Valuing a young company is one of the more difficult tasks in valuation. Trying to pin a value on a young company, startup, or idea business is difficult because of little or no revenues and large operating losses.

Other challenges are the short financial histories of young companies, plus the dependence on outside capital to start the business. All of those aspects make valuing these young companies much more challenging.

Other considerations are the fact that many new companies don’t survive beyond the first few years. As with any other company, you are basing any valuation work largely on estimations, and working with young or startup companies is no different.

In today’s post, we will learn:

• What are the four questions to ask?
• Avoid the dark side of valuation
• The Steps to Valuing a Young Company
• Putting it all to work with a real company
• Investor Takeaway

Okay, let’s dive in and learn more about valuing young companies.

What Are the Four Questions to Ask?

Before we can start valuing any company, we need to understand where each company is in its life cycle. Whether they are Amazon, Apple, or the most brilliant idea in someone’s head, each company is part of a life cycle. Each company, as they grow to go through this cycle, move from:

• Idea companies – no revenues, operating losses
• Startups – small revenues, increasing losses
• Second-stage companies – growing revenues, moving towards profits
• Mature companies – stable revenues, growing profitability
• Declining companies – falling revenues, stable profitability

As you can see from the list above, the newer companies have little to no revenue with zero profitability, so assigning a value should be difficult but not impossible.

Why is it not impossible?

Gross profit margin is one of the three main margins formulas in a company’s income statement which measures a company’s efficiency in creating profitability.

Gross profit margin, or “Gross Margin”, is basically how profitable a product or service is, before you account for the operating costs, taxes and interest payments to run the business.

This formula can be useful for uncovering if a company has a competitive advantage, more on that later.

To get a good sense of what makes a good gross margin, we will examine the average gross profit margin by industry over 20 years of data from the S&P 500. It’s not always the absolute gross margin which is most important when looking at this formula, but rather a comparison between peers.

This post will cover:

• The Basics of Gross Profit Margins
• Finding Gross Margin in the 10-k (Real Life Examples)
• Evaluating Companies Based on Their Gross Margins
• The Sustainability of Gross Margins
• Average Gross Profit Margin By Industry [S&P 500]

Alright, let’s take a deep (and important!) dive into gross profit margins and their prominent place in every company’s income statement/ P&L.

The sweetest source of returns in the stock market are compounding dividends. To generate serious wealth from investing, you need compound interest; and dividends provide you with the best of it.

To understand this magic, you must understand the power of compound interest.

Compound interest causes money to multiply.

It’s like a tree. Notice how the branches of a tree all sprout from each other. It started with a seed, which grew to a trunk, which started to sprout branches, and those branches sprouted branches, and on and on.

I again implore you to closely examine the branches of a tree.

You can see that a branch takes many routes to finally get back to its base. And the higher and further a tree grows, the farther and further it can continue until it reaches a massive size.

The same happens with your wealth with compound interest.

When you receive a return on your investments, and immediately reinvest that money into more investments, it’s like a branch which sprouts multiple more branches.

As time goes on, that reinvested money earns its own return, which then also earns a return, and multiples in a virtuous cycle.

Let’s look at a visual example of this.

American Express was one of the turning point investments for Warren Buffett. It was the beginning of his starting down the path to become the investor he is now. Buffett’s buying of American Express was the first of “buying wonderful companies at fair prices.”

Today, American Express is one of his largest positions; fifty-seven years later, he owns upwards of 18% of the company. And it continues to earn Buffett high returns on capital, one of his benchmark ideas behind finding wonderful companies.

In today’s post, I thought we would examine the status of American Express in 1964, along with the conditions that led Buffett to pull the trigger on one of his seminal investments. Along with examining the company and the economic conditions, we could look at what a valuation might have looked like in 1964, hindsight being 20/20 and all.

In today’s post, we will learn:

• American Express Business Model in 1963
• American Express Financials in 1963
• The Salad Oil Scandal
• Why Buffett Bought American Express
• Valuation of American Express in 1963
• Investor Takeaway

Myth #8 that Tony Robbins outlines in his book is that “You gotta take huge risks to get big rewards”. I’m sure that many of you have heard a phrase very similar to this, but is it true? Let’s break down the true risk vs. reward of investing in the market!

Personally, I love the title of this myth because I really do think that a lot of people think this way, but I also think that a majority of those people are those that might not necessarily understand how the stock market works. People believe that the market is nothing more than organized, legalized gambling and that if you risk it all, you can get really, really rich.

Well, this is certainly true in the sense that a high risk can definitely mean a high reward, but you can also get a high reward without having a major risk.

Robbins brings up a very famous quote from Warren Buffett about managing risk. Regarding investing in the market, “Rule No 1: Never Lose Money. Rule No 2: Don’t forget Rule No 1.”

Buffett is widely regarded as the greatest investor of all time and this simple quote really shows the importance that he personally places on protecting his downside when investing. If you can manage to never lose money, then your only other two outcomes are to make money or keep the exact same amount of money you have – both of which sound like decent outcomes! Although we all prefer to make some moolah 🙂

Robbins goes into his “four proven strategies for achieving strong returns while anchored firmly in calmer waters” – let’s dive in!

Structured Notes

Structured Notes are something that is not often available to the common people because the wealthy will take-advantage early on. Essentially, you are loaning money to the bank and in return, you get a certain amount of the upside that the bank receives from their investments; but you limit the downside as you’re guaranteed to get back at least the amount that you put in.

So, you might put in $10K and you’re guaranteed to get at least $10K back at the end of the term. For that guaranteed “protection”, you’re not going to get all of the profits if the market goes up as a sort of payment for that risk mitigation.

The concern with something like this is that these notes are only as sound as the bank that is backing them. While a bank might seem very reliable and one that would have a great balance sheet, Robbins brings up Lehman Brothers that also seemed like a great company until they went bankrupt.

Just because there doesn’t appear to be much downside risk, there still is. You always have to keep that in mind!

Market-Linked CDs

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Welcome to the Investing for Beginners podcast. In today’s show, we discuss:

• How to start investing, creating a plan, and deciding on your “why”
• The difference between retirement accounts, diversification, the impacts of inflation, and how to reduce fees.
• The six different investments for beginners to focus, and how to start dipping your toes into investing, even without a lot of money.

For more insight like this into investing and stock selection for beginners, visit stockmarketpdf.com

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Transcript

Announcer: [00:00:00] What’s the best way to get started in the market. Download Andrews ebook for free@stockmarketpdf.com.

Announcer: [00:00:13] I love this podcast because it crushes your dreams of getting rich quickly. They actually got me into reading stats for anything you’re tuned in to the Investing for Beginners podcast led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now.

Dave: [00:00:00] All right, folks. Welcome to Investing for Beginners podcast. Tonight, we have episode 201 tonight. Andrew and I are going to go back to the basics. We’re going to do a little refresher for those of you who are maybe just starting out with us tonight or just recently. Or any of those who view, who have been with us for a while might just need a refresher. It’s not bad to go back to the basics once in a while and think about how you get started with the stock market.

So I thought we would talk a little bit about some of the ideas about investing and how you get started investing. So let’s, I guess the first thing, let’s discuss. Why invest in the stock market? Why do we talk about this? Why do we want to do this? And really, it comes down to what is your plan and what are you trying to do?

And it really comes back to what are you investing for? Are you investing for your retirement? Are you trying to save for a home someday? Maybe you’re trying to save money to put your kid through school, or maybe you’re trying to start a legacy fund for your children. It doesn’t really matter what that is.

What’s your, why is what really matters is that you understand what the why is? Because before you can begin to do anything with investing in the stock market, any sort of money planning, you really need to figure out what your why is and how to go from there. So there are some different ideas that Andrew has. Some things he’d like to comment on before we proceed. So Andrew, take it away, sir.

Andrew: [00:01:34] I guess for me, one of the biggest visualizations for having a great why is financial freedom? On our tagline, your path to financial freedom, there’s a lot of stuff. I guess visualizations. You have some people who think about lying on the beach all day long.

The amortization of intangible assets can sometimes be hidden in the consolidated financial statements because amortization is grouped in with depreciation. But as the economy increasingly becomes more knowledge and intangible asset-based, investors need to more closely understand the accounting behind the amortization of intangibles.

Depending on the intangible asset in question, a large amortization expense can suppress ROIC over the short term until that amortization is fully expensed, particularly after a large one-time acquisition.

The longer the “useful life” of these intangible assets, the greater the potential impact to the balance sheet, and balance sheet/profitability metrics such as ROIC.

To fully grasp this concept, we’ll need to work through these topics:

• The Basics of Amortization of Intangible Assets
• Capital Allocation Decisions and their Impact to Long Term Assets
• Example: Suppressed ROIC due to Large Intangible Assets
• Investor Takeaway

Buckle up, let’s dig in.

Investors demand growth from companies. Wall Street loves growth. But how is company growth defined exactly?

In this post we’ll examine 4 separate types of company growth rates and how they can be improved, and which types tend to receive more focus… depending on the company itself. First, let’s start with the bottom line, or Earnings Per Share.

1—Earnings Per Share Growth

Earnings per share (EPS) is basically the lifeblood of Wall Street. Maybe legendary fund manager Peter Lynch from Fidelity’s Magellan summed it up best:

“Behind all the smoke and noise on the market’s surface, it’s important to remember that companies — small, medium, and large — make up the market’s backbone. And corporate earnings drive stock prices.”

The formula for EPS is the following:

EPS = (Earnings) / (Shares Outstanding)

From a conceptual standpoint, earnings per share makes a lot of sense because it refers to the earnings available to each shareholder (per share).

If you are new to investing, all the terms and jargon might seem overwhelming. But today’s post will help you learn some of the more common terms used in investing. Remember, learning to invest is like eating a pizza; you have to eat it piece by piece, and eventually, you will have it all down.

In today’s post, we will learn:

• Different Investment Types
• Investing Platforms
• Types of Retirement Accounts
• Financial Statement Terms
• Financial Ratios and Associated Terms

Okay, let’s dive in and learn more about investment terms everyone should know.

Different Investment Types

There are multiple ways to invest your hard-earned money; below are a few of the common investment types. There are other choices for investments, such as crypto, art, collectibles, and futures, but these are the most commonly used terms.