Global Value Investing

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A multifaceted approach to value investing with stock valuation based on intrinsic value estimated from cash returns, appraised value of assets, and other facets of value.

 

 

Glossary

This is a selective glossary for value investing terms only. For a more comprehensive financial glossary, see the most popular textbooks for investments. These definitions are included for certain terms that appear at this website. Following this is a list of other keywords for use in web-wide searches.

Definitions:   A to M   |   N to Z   |   Keywords

Petersburg paradox : Also known as St. Petersburg paradox. As applied to stock valuation, what is the investment value of an infinite series of perpetually increasing cash payments that become infinite in size? The mathematical expectation of the series is equal to infinity. Is the present value therefore infinite? The principle of the mathematical expectation of monetary gains has proven to be open to question in the case of the St. Petersburg Paradox outlined by Nicolas Bernoulli. See the entry for Allais paradox.

prediction : an estimate based on understanding the causal relationships among the key variables in a system; contrasted with a forecast which is an estimate based on a projection of historical data into the future.

rationality, market : although individual market participants may vary in their degree of rational choice and rational action, the aggregate outcomes for the market as a whole are considered rational to the extent that the market is efficient.

replacement cost : a balance sheet concept for a ceiling for valuation of a company; equal to the replacement cost of its assets minus its liabilities. It is an upper limit on value to the extent that if the market price of the common stock was too far above its replacement costs, competitors would try to replicate the company.

resource conversion : redeployment of assets to higher uses, other ownership, or control; financing of asset acquisitions, refinancing of liabilities, or both. Includes mergers and acquisitions, hostile takeovers, goings-public, goings-private, leveraged buyouts, management buyouts, and restructuring troubled companies.

safety margin :
the difference between price and value for a common stock.

screen : also known as filter; a criterion used to reduce the universe of securities to a short list for deeper investigation. For example, a no-load screen for mutual funds, a minimum $5.00 per share price screen for common stocks, or a socially responsible investing screen for stocks or mutual funds. Screening can be done with one or more criteria and is sometimes combined with sorting in some rank order. Note that screening and sorting are not valuation. For example, no-load mutual funds ordered by annual operating costs from lowest (best) to highest (worst), dividend-paying stocks ordered by dividend yield from highest (best) to lowest (worst), or profitable companies ordered by return on equity from highest (best) to lowest (worst).

technical analysis :
a method of analyzing common stock prices that uses market-generated data such as share price and share trading volume in order to time market turns.

timing :
a.k.a., market timing; using market-generated data such as share price and trading volume to predict future stock prices.

total return : price change (capital appreciation; gain if positive and loss if negative) plus dividend income measured in the local currency of the bourse, expressed in average annual percentage. The total return for the S&P 500 Common Stock Price Index would include reinvested dividends.

unit price : any measure used in unit pricing; expressed either in number of units per dollar or other currency or in dollars or other currency per unit; for common stocks, unit prices for what an investor gets by owning the stock are commonly expressed as price ratios; for example, the P/E ratio can be expressed as the dollar market price per unit of earnings, the P/BV ratio can be expressed as the dollar market price per unit of book value, and the dividend yield or D/P ratio can be expressed as the number of dividend units per dollar market price; price is not value, and unit pricing is not valuation.

valuation : estimating the worth of an investment by one or more methods using either economic stocks or economic flows. Stocks and flows are two sides of the same coin, and each can be expressed equivalently in terms of the other. The method of appraisal involves an estimation of appraised economic value as determined from assets which is an economic stock. Appraised economic value may be either absolute or comparative. The method of anticipation involves an estimation of intrinsic economic value as determined from projected cash returns which is an economic flow. Intrinsic economic value is independent of current market price and is usually indicated by terms such as future, projected, forecast, predicted, expected, potential, power and outlook. The future cash flow stream is discounted to a present equivalent economic stock. A thorough analysis will include both intrinsic economic value and absolute appraised economic value.

value : a misleading term when not qualified by a descriptive adjective. Three concepts of value as applied to common stock must be distinguished: accounting value, economic value, and market value. (1) Accounting value is also known as book value or net worth. (2) Economic value based on discounted cash flow is also known as intrinsic value. (3) So-called market value is also known as market capitalization of equity and is equal to market price per share multiplied by the number of shares outstanding. Related concepts are investment value, book value, and breakup value. See accounting value, economic value, and market value. A less ambiguous distinction is between deep value and surface value. Deep value is investment value based primarily on economic value and buttressed by accounting value, quality and other aspects of value independent of market price. Surface value is a misnomer -- it is not really value but rather market price, usually expressed as a ratio either with accounting items such as earnings, dividends, net worth, and sales, or with growth rate. Surface value is analogous to unit pricing of fungible commodities by number, by volume, and by weight, for comparison shopping without regard to quality.

value investing (approach) : also known as intrinsic value investing; an approach that combines both a unique philosophy and a corresponding method of valuation. The philosophy emphasizes the valuation of individual companies as going-concerns and seeks long-term total return on equity investment subject to preserving the purchasing power of invested capital. The method of investment valuation is the estimation of absolute intrinsic economic value based on the discounted cash flow of expected dividends or free cash flow to equity owners.

value investing (style) : an ambiguous term that generally refers to the use of fundamental analysis with an emphasis on absolute book value and on comparative market value using price ratios rather than on forecasts of earnings growth rates. The method is often mechanical screening and sorting based on price to earnings ratio or P/E, price to book value ratio or P/BV, and dividend yield or dividend to price ratio or D/P, but not the method of discounted cash flow. Thus, this style might equally well be referred to as price investing. Some economic value is associated with growth, but some economic value is associated with decline, as in bankruptcy liquidations. It is often contrasted with growth investing, but the two styles are like Siamese twins joined at the hip.

volatility : variability or fluctuation in a time series or sequence of data. Price volatility is the ups and downs of market price over time. Volatility is often measured by the standard deviation statistic. Volatility, like the beta statistic, is used in pricing models as opposed to valuation models as a proxy for risk. Volatility, like beta, is based on historical data and thus is subject to change as conditions change.


Keywords

A anomalous pricing, arbitrage, asset allocation, asset pricing circularity, asset pricing models, autoregression
B beta coefficient, Buffett
C capital asset pricing model, CAPM, capital market line, CML, charting, circularity, common stock, contrarian, cycle
D data snooping, diagonal model, dividend yield, dynamic pricing
E earnings yield, economic value added, EVA, efficient markets hypothesis, EMH, equilibrium, excess return, expected return
F fallacies of composition and division, feedback trading, financial fad, fluctuation, fundamental valuation theorem
Gglamour stock, Group of Seven nations, Graham and Dodd
H high-technology
I index investing, indexing, industry effect, investment strategy
JJanuary effect
K Kondratiev wave
Llogical circularity
Mmarket efficiency, market timing, martingale stochastic process, mathematical identity, modern portfolio theory, MPT, momentum investing, moving average, multivariate CAPM, MCAPM
Nnormal distribution (a k a Gaussian)
Ooscillator
P persistent anomaly, pricing effect, portfolio, portfolio selection, portfolio performance
Q q or Tobin’s q, quantitative analysis
R research and development, R&D, random walk stochastic process, real return, research and development, return on equity, return on investment, risk-adjusted return, risk factor, risk premium, risk-free rate
S seemingly unrelated regression, Sharpe-Lintner-Black CAPM, Sharpe-Lintner-Mossin CAPM, Stable Law distribution, stock market, stock market pricing process, stock prices
Ttechnology stock
Uunivariate CAPM, UCAPM
Vvalue, value investing
Wwave, world competitiveness
Xx.d. or ex-dividend
Yyield curve
Z zero-beta portfolio


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