Glossary

A hands-on approach to portfolio management whereby the portfolio manager buys and sells investments as their prospects change.

A common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1% or 0.01%; 100 basis points equals 1%.

Investment strategies structured without regard for a given index’s composition. Investment managers who manage with an absolute type return mindset are generally benchmark agnostic.

Generally, the result of subtracting a company’s liabilities from its assets. There are nuances.

The construction of portfolios by performing fundamental analysis on individual securities rather than making macroeconomic assumptions (top down).

The amount spent to acquire or improve productive assets in order to maintain or increase a company’s capacity and efficiency for a period greater than one year.

A high-quality company with the potential to consistently compound shareholder wealth at attractive levels over the long-term.

The tendency of people to favor information that confirms their existing beliefs and to reject disconfirming information.

An investor who goes against prevailing market trends (i.e. zigging when others are zagging).

A security that can be converted into another security. Generally, this refers to convertible bonds and convertible preferred stocks that pay interest and can be converted into shares of common stock (based on certain factors). Convertible bonds are sometimes referred to as stocks on training wheels.

The difference in yield between a U.S. Treasury and another debt security of the same maturity but different credit quality (e.g., corporate bond). Essentially, it is compensation for default risk.

A valuation method used to estimate the value of an investment based on its future free cash flows, discounted to the present.

The rate (required rate of return) used in a discounted cash flow analysis.

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates. The lower the duration, the less sensitive a bond or bond portfolio is to a change in interest rates.

Earnings before interest, taxes, depreciation and amortization.

A company’s ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share. Much like a moat kept invaders of medieval castles at bay, an economic moat keeps competitors from destroying a company’s profits.

A measure of a company’s total value: market cap plus debt, minus cash.

The involuntary sale of assets or a security at virtually any price to create liquidity. Forced selling can create opportunities for the prepared. Think of it as the transfer of assets from weak hands to strong hands.

Cash flow minus capital expenditures (Capex).

A company’s free cash flow per share divided by its current market price per share.

A method of valuing a security that attempts to measure its intrinsic value by analyzing financial and other quantitative and qualitative factors.

Generally Accepted Accounting Principles.

The tendency to build one’s perspective from recently available information to argue that what happened at a certain point in the past was more predictable than it actually was based on information available at the time.

The estimated value of a business, calculated using fundamental analysis.

A value investing concept whereby a stock’s market price is less than the estimated intrinsic value. It is not a guarantee against loss or future returns.

Income from a company’s primary business operations, excluding extraordinary income and expenses.

A stock’s market price divided by its trailing, forward or other earnings calculation.

One measure of a company’s capital efficiency. Value creation occurs when a company’s ROIC is greater than its cost of capital. The formula is net operating profit after-tax (NOPAT) divided by invested capital, generally.

A measure of profitability that calculates how many dollars of profit a company generates with each dollar of shareholder’s equity. The formula is net income divided by equity, generally.

When a company buys back its shares from the marketplace. Some management teams buy back shares opportunistically as a capital allocation decision, yet others buy back shares in a mechanical fashion to offset dilution from options.

A division of a company that is spun out into an independent business. Shareholders of the parent company receive shares in the new company to compensate them for the loss of equity in the parent.

Accounts for price change and income received.

An investment philosophy rooted in fundamental analysis that has two core tenants: margin of safety and intrinsic value. The goal is to calculate an intrinsic value for each company and invest when shares are trading at a discount to intrinsic value, thus creating a margin of safety. A margin of safety helps reduce the risk of a permanent loss of capital, but is not a guarantee against loss or future returns.

Plots the yields of bonds with like credit ratings, but different maturities. The yield curve is generally upward sloping (normal), flat or inverted (atypical). An inverted yield curve occurs when short-term yields are greater than long-term yields.