First things first, every time the topic of EPS or P/E Ratio come up, I can't help but do a quick search on Investopedia to refresh my understanding on what it is.
EPS - Earnings Per Share
Let's take the exameple that Company XYZ Inc. has made a $125,000,000 and the company decides to gie out $1,000,000 in dividents. They had 10M shares outstanding the first half of the year and then 14M shares the second half.
So... to get the EPS we do....
(Net Income - HOW MUCH THEY ARE GIVING OUT ) / Average Outstanding Shares
So... in this case the Average Outstanding Shares would be 12M. Thus, we get...
($25M - $1M) / 12M = $2 per share.
Also, be careful with my terminology. Is it Net Income - Dividends OR Net Profit - Dividends? The examples SO far, all seem to say Net Income, so I just wanna be clear of that. The reason I am asking this is suppose XYZ Inc uses $5,000,000 from the $25,000,000 to invest in buildings or something. Will the EPS be calculated with $25,000,000 or the $20,000,000 that's left over?
Also, the reason I capitalised HOW MUCH THEY ARE GIVING OUT, is because I wanted to know if it only applies to dividends. Suppose a XYZ Inc. wants to donate $1,000,000 to a charity. Is the new equation
($25M - 2M)/12M
Now, the most important question I have, is about the actual value of the EPS. A $2 EPS... what does this mean exactly? To me it sounds like the company profited 2 dollars for every share owned... but this is still a bit cloudly to me. If you know, could you please go a little in depth with this, because I literally have to Google EPS, everytime it comes up. Sometimes people say things like... the investor pays $2 for every dollar the company earns but what does that even mean. Sounds like I am losing money, if I am PAYING 2$ for every $1 it earns.
Next, we have the Price to Earnings Ratio. From my understanding, EPS alone can not provide the investor with enough information to many any kind of remarkable decision. However, you van use the EPS to use to generate different kinds of ratios which may actually give you some good information and make smart comparisons between companies. To begin...
P/E Ratio = Stock Price / Earnings Per Share
To exemplify, if XYZ Inc. is at $10 / share, their P/E ratio = $10 / $2 = 5
Therefore, it's trading @ 5 times earnings.
Now suppose a similar company is at $25 a share and their EPS is $1.95. Their P/E ratio 12.8.
To me, XYZ Inc. is a way better (valued) company of the two, because it may be undervalued and it's got a higher EPS (if that's something I should look at). But what about the P/E ratio? Is a lower P/E ratio always better? I guess I should watch Is Stock With a Lower P/E Always A Better Choice?.
** Also, a reminder, if I say something that is not correct, please do not hesitate to correct me, I want to learn value investing from those have knowledge in this topic so I too can be an intelligent investor. **
Yields & Bonds
To begin, let's dive quickly into bonds. Whereas a stock is an ownership in a piece of company and if you are an investor on a publicly traded company you are apart of it's earnings and assets. Bonds, on the other hand are a "loan" that entities (government, institutions, etc) sell to investors so that the entity doesn't have to go to the banks and stuff.
That being said, all bonds have the following: (, right?)
- Face Value: The price each bond is sold for (typically they are several hundred dollars)
- Coupon: Interest rate it will give back to you
- Maturity Date: The date that you can sell back your bond and get the initial loan back.
In addition, you can sell your bond before maturity... this is something that's still cloudy... is there a website or something where people go and upload/sell their bonds. Kinda curious about how this works :D
Anyways... the real confusion is when bond yield comes in to play. So a bond yield is just the return percentage, right?!
YIELD = (Interest Rate / Bond Price) × 100
And I get the philosophy of how bond yields vary inversely with the market price of the bond. ie.
When bond price goes up, yield goes down. When bond price goes down, yield goes up.
So why would I care about the price of a bond? Isn't the goal to have a high yield through out the duration before maturity? I am out here trying to make money, so you are telling me I can make more if the bond I bought loses value? Something doesn't add up.
Here is a quote of something Graham initially spotted in 1957 before it became noticeable to everyone in 1959.
Never before had stocks yielded less than bonds; after all, since stocks are riskier than bonds, why would anyone buy them at all unless they pay extra dividend income to compensate for their grater risk? ...
More than four decades later, the relationship has never been normal again; the tield on stocks has (so far) continuously stayed below the yield on bonds. [Zweig 114]
Uhhh..? WTF WHY! Sorry, but I don't know what to take of this. This is kinda crappy, is it not?
Anyways, I wanna wrap this u shortly, but this chapter briefly discusses Dollar Cost Averaging and I believe I have a good understanding of it and it seems okay!
Basically, I am essentially devoting $X amount, let's say $500, every month to buy a specific stock. So if a stock was averaging $50, it will give me 10 shares, if it was $54, I will buy 9 shares.
One thing I wanna cover is... does the algorithm wait until the end of the month to look at the average price? Suppose the average price was $49.50 but the price on the last day of the month pushes the average to $50.34?
So, when I decided to YouTube search dollar cost averaging, some of the suggestions were negative, in the sense that, thi strategy is a "losing" strategy. But it didn't resonate with the way my understanding of it, but whatever.
Lastly, there is one last image/chart I want to share with you about Dollar Cost Averaging, that I am having trouble understanding. Figure 5-1 shows the magic of Dollar Cost Averaging in a more recent bear market.
Done.
Anyways, if this helps at least one other person, I will try and do this again next weekend with Chapter 6. The Universe has just kept me so busy, I have been behind for months in this book. Thank you everyone for taking the time to reply or view anything by a complete n00b.
Submitted June 29, 2017 at 09:26AM by igotlove4every1sueme http://ift.tt/2s5qqmI
