The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market
by Pat Dorsey
updated 1d ago
by Pat Dorsey
updated 1d ago
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Johann Van Tonder added 6mo ago
Paying less taxes and buying back shares are good things for shareholders, no question, but they’re short-term fixes rather than long-term sources of earnings growth.
Johann Van Tonder added 6mo ago
reasonable to say that any firm that’s able to convert more than 5 percent of sales to free cash flow—just divide free cash flow by sales to get this percentage—is doing a solid job at generating excess cash.
Johann Van Tonder added 6mo ago
good way to think about the returns a company is generating is to use the profitability matrix, which looks at a company’s ROE relative to the amount of free cash flow it’s generating.
Johann Van Tonder added 6mo ago
For interest rates, you can use a long-term average of Treasury rates as a reasonable proxy.
Johann Van Tonder added 6mo ago
it’s better to assess risk by looking at the company, rather than by looking at the stock, and that a firm’s riskiness is determined by the likelihood that it will or won’t generate the cash flows that we’re forecasting.
Johann Van Tonder added 6mo ago
invert the P/E and divide a firm’s earnings per share by its market price, we get an earnings yield.
Johann Van Tonder added 6mo ago
The problem is that risk and growth often go hand in glove—fast-growing firms tend to be riskier than average. This conflation of risk and growth is why the PEG is so frequently misused. When you use a PEG ratio, you’re assuming that all growth is equal,
Johann Van Tonder added 6mo ago
ranges all the way from just 20 percent for very stable firms with wide economic moats to 60 percent for high-risk stocks with no competitive advantages. On average, we require a 30 percent to 40 percent margin of safety for most firms.
Johann Van Tonder added 6mo ago