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Copyrighted Material ch10_IND_4502.qxd 9/8/05 10:53 AM Page 277 INDEX Abercrombie & Fitch, 109, buy-side, 100–101, 259 strategy, 98 114, 145 recommendations, 35–36 types of, 217 About.reuters.com, 120 reports, 40 Asset management firms, Accounting periods, 43 track record of, 120 41 Accounting systems, types Angel investing, defined, Auditor’s report, 60 of, 57–58 225 Audits, financial Accounts payable, 51–52, Angel investors statements, 61 273 characterized, 41–42 Automatic payment plan, Accounts receivable, 273 group meetings, as 17, 239 Acquisitions, 61, 76 information resource, Automobile industry, 156 Active management, 258 37–38 AutoZone, 126–127 Activity ratios, 66 Annual accounting period, Average annual returns, Actuaries Share indexes, 72 43 216 Additional paid-in capital, Annual reports, Average price, 174 273 information provided Aggressive growth, 19 by, 27, 40–41, 49, 53, Back-office systems, 110 Aggressive stocks, 224 56, 59–60, 96, 234 Bad debt, 112 Albertson’s, 134 Apple Computers, 132, 227 Bad news Alcoa, 108 Application forms, as buying opportunity, Allied Chemical, 253 dividend reinvestment 162–164 ALLTEL Corp., 82, 84 plans (DRPs), 179 impact of, 148 Alpha, 138 Applied Materials, 35, 108, Balance sheet Alternative investing, 22, 156 analysis of, 111–112, 151 225, 237–238, 258 Arbitrage, 258 annual, 50 Alternative minimum tax Ask, 25 assets, 51–52 (AMT), 258 Asset(s) cash, 53–54 Amazon.com, 132 allocation of, see Asset defined, 273 America Online, 119 allocation format of, 53 American Express, 68, 135 characteristics of, 51, 62, importance of, 55 American Stock Exchange 80 information provided by, (AMEX), 24–25COPYRIGHTEDclasses, 18–19, 213, 217,MATERIAL52–55, 62, 81–82 Ameritrade, 12, 16, 36 226 liabilities, 51–52 Amortization, in valuation information resources, limitations of, 55 process, 88, 91–92, 105 parts of, 51 259 quality, 68 purpose of, 50 Analysis, types of, see Asset allocation return on equity (ROE), Fundamental analysis; advantages of, 140, 217 80 Technical analysis purpose of, 220 shareholder equity, Analyst(s) risk management and, 51–52, 69 bias, 100–101 214 strong, 173 277 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 278 278 Index Banking industry, 137. See defined, 259 Business trends, 20 also Financial services determination of, Business Week, 37 industry 151–152 Buy-and-hold strategy, 98, Bank loans, requirements implications of, 78, 117, 130–131, 161–162, for, 41 143 235, 252 Barron’s, 37, 173 Boom-bust cycle, 71 Buying below book strategy Basic earnings per share Borrowing, monitoring book value (EPS), 63–65 strategies, 112 determination, Bass family, 173 Boston Scientific Corp., 151–152 Baxter International, 158 204–208 case study, 152–153 Bear market, 133, 149, 161, Brand names, 174 checklist for, 154 222, 253 Breakup value companies, defined, 151 Behavioral finance, 153–155 Buying decisions 198–199 Bristol-Myers, 253 mistakes, dealing with, Bel Fuse, 24 Broker(s) 196 Berkshire Hathaway, 23, 26, commissions, see thesis statement 135 Commissions development, Beta, 138, 214, 258 discount, 16, 231, 241 186–189, 200 Bid, 25 full-service, 13–15, Buying opportunities, BJ’s Wholesale Club, 134 230–231 selection factors Blockbuster, 170 functions of, 12–14 intelligent investing, Block trade, 118, 259 licensure, 13 127–129 Bloomberg, 37 Brokerage accounts, types market capitalization, Bloomberg Television, 37 of, 268–269 124–125 Blue chip stocks, 157, 176, Brokerage firm(s) patience, 129–130 224. See also specific automatic payment per-share growth, companies plans, 239 126–127 Board of directors, discount, 12–14, 16, 20 Buy list, 147 functions of, 23, 259 dividend reinvestment Buy low, sell high strategy, Bogle, John, 27 plans (DRIPs and 156–157, 271–272 Bond(s) DRPs), 176–179 Buy side, defined, 259 advantages of, 136, 215 fees, see Commissions; Buy-side analysts, 100–101, buying process, 230–231 Fees 259 consistent income, 229 full-service versus diversification strategy, discount, 13–14, 16 Call options, 259, 267 223, 228 information resources, Call risk, 230 goal-setting, 230 15 Capital Cities/ABC, 27 issuance of, 51 minimum investment, 17 Capital expenditures, 91, maturity of, 54 selection factors, 15 135, 143–144 payable, 51 Broker-dealers, 24 Capital gains, 15, 197, 218, prices, influential Brown, John, 30 259–260 factors, 221 Buffett, Warren, 23, 26–28, Capitalizations, 253. See also risk management, 96, 98, 103, 135–136, Market capitalization 229–230 167, 250, 252, 255, 263 Capital preservation, 19, sell process, 230–231 Bull market, 116, 161, 168, 211 stability, 228–229 222, 232 Cash, see Cash flow; Cash taxation, 229 Business acumen, 98–99 flow analysis; Cash transaction costs, 231 Business cycles, 130 flow statement Bond funds, 21, 223 Business expansion, 148 asset conversion to, 151 Book value Business magazines, 37 conversion cycle, 66 buying below, see Buying Business plan, analysis of, implications of, 54 below book strategy 107–108 from investing, 56, 62 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 279 Index 279 investments, advantages Circle of competence, Current assets, 53–54, 111, of, 216 26–27, 210, 227–228, 260, 267 net increase/decrease in, 254 Current debt, 52 56 Class A/Class B shares, 23 Current liabilities, 53, 55, portfolio diversification CNBC, 37 260, 267 strategies, 140 Coca-Cola, 27, 71, 89–90, Current price, 174 reserves, 43, 223 130, 135, 163, 165, Current ratio, 66, 69, 148, Cash-basis accounting 175, 176, 253 158, 173, 260 system, 58 Commissions, 13, 15, 131, Custodial IRAs, 22 Cash flow 175, 180, 239, 241 Customer franchises, 174 analysis, see Cash flow Commodity, 260 CyberOptics, 91 analysis Common stock, 22–23, 116, Cyclical approach, 156–157 free cash flow, 137, 222 Cyclical industries, 71, distinguished from, 87 Company analysis, 107, 201 148–149 importance of, 56–57, Company-sponsored DRPs, Cyclical opportunities, 99 143 177–178 Cyclical stocks, 156–157, multiples, 88 Comparables/comps, in 260 uses of, 88 retail industry, 110, valuation based on, 113–114 Day order, 269 87–88, 91 Competition, significance Dean Witter, 179 Cash flow analysis of, 158–159, 170, 196 Debt characterized, 87, 172 Compound annual growth bad/good, 112 discount, see Discount rate (CAGR), credit card, see Credit cash flow (DCF) 245–246 card debt analysis Compounding, 6–10, 216 level, 29, 38, 42–43, 51, Cash flow per share ConAgra, 148 76, 112, 135, 148, 160, calculation of, 87 Conferences, see Investment 163 defined, 260 conferences long-term, 112 Cash flow statement Consumer demand, 165 repayment, 55 example of, 57–59, 90 Continuing valuation, Debt to assets ratio, 66 format of, 56 93–94 Debt to equity ratio, 66, importance of, 59 Contrarian investing 68–69 income statement strategy, 140–141 Debt to total capital ratio, compared with, 56 Convertible preferred 66 information provided by, stock, 64–65 Deep Value investing, 140 55–56, 62 Corporate bonds, 222. See Defensive investors, 168 manipulation of, 88–89 also Bond(s) Deferred liability, 83 Cash-on-cash return, 82 Corporate raiders, 87, 173 Deferred taxes, 84, 131 Cash to debt ratio, 68 Cost of goods sold (COGS) Dell, 227 CBS Marketwatch, 37, 40, calculation of, 46–47 Department 56, 73–77 120, 246 defined, 44–45, 273 Depreciation Cedar Fair, L.P., 33–34 return on equity analysis, defined, 260 Certificates of deposit 81 expense, 44 (CDs), 12, 19, 222, 224 sample income impact of, 56, 87 Charge offs, 68 statement, 48 in valuation, 88, 91, 259 Charles Schwab, 16, 22 Cost of sales, 46 Derivatives, 233 Checking accounts, 43 Coverdell IRA, 21 Devine, Brian, 134 Chemical companies, 156 Covered options, 260 Diluted earnings per share Chiron, 26 Credit card debt, 51, 68, (EPS), 63–65 Chrysler, 174 177 Dilution, 260 Churning, 15, 260 Credit risk, 229 directinvesting.com, 176 Cincinnati Financial, 82–84 Currency risk, 219 Direct-purchase plans, 180 ch10_IND_4502.qxd 9/8/05 10:53 AM Page 280 280 Index Direct stock purchase plans Dollar cost averaging, Enterprise value, 101, (DSPs), 176–180, 239 161–162, 174–176, 239 103–105, 127 Direct-to-consumer Dot-com boom, 117, 125 Enterprise value-to- business, 49 Doubled stocks, 197 structural free cash Discount brokerage firms, Dow Jones Industrial flow ratio, 127 12, 20 Average, 28, 129 Entertainment companies, Discount brokers, 16, 231, DTE Energy, 137 174 241 Equipment purchases, 55 Discounted cash flow Early exercised options, Equity, 62 (DCF) analysis 260 ESL Investments, 126 case study, 92–94 Earnings, see also specific Established businesses, characterized, 92 types of earnings analysis guidelines, Discretionary account, 268 from continuous 108 Diversification operations, 261 E*TRADE, 12, 16, 22, 36 asset allocation, 214, 217, defined, 261 Excess returns, 183 221 growth, 29, 124, 146, Exchange-traded funds benefits of, 135, 213 160, 196, 243 (ETFs), 265 case study, 227–228 implications of, 55, 62, Expectations, 70 risk management, 214, 273 Expense ratio, 235 222–227 reports, 169 Expenses, as information strategy tips, 228 stability, 243 resource, 105. See also Dividend record, 243 Earnings before income specific types of Dividend reinvestment, 253 tax, 273 expenditures Dividend reinvestment Earnings before interest Expiration date, 261 plans (DRIPs/DRPs) and tax (EBIT), advantages/ 44–45, 68, 81, 91 Fair market value, 53 disadvantages of, Earnings before interest, Fair value, 105 176–177 taxes, depreciation, Falling comps, 114–115 characteristics of, 19, and amortization Family, as information 176–182, 236, 237, 240 (EBITDA), 87–88, 91 resource, 32–34 defined, 176 Earnings per share (EPS) Fannie Mae, 152 dividends
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