, yesterday's
laggards become tomorrow's leaders, and vice versa
3) Great investment opportunity comes when a marvelous business faces a one time
huge but solvable problem
4) There are two types of business: One where you have to be smart every day, Two
have to be smart once
5) Always exhibit second level thinking – don’t go just by the headlines
6) First test is always, who doenst know that?
7) Value investors score their biggest gains when they buy an underpriced asset,
average down unfailingly and have their analysis proved out
8) Thus, it becomes tempting to relax rules and increase leverage. And often this is
done just before the risk finally rears its head. Always be alert and ready for worst
case even during best of times
9) Ways to counter mob mentaility: Here are the ones that work for Oaktree: • a
strongly held sense of intrinsic value, • insistence on acting as you should when price
diverges from value, • enough conversance with past cycles—gained at first from
reading and talking to veteran investors, and later through experience—to know that
market excesses are ultimately punished, not rewarded, • a thorough understanding
of the insidious effect of psychology on the investing process at market extremes, • a
promise to remember that when things seem “too good to be true,” they usually are,
• willingness to look wrong while the market goes from misvalued to more
 misvalued (as it invariably will), and • like-minded friends and colleagues from whom
to gain support (and for you to support).
10) Most people seem to think outstanding performance to date presages outstanding
future performance. Actually, it’s more likely that outstanding performance to date
has borrowed from the future and thus presages subpar performance from here on
out
11) In dealing with future to ensure not to get carried away – thing about what will
happen and whats the probability
12) Get a feel of where you are in the cycle. Are investors optimistic or pessimistic? Is
media in a frenzy? Are novel investment schemes being doled out? Are there too
many new fund offerings? Is capital abundant?
13) Coincidence looks like causality. Rem the alternative history phenomenon.
14) We need to remember, however, that an extremely high margin is suspect on two
counts. First, it may simply not be reasonable to accept the prediction that one
company's assets, on a sustained basis, will generate much higher earnings than
would similar assets in the hands of another company. Second, the more valuable
the franchise, the more attractive it will be to potential competitors
15) It is very easy as an investor to remember the exceptions—those companies that
managed to dig moats in tough industries, often through the vision of a talented
CEO. Companies like Starbucks, Dell, Nucor, Bed, Bath, and Beyond, and Best Buy all
created substantial amounts of shareholder wealth by thriving in extremely brutal
industries. But by anchoring on the success of companies like these and assuming
their experiences are the rule rather than the exception, we confuse the possible
with the probable. That’s not good, because a big part of successful investing is
stacking the odds in your favor

Mental Models:
1) When we make predictions, we often fail to recognize the existence of luck, and as a
consequence we dwell too much on the specific evidence, especially recent
evidence. This also makes it tougher to judge performance. Once something has
happened, our natural inclination is to come up with a cause to explain the effect.
The problem is that we commonly twist, distort, or ignore the role that luck plays in
our successes and failures. Thinking explicitly about how luck influences our lives can
help offset that cognitive bias
2) Most people have a general sense that luck evens out over time. That may be true in
the grand scheme of things. But the observation doesn't hold for any individual, and
the timing of luck can have a large cumulative effect. We can err in the opposite
direction as well, unconsciously assuming that there is some sort of cosmic justice, or
a scorekeeper in the sky who will make things even out in the end. This is known as
the gambler's turns out that many things in nature do even out, which is why we
have evolved to think that all things balance out. Several days of rain are likely to be
followed by fair weather. But in cases near the side of the continuum where
outcomes are independent of one another, or close to being so, the gambler's fallacy
is alive and well
3) Our results show that it is easy to be fooled by randomness, and we suspect that a
number of the firms that are identified as sustained superior performers based on 5-
year or 10-year windows may be random walkers rather than the possessors of
 exceptional resources. You have to untangle skill and luck to know what lessons you
can take from history. Where skill is the dominant force, history is a useful teacher
4) Our minds have an amazing ability to create a narrative that explains the world
around us, an ability that works particularly well when we already know the answer.
There are a couple of essential ingredients in this ability: our love of stories and our
need to connect cause and effect. The blend of those two ingredients leads us to
believe that the past was inevitable and to underestimate what else might have
happened
5) Any activity that combines skill and luck will eventually revert to the mean. This
means that you should expect a result that is above or below average to be followed
by one that is closer to the average. whenever the correlation between two scores is
imperfect, there will be regression to the mean . In some endeavors, such as selling
books and movies, luck plays a large role, and yet best-selling books and blockbuster
movies don't revert to the mean over time
6) Gladwell argues that the lore of success too often dwells on an individual's personal
qualities, focusing on how grit and talent paved the way to the top. But a closer
examination always reveals the substantial role that luck played. If history is written
by the winners, history is also written about the winners, because we like to see
clear cause and effect. Luck is boring as the driving force in a story. So when talking
about success, we tend to place too much emphasis on skill and not enough on luck.
Luck is there, though, if you look
7) Recent research shows that while some companies do sustain superior economic
performance, the rate of reversion to the mean today appears to be accelerating.
The research also indicates a clear link between the age of a firm and a decline in
economic profitability. Not only do companies see their performance deteriorate
with age, but the aging process is also happening faster because technology is
changing faster and the life cycles of products are getting shorter
8) A system in which events are dependent is a system that has memory of what
happened before. they are dependent, as many social interactions are, then the
distribution of luck is skewed. In a skewed distribution, good and bad luck are not
balanced, on average. Rather, a few benefit from extremely good luck. This means
that skill and success are only loosely connected. Events in such systems are not
random, but they are nonetheless unpredictable
9) Whenever people can judge the quality of an item by several different criteria and
are allowed to influence one another's choices, luck will play a huge role in
determining success or failure. For example, if one song happens to be slightly more
popular than another at just the right time, it will tend to become even more
popular as people influence one another. Because of that effect, known as
cumulative advantage, two songs of equal quality, or skill, will sell in substantially
different numbers. That makes it next to impossible to predict success
10) Social systems also have critical points and phase transitions
11) If you measured the performance of a trained sprinter on two consecutive days, you
would expect to see similar times. In statistics, this persistence is called reliability. If
luck is more important, then you would expect the reliability to be low. The test for
reliability, or persistence, measures the same quantity over different periods of time.
Statisticians assess persistence and predictive value by examining the coefficient of
correlation, a measure of the degree of linear relationship between two variables in
 a pair of distributions. Because high skill is associated with high correlations for
persistence and predictability, correlations allow us to infer a great deal about the
nature of the activity

Cognitive biases:
1) In the economy of action, effort is a cost, and the acquisition of skill is driven by the
balance of benefits and costs. Laziness is built deep into our nature.
2) But there were questions where no good answer came to mind, where all I had to go
by was cognitive ease. If the answer felt familiar, I assumed that it was probably true.
If it looked new (or improbably extreme), I rejected it. The impression of familiarity is
produced by System 1, and System 2 relies on that impression for a true/false
judgment beliefs
3) These findings add to the growing evidence that good mood, intuition, creativity,
gullibility, and increased reliance on System 1 form a cluster
4) In fact, all the headlines do is satisfy our need for coherence: a large event is
supposed to have consequences, and consequences need causes to explain them.
We have limited information about what happened on a day, and System 1 is adept
at finding a coherent causal story that links the fragments of knowledge at its
disposal
5) the halo effect is a good name for a common bias that plays a large role in shaping
our view of people and situations. It is one of the ways the representation of the
world that System 1 generates is simpler and more coherent than the real thing
6) The normal state of your mind is that you have intuitive feelings and opinions about
almost everything that comes your way. You like or dislike people long before you
know much about them; you trust or distrust strangers without knowing why
7) We do not expect to see regularity produced by a random process, and when we
detect what appears to be a rule, we quickly reject the idea that the process is truly
random. Random processes produce many sequences that convince people that the
process is not random after all
8) We defined the availability heuristic as the process of judging frequency by “the ease
with which instances come to mind.”
9) Using base-rate information is the obvious move when no other information is
provided
10) The most representative outcomes combine with the personality description to
produce the most coherent stories. The most coherent stories are not necessarily
the most probable, but they are plausible, and the notions of coherence, plausibility,
and probability are easily confused by the unwary
11) In The Black Swan, Taleb introduced the notion of a narrative fallacy to describe how
flawed stories of the past shape our views of the world and our expectations for the
future. Narrative fallacies arise inevitably from our continuous attempt to make
sense of the world. The explanatory stories that people find compelling are simple;
are concrete rather than abstract; assign a larger role to talent, stupidity, and
intentions than to luck; and focus on a few striking events that happened rather than
on the countless events that failed to happen
12) The conclusion is straightforward: the decision weights that people assign to
outcomes are not identical to the probabilities of these outcomes, contrary to the
expectation principle. Improbable outcomes are overweighted—this is the possibility
 effect. Outcomes that are almost certain are underweighted relative to actual
certainty. The expectation principle, by which values are weighted by their
probability, is poor psychology

Investing Methodology:
1) The raw materials for the process consist of (a) a list of potential investments, (b)
estimates of their intrinsic value, (c) a sense for how their prices compare with their
intrinsic value, and (d) an understanding of the risks involved in each, and of the
effect their inclusion would have on the portfolio being assembled
2) Once I’ve established the size of the company relative to others in a particular
industry, next I place it into one of six general categories: slow growers, stalwarts,
fast growers, cyclicals, asset plays, and turnarounds
3) Each time you buy a stock, write down why you bought it and roughly what you
expect to happen with the company’s financial results. I’m not talking about
quarterly earnings forecasts, just rough expectations: Do you expect sales growth to
be steady or to accelerate? Do you expect profit margins to go up or down? Then, if
the company takes a turn for the worse, pull out your piece of paper and see
whether your reasons for buying the stock still make sense. If they do, hold on or buy
more. But if they don’t, selling is likely your best option—regardless of whether
you’ve made or lost money on the shares

Valuation:
1) With no value for speculative growth, the accounting accounts for $14.63 of the $24
in market value, made up of $6.68 in book value and $0.684 + $7.27 = $7.95 from the
short-term forecasts. Thus the amount of the market price unexplained by the
accounting is $9.37. That is the value that the market is placing on speculative
growth. shows how I have deconstructed the market price into three components:
(1) the book value, (2) the value from short-term earnings, and (3) the value the
market places on subsequent speculative growth
2) With value set to Cisco’s market price of $24, we can infer the market’s long-term
growth rate: The growth rate, g, is that growth rate that reconciles the model to the
market price. The implied long-term growth rate for Cisco after 2010 is 5.63 percent
per year. (The corresponding rate for GE is 8.48 percent.) Rather than applying a
model to transform one’s own forecast to a value, we have applied the model in
reverse engineering mode to extract the market’s forecast.4 This is the way to
handle valuation models
3) Start by calculating the value implied by an accounting for value, identify speculative
value in the market price, transform that speculative value into an earnings growth
path, and then ask whether that growth path is a reasonable one
4) This is the case when firms expense R&D and brand-building expenditures, carry
inventory at LIFO (last in, first out), accelerate depreciation (with short estimated
asset lives), or keep intangible assets off the balance sheet. Indeed, this will always
be the case when accountants keep book values low on the balance sheet for any
reason; a lower book value results in a higher book rate-of-return (all else constant
5) Book rate-of-return is an accounting measure determined by how one accounts for
book value. It is not necessarily a measure of real business profitability. Accounting
that keeps book values lower generates higher book rates-of-return and higher
 residual earnings. Well, maybe or maybe not, but these accounting rates-of-return
cannot be taken as evidence. They simply represent that earnings from these
investments are flowing through their income statements, but the assets that
generate the income are missing from their balance sheets, due to the accounting
that typically excludes most intangible assets from the balance sheet
6) testing, we are really negotiating with Mr. Market
7) But could it be the firm with Accounting Treatment II? That firm is one with growing
investment (like Starbucks) but one subject to conservative accounting. The
accounting depresses operating income and RNOA, but the depressed earnings
mean more growth in the future. Starbucks’ accounting is indeed conservative. It
expenses advertising immediately, indeed all of its investment is in brand building. It
expenses training of its growing number of employees (its investment in its human
capital) immediately. It expenses all costs in developing its important supply chain
with coffee growers around the world. And it expenses store-opening costs, an
investment to produce future sales. With such a high-investment growth rate, the
effects on income are likely to be significant
8) R = (NOA*RNOA1/P) + ((1-NOA/P)*g)
is the book value of net operating assets relative to the market price of operations,
the enterprise book-to-price ratio of last chapter. The expression simply says that
the expected return from buying the business at its current market price (without
taking on the debt) is a weighted-average of the profitability, RNOA1, and expected
growth, g, with the weights given by the enterprise book-to-price ratio. Call it the
weighted-average return formula
9) The return of 6.97 percent for zero growth has a special meaning. It is the return to
the no-growth valuation anchored on the accounting for value. You may be skeptical
about growth, for growth is risky, so will not pay for it. To be conservative—to
maintain a margin of safety, as Benjamin Graham would advise—you might dismiss
growth; if so, you expect a 6.97 percent return by buying at $24. But the profile also
gives the payoff for added growth.8 So you understand the upside; you may only
earn a 6.97 percent return but, if growth of 4 percent materializes, you expect to
earn 10.48 percent, and if things were to go very well with 7 percent growth, you
expect 13.12 percent
10) To assure equivalence, however, it is necessary to: Use beginning-of-year invested
capital (i.e., last year's value) instead of average or current-year invested capital.
Define invested capital for both economic profit and ROIC using the same value. It is
critical to define NOPLAT consistently with your definition of invested capital and to
include only those profits generated by invested capital. Specifically excluded are
excess cash and marketable securities—that is, cash greater than the operating
needs of the business. Excess cash generally represents temporary imbalances in the
company's
11) In addition to invested capital, companies can also own nonoperating assets.
Nonoperating assets include excess cash and marketable securities, receivables from
financial subsidiaries (e.g., credit card receivables), nonconsolidated subsidiaries,
overfunded pension assets, and tax loss carryforwards. Summing invested capital
and nonoperating assets leads to total funds invested
12) Look back as far as possible (at least 10 years). Long time horizons will allow you to
determine whether the company and industry tend to revert to some normal level of
 performance, and whether short-term trends are likely to be permanent.
Disaggregate value drivers—both ROIC and revenue growth—as far as possible. If
possible, link operational performance measures with each key value driver. If there
are any radical changes in performance, identify the source. Determine whether the
change is temporary, permanent, or merely an accounting effect. If possible, perform
your analysis on a granular level, not just on the company as a whole. Real insight
comes from analysis of individual business units, product lines, and, if the data exist,
even customers
13) The level of NOPLAT should be based on a normalized level of revenues and
sustainable margin and return on invested capital (ROIC). This is especially important
in a cyclical business: revenues and operating margins should reflect the midpoint of
the company's business cycle, not its peak or trough. RONIC: The expected rate of
return on new invested capital (RONIC) should be consistent with expected
competitive conditions. Economic theory suggests that competition will eventually
eliminate abnormal returns, so for companies in competitive industries, set RONIC
equal to WACC. However, for companies with sustainable competitive advantages
(e.g., brands and patents), you might set RONIC equal to the return the company is
forecast to earn during later years of the explicit forecast period
14) Remember, the key value driver formula is based on incremental returns on capital,
not company-wide average returns. If you set RONIC in the continuing-value period
equal to the cost of capital, you are not assuming that the return on total capital (old
and new) will equal the cost of capital. The original capital (prior to the continuing-
value period) will continue to earn the returns projected in the last forecast period.
In other words, the company's competitive-advantage period has not come to an
end once the continuing-value period is reached
15) Asset value in strategic terms corresponds, therefore, to the free-entry (no
competitive advantage, level playing field) value of the firm— a circumstance that
probably characterizes a substantial share of all industries and markets. 1 For these
firms, the intrinsic value is the asset value
16) The second most reliable measure of a firm's intrinsic value is the second calculation
made by Graham and Dodd, namely, the value of its current earnings, properly
adjusted. This value can be estimated with more certainty than future earnings or
cash flows, and it is more relevant to today's values than are earnings in the past. To
transform current earnings into an intrinsic value for the firm requires us to make
assumptions both about the relationship between present and future earnings and
about the cost of capita
17) Resolving discrepancies between depreciation and amortization, as reported by the
accountants, and the actual amount of reinvestment the company needs to make in
order to restore a firm's assets at the end of the year to their level at the start of the
year
18) Thus, the EPV that equals the asset value defines the intrinsic value of the company,
regardless of its growth rate in the future
19) Consider the case in which the asset value of a company— the reproduction costs of
the assets— is greater than its EPV, properly calculated. There are only two
conditions in which we are likely to find these results. In the first, the firm's
management is doing a poor job by failing to earn as much on the assets as it should.
In the second, the industry is operating with more than normal excess capacity
 20) If the value investor identifies a firm with a franchise and good prospects for growing
the franchise, then he or she might pay for the full EPV of the firm, in the
expectation that the margin of safety will be created by the difficult-to-measure but
clearly genuine value of growth
21) Always remember the four drivers of valuation: risk, return on capital, competitive
advantage, and growth. All else being equal, you should pay less for riskier stocks,
more for companies with high returns on capital, more for companies with strong
competitive advantages, and more for companies with higher growth prospects.
Bear in mind that these drivers compound each other. A company that has the
potential to grow for a long time, with low capital investment, little competition, and
reasonable risk, is potentially worth a lot more than one with similar growth
prospects but lower returns on capital and an uncertain competitive outlook
22) To justify paying today’s price, you have to be plenty confident that the company’s
outlook is better today than it was over the past 10 years. Occasionally, this is the
case, but most of the time when a company’s valuation is significantly higher now
than in the past, watch out. The market is probably overestimating growth
prospects, and you’ll likely be left with a stock that underperforms the market over
the coming years
23) The second caveat concerns firms with ROEs that look too good to be true because
they’re usually just that. ROEs above 40 percent or so are often meaningless because
they’ve probably been distorted by the firm’s financial structure. Firms that have
been recently spun off from parent firms, companies that have bought back many of
their shares, and companies that have taken massive charges often have very
skewed ROEs because their equity base is depressed. If you see an ROE over 40
percent, check to see if the company has any of these characteristics

Warren Buffet:
Capex intensive: any change in sector will affect since investment will have to be at current
inflated prices, undifferentiated sectors must earn poor returns, no amount of cape will
change it, inflation will consume most of earnings,

Business choose: prefer tailwinds to headwinds, previous success due to tailwinds? Have to
be smart onces business as compared to smart every day business, unlikely to experience
major change,

Reinvestment: capital retained produces incr earnings above available to investors,

Howards Marks:
Second level thinking: What is the range of likely future outcomes? • Which outcome do I
think will occur? • What’s the probability I’m right? • What does the consensus think? •
How does my expectation differ from the consensus? • How does the current price for the
asset comport with the consensus view of the future, and with mine? • Is the consensus
psychology that’s incorporated in the price too bullish or bearish? • What will happen to the
asset’s price if the consensus turns out to be right, and what if I’m right? But in dealing with
the future, we must think about two things: (a) what might happen and (b) the probability
that it will happen
Accounting for value:
Value: involves either increasing profitability (the rate-of-return) or growing a balance sheet
that will add residual earnings, Growth that is valued does not come from earnings growth
but from residual earnings growth,

Valuation: deconstructed the market price into three components: (1) the book value, (2)
the value from short-term earnings, and (3) the value the market places on subsequent
speculative growth, R = (NOA*RNOA1/P) + ((1-NOA/P)*g),

Accounting: Firms can produce earnings and residual earnings with inventory write-downs,
as in the one-period example, or with impairments and restructuring charges to any asset
(that reduce further depreciation and other expenses). They will generate residual earnings
under the GAAP and IFRS requirement to expense R&D investments and brand-building
advertising expenditures, cookie jar accounting, firms expense R&D and brand-building
expenditures, carry inventory at LIFO (last in, first out), accelerate depreciation (with short
estimated asset lives), or keep intangible assets off the balance sheet to inflate ROE, They
simply represent that earnings from these investments are flowing through their income
statements, but the assets that generate the income are missing from their balance sheets,
due to the accounting that typically excludes most intangible assets, Book rate-of-return is
an accounting measure determined by how one accounts for book value. It is not necessarily
a measure of real business profitability, That firm is one with growing investment (like
Starbucks) but one subject to conservative accounting. The accounting depresses operating
income and RNOA, but the depressed earnings mean more growth in the future

Valuation by Mckinsey:
Value creation: companies that grow and earn a return on capital that exceeds their cost of
capital create value, FCF = NOPLAT * (1-g/roic). Value = FCF/ (COC-g), we should use the
return on new, or incremental, capital, but for simplicity here, we assume that the ROIC and
incremental ROIC are equal, Whether a company can sustain a given level of ROIC depends
on the length of the life cycles of its businesses and products, the length of time its
competitive advantages can persist, Sustaining growth is difficult because most product
markets have natural life cycles, Look back as far as possible (at least 10 years). Long time
horizons will allow you to determine whether the company and industry tend to revert to
some normal level of performance

Value investing by Bruce:

Principles: You have to wait for Mr. Market to offer you a bargain, the reproduction cost of
the assets is going to be the most appropriate measure— the intrinsic value— of the
company's worth, Resolving discrepancies between depreciation and amortization, as
reported by the accountants, and the actual amount of reinvestment the company needs to
make in order to restore a firm's assets at the end of the year to their level at the start of
the year, If the value investor identifies a firm with a franchise and good prospects for
growing the franchise, then he or she might pay for the full EPV of the firm, in the
expectation that the margin of safety will be created by the difficult-to-measure but clearly
genuine value of growth
Moats: in the world where businesses fiercely compete with one another, real barriers come
in very few forms, The clearest cut are governmental privileges, such as licenses, patents,
copyrights, or other protections that keep potential competitors at a safe distance. The
other barriers we have described stem from either cost (supply) or customer (demand)
advantages