How To Value A Stock For Dummies

So since I was 19 years old, I have been obsesses with learning how to put money into the stock market and take more out. You can call it investing, valuation or analysis but at the core, that’s all every single person is trying to do.

Now I live by a simple philosophy, “ Money see, Monkey do”; and this works like magic. You have to be careful which monkey you try to learn from. My monkey, Mentor is warren buffet. The problem is, when someone has such a profound understanding of something they tend to over simplify it

Its like my friend who loves fishing, he tells me tommy, just stay still and pull when you feel a bite. 3 hours later and no fish, I realize it was a little harder than he let one

In this video, you will not hear me say big words, no PE ration, PEG ratio, Beta, Alpha, intrinsic or Book value, just forget it. This is a video for dummies who will leave understating value forever.

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1. What is a Business Worth

-Warren buffet says this “ “The value of a business is the cash it’s going to produce in the future.”

-What does that mean exactly

-The answer its simple ( I’ll be attempting to translate this via some examples of a farm )

How much is a farm animal worth ( lets say a chicken )

-To buy the chicken it cost a certain price, lets say $100 ( sunk cost )

-The chicken produces Eggs ( Revenue )

-To maintain the chicken there are expenses ( cost of sales )

So here is the idea:

-If this chicken cost $100, and makes Free cashflow of $20 a year from the eggs, for the next 10 years, then we cut it and sell the meat for $50.

-Its easy this chicken its worth all the money we will get out of it, lets say 20×10 years makes us $200

-The value of this chicken is $200 and we can buy it today for $100

2. Discount rate

But is it though, because by investing into that chicken we just left a Cow investment on the table

The discount rate, is basically what you could make somewhere else (without any risk )

To discount cash flow appropriately:

Its simple you have to discount todays cash flow, against the opportunity you would have somewhere else

The formula for this is 1/(1+r)^Year

And this basically tell you what that money is worth later in time

So is the Chicken a good investment

Yes

3. Margin of Safety

This is simple, its like an bridge, when they build a bridge with a maximum weight of 1000 cars and it can only fit 500 cars

Its to make sure that just in case, if anything goes wrong, theirs more than enough coverage

That’s the margin of safety, and in investing we don’t know what the future might bring

So we have to buy it below whats its worth, to get a margin of safety

So if its worth 170 and we pay 100, we are getting a margin of safety of 70% ( not bad )

But if we paid 150 and cash flows slow down to 10 eggs in the last 5 years ( we lose money )

4. The Farmer and his chickens

-The cool thing is with this example, that famer is always willing to sell you a chicken at his prices and always to buy a chicken at his prices

-Some days he will be crazy, and say I want 200 for a chicken that can only $20 worth of eggs, bad deal

-Sometimes he’ll say I want $50 and that’s a good deal

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*Some of the links and other products that appear on this video are from companies in which Tommy Bryson will earn an affiliate commission or referral bonus. Tommy Bryson is part of an affiliate network and receives compensation for sending traffic to partner sites. The content in this video is accurate as of the posting date. Some of the offers mentioned may no longer be available. I’m an Accountant but I’m not your Accountant, always review information with your Accountant/CPA and your Financial Advisor.

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