The Little Books That Builds Wealth by Pat Dorsey

Chapt 12 - What is a moat worth?
Even the best company will hurt your portfolio if you pay too much for it

Bottom line
1. A company's value is equal to all the cash it will generate in the future.That's it.

2. The fourth most important factor that affect the valuation of any company are how much cash it will generate(growth), the certainty attached to those estimated cash flows(risk), the amount of investment needed to run the business(return on capital), and the amount of time the compnay can keep competitors at bay(economic moat).

3. Buying stocks with low valuations helps insulate you from the market's whims, because it ties your future investment returns more tightly to the financial performance of the company.

Chapt - 13
Tools for valuation - How to find stocks on sale

The bottom line
1. The price-to-sales ratio is most useful for companies that are temporily unprofitable or are posting lower profit margins than they could.If a company with the potential for better margins has a very low price-to-sales ratio, you might have a cheap stock in your sights.

2. The price-to-book ratio is most useful for financial services firms, because the book vaule of these companies more closely reflects the actual tangible value of their business.Be wary of extremely low price-to-book ratios, because they can indicate that the book vaule may be questionable.

3. Always be aware of which "E" is being used for a P/E ratio, because forecasts don't always come true. The best "E" to use is your own: Look at how the company has performed in good times and bad, think about whether the future will be a lot better or worse than the past, and come up with your own estimate of how much the company could earn in an average year.

4. Ratio of price to cash flow can help you spot companies that spit out lots of cash relative to earnings.It is best for companies that get cash up front, but it can overstate profitability for companies with lots of hard assets that depreciate and will need to be replaced someday.

5. Yield-based valuations are useful because you can compare the results directly with alternative investments, like bonds.

Lesson from Sub-prime crisis

From Richard Scully NCR Research 04-Apr 08
1. First sign of trouble, hit the door
2. For current stock pick, look for stock that has dropped 50 to 70 % from previous high.
3. Look for stock with single PE.
4. Look for stock that is cash rich.