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Value Investing Glossary

10-K: A yearly review of the status of a business. This document is filed with the SEC, and can be found at www.sec.gov. See Annual Report.

10-Q: A quarterly review of the status of a business. This document is filed with the SEC, and can be found at www.sec.gov.

Accelerated Depreciation: A method of depreciation in which larger deductions are taken in the early years of an asset's life.

Accounts Payable: Money that is owed to suppliers.

Annual Report: A yearly review of the status of a business that a company sends to its shareholders every year. A company's annual report is usually similar to its 10-K filing, but 10-Ks are usually all text, while annual reports are usually loaded with pictures and graphs.

Arbitrage: The purchase and sale of a single security in two different markets. For example, suppose that Costco stock is selling for $30 per share on the NASDAQ and $31 per share on the Chinese market. I might buy costco on the NASDAQ and short it on the Chinese market in order to pocket the $1 difference.

Asset Class: A type of investment. Stocks, bonds, and cash are asset classes, as are large cap stocks, foreign stocks, investment grade bonds, junk bonds, etc.

Balance Sheet: A financial statement that details a company's assets, liabilities, and shareholders' equity.

Cash Flow Statement: A financial statement that details the actual cash that flows into an out of the business.

Combined Ratio: An insurance company's combined ratio is its total expenses (underwriting expenses plus incurred losses) as a percentage of revenues. If you subtract this number from 1, you'll get the underwriting profit margin. For example, if Jeff's Insurance Co has a combined ratio of .96, its underwriting profit margin is 1 - 0.96, which is .04 (4%).

Cost Basis: The original cost of an investment, minus any adjustments that may be required for tax purposes.

Credit Rating: An assessment on an entity's ability to pay its debt, which is usually made by Moodys or Standard and Poors. For example, if company XYZ has a high credit rating, its bonds are considered to be safe investments. Ratings range from AAA(highest) to D(deafult). See www.moodys.com and www.standardandpoors.com for more information.

Depreciation: See Straight Line Depreciation

Dollar Cost Averaging: A strategy in which a person invests a certain amount of money per month, every month, in the stock market.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. This metric is widely used in the financial industry, but it isn't very useful by itself; it ignores depreciation which represents an actual cost.

Float: Money that a business holds but does not own. For example, insurance companies generate float because they receive premiums before they must pay out claims.

Free Cash Flow: The amount of cash that has been earned by a business in a given year. Defined as a company's cash from operations, minus capital expenditures, minus stock option costs.

Insolvent: Unable to pay off its debts.

Intrinsic Value: the Net Present Value of all dividends that will be paid to a company's shareholders.

Inventory Turnover: The number of times that a firm's inventory is replaced in a given year. Defined as a company's annual cost of goods sold divided by the its average inventory over a one year period.

Investment Grade: A debt obligation that is rated Baa3 or higher by Moodys, or BBB- or higher by Standard and Poors.

Junk Debt/Junk Bond: A debt obligation that is rated Ba1 or lower by Moodys, or BB+ or lower by Standard and Poors.

Maintenance Capital Expenditures (or Maintenance Cap Ex): The money that a business must invest in properties, plants, and equipment in order to maintain its operations and its competitive position. This does not include investments that must be made in order to grow the business.

Maturity Date: The date on which a bond issuer pays the bond's principal to its investors.

Net Present Value: The current value of a future dollar. Defined as (future payment) divided by 1 + (discount rate / 100) to the power of (number of years until the payment will be received).

Owner's Earnings: Defined as Net Income + Depreciation - Maintenance Cap Ex

Principal: The amount of money that has been lent.

Salvage Value: The estimated value that an asset will have at the end of its useful life.

Short: To sell shares in a stock that you do not own; i.e., to own a negative number of shares.

Straight Line Depreciation: Long term assets decrease in value over time, and "depreciation" estimates this decrease. For example, if my company buys a building for $300,000, if the building has a salvage value of $0, and if that building has a useful life of 30 years, I will take a $10,000 depreciation expense each year.

Undervalued Stock: A stock that is trading at a discount to its intrinsic value.

Useful Life: How long an asset is expected to be useable.

Zero Coupon Bond: This type of bond does not pay interest over time. All interest is paid when the bond reaches its maturity date.