Evaluation De-Mystified

When I put my first dollar into the market in 2017, I had zero knowledge of the value of what I was buying.

Because of this, my only way of making sense of what I owned was relying on the price of my assets. If the price went up, I was happy because I could sell it to someone else for more than I paid. If the price went down, I was scared that I'd never get back all the money I originally invested, I'd usually sell so I couldn't "lose more money".

This is how the majority of people invest.

And it's completely wrong.

If you continue investing this way you'll lose money. And if you want to invest, I know your goal is to make money. So stop gambling your money away!

The key to great investing is knowing when an asset is priced below the price you can buy it for.

The 5 tools in Evaluation De-Mystified are tools that I use regularly to help me:

• Value what I'm buying
• Find out if it's priced for me to make a profit over the long-term
• Shows me a quick view of the capital allocation abilities of management

Most of the people who do financial calculations make you think you need an MBA to calculate what a stock is worth.

This is false. I like simple math. The fewer numbers I have to put in and hunt for the better.

The 5 methods I'll be covering in Evaluation De-Mystified are:

1. Earning Growth With MOS
2. Equity Bond
3. Free Cash Flow
4. Owners Earnings
5. Rule Of One

Here is a short breakdown of how I use each of these when analyzing a business.

Earnings Growth With MOS: this is my bread and butter technique for showing what a business in the stock market could be worth in 10 years' time. If it's worth $10 dollars, this tool tells you it could be worth $60 dollars in 10 years. It then builds in a margin of safety to make sure your downside is protected.

Equity/Bond: this is an idea taken right from Warren Buffett to show the "coupon" rate of a stock. It does a great job showing you how much your equity/bond can grow. If you buy a stock today, it might be yielding 5%. This method shows you how this yield can grow and what the asset would yield in 2, 5, or 10 years' time.

Free Cash Flow: this method simply shows you how much cash you can pull out of the business over a given time. If the money you pull out of the business exceeds the market cap in a few short years, you know you are probably getting yourself a great deal.

Owner's Earnings: this is a great number Warren Buffett made up. It allows the investor to see how much of the earnings a company makes actually belong to the owner of the business (as a whole). Most people think this is net income, but Buffett has some interesting additions to this number that gives the investor a better representation of what an owner would be making if they owned the business in full.

Rule Of One: yet another of Buffett's great inventions. This is a measure of the management of a business to create value from retained earnings. Most investors make the mistake of forgetting about retained earnings. Buffett showed how important this number is and how we can use it to quickly see if management is creating shareholder value from retained earnings.

Not only will I be going over how to calculate these numbers but I'll also cover:

• Resources to help you find required numbers as quickly and pain-free as possible
• What you need to look out for when applying growth rates
• Why using conservative numbers will serve you best
• Where to find every number for free
• How to reduce risk in your modelling

I want to make your ability to evaluate a company as simple as possible. When you know the value of what you are buying you'll unlock a tonne of benefits like:

• More money due to higher returns
• Less risk due to buying assets that are not overpriced
• Less stress from knowing your investments will continue increasing in value and all you need to do is wait and let the business function
• Reduced time spent trying to find out what a stock is worth

If you're willing to spend some time finding 5-7 input numbers, which can be found in a few minutes time with the free tools I show you, you'll be able to evaluate a business very quickly. Evaluation is like muscle memory, the more you do it, the faster and more efficient it becomes. With these tools, you'll build these skills 10 times faster.