Definitions

Dividend Discount
A valuation model sometimes used by investors where the analyst discounts his/her estimates of future annual dividends to the present using a risk-adjusted discount rate to arrive at an estimate of intrinsic value.

Intrinsic Value
A discount to our estimate of a security’s fair value. By investing at a discount to our fair value estimate, we expect that any mistakes in our estimate or value deterioration will not necessarily result in a negative investment return.

Margin of Safety
A key part of our strategy is the concept of margin of safety, which applies both to the qualities we look for in a business and the price that we pay for that business. A margin of safety exists when most of the above criteria have been met and there is a meaningful discount between the market price at which a company’s shares trade and our estimate of a company's intrinsic value.

Our estimates of intrinsic value are typically based on a discounted cash flow analysis that employs conservative estimates of future cash flows. We look at various downside scenarios and pay careful attention to the amount of capital investment needed to fund future growth and how marginal returns on capital trend over time. We supplement our discounted cash flow work with other analyses, such as change-of-control multiples, free cash flow multiples, leveraged buyout models, and economic profit models. In all of our analyses, we acknowledge the challenges of making precise long-term projections and the dangers of extrapolating positive recent trends into the future.

The most obvious benefit of investing with a margin of safety is that it provides less downside risk against permanent capital loss. A margin of safety, however, also provides the potential for significant value creation. The following graph is a hypothetical illustration of the potential upside benefits of investing in a company when there is a meaningful margin of safety in the share price. Please note this graph is for illustrative purposes only to demonstrate the margin of safety concept and does not represent any specific investment.


Price/Book
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower price/book ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company.

Price/Cash Flow
A measure of the market's expectations of a firm's future financial health. Because this ratio uses cash flow, the effects of depreciation and other non-cash factors are removed. The ratio is calculated by dividing the share price by the cash flow per share.

Repurchase Agreement
A type of short-term borrowing for dealers in government securities. The dealer sells the government security to investors, usually on an overnight basis, and buys them back the following day.

Sovereign Debt
Bonds issued by a foreign country in that country's currency to finance to country's growth

Yield
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment's cost, its current market value or its face value.