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How to Determine the True Value of a Stock 


How to Determine the True Value of a Stock this is the rich dad stock cast with andy tanner the show that kicks 401ks in the asphalt and teaches you to be the master of your own stock investing domain and heres your host greg arthur welcome welcome welcome to the show at the time of this recording we have an amazing story that most people are completely unaware of were gonna take a look at this story were gonna see what the stock market can add to it in my opinion this story is a little this story is a little scary lets see

 what you think apple and google launched a new software

 that allows public health officials around the world to create their own contact tracing apps thanks to bluetooth the app can detect people nearby you who have interacted with you and may have coronavirus if someone tests positive for coven and shares it with the app users who were near them within the last days will get notified now that sounds like a really good from a health standpoint app but for me the privacy issue is a little bit terrifying but thats not what were here to talk about were here to talk about stocks and id really like to ask andy tanner to come teach us how to evaluate these companies google and apple and then have him actually do an evaluation so we can see his process in action so andy welcome to the show hey thanks greg appreciate it its good to uh good to be with you good to be you good to be you im a im a total loser good to have you here andy i feel like its good to me me but i also feel like itd be pretty good to be you as well no no andy id like to be you youre a little bit more brilliant than me and youre also six seven and im a little bit tiny and im a little embarrassed by it oh thats hilarious just enjoy your seats on the airplane fair enough fair enough so andy i just told you what i consider a little bit of a terrifying story that apple and google are creating this app or these apps right where health officials can track basically your movements yeah i understand the purpose for the app but i do have privacy concerns but what i want to ask you is if you could first just teach us how to how you evaluate any stock and then you dont mind evaluating those two stocks and and i want to point out im not asking you to make recommendations to buy or not i just want to use these as the example for you to teach us kind of a howto lesson its its a pleasure to do that because you know heres the problem that people have whenever they get into investing whether it be real estate or business or commodities or whatever they have no idea where prices will go they dont know how long a certain trend will last and its always the problem that they face is they dont know what to do and the reason i think thats so important is it when you get in a situation where you dont know what to do you consider your options what are they well i can ask someone what to do or i can learn what to do right right and uh if i ask someone to do im in the advice mode usually those people have charged me you know quite a bit for that advice as we know in the 401k theyll take anywhere from half to more of your money to do that over time and they do it in a sneaky way that you dont see and so i like that idea of of hey how do i find value and how would i analyze a company and how do i find companies and its kind of interesting because i take whats called a topdown approach meaning that i dont like say well lets like a lot of people do it opposite theyll be in home depot and theyll see a lot of customers say well lets go analyze home depot and then theyll go on the way home and theyll drive through the mcdonalds drivethru and get a happy meal and say well gee a lot of people here maybe ill look at that one too theres stocks out there thats a pretty slow way to do it right so were gonna well take would you want to look at google and you want to look at apple yes okay well just well go ahead and do that before we do just understand though i would probably um never find those companies because the way i do this is i say what are the criteria im looking for what does value mean to me and and ill go run a search and often theyll be companies that ive never even heard of before right how do you find the neil in the haystack so think of it this way is this isnt exactly like getting married because you can always sell your stock its a lot easier to sell your stock and change your mind than marriage exit strategy but nonetheless there are things that youre looking for so if i just said you know you and i are both very happily married and both of us uh out kicked our coverage if i can say it that way we both made up but if uh if someone was uh in the market for a partner you might say what are you looking for and they would create a list of criteria wouldnt they what are you looking for what does it mean to you well i want someone with a sense of humor and id like someone who you know i love old movies so i want to have someone that ensures my hobbies and i definitely want to feel physically attracted that person maybe thats important to you or maybe its more important that theyre fit and you want to be fit from a health standpoint so you have this criteria you go through and that kind of helps you and thats why matchcom they take the approach of look dont go to a thousand singles bars one at a time give us your criteria for what you think is valuable and then well go out and run a search and well provide you with all these possible matches does that make sense yeah it really does so lets talk about what is value if were going to run value on google and run value on apple a price is what you pay and values what you receive and thats where with anything in life you know price is the money that comes out of your wallet and whatever you take home is the value so entrepreneurs look to provide value and in exchange they take your money and you give them money hoping because what they gave you is more valuable to you than the cash was so price is what you pay and values what you get so as we analyze google and apple uh the first thing were gonna do is ask well what are we paying now thats deceptive isnt it because if someone says well google is so many you know dollars and and apples so many dollars you know hundreds of dollars well thats expensive well we cant answer the question of value just on price can we we might say well its expensive maybe its worth a lot or oh no thats too expensive there might not be value there so we on one side of the equation were going to really look at price on the other side of equation we got to look at what were going to receive does that make sense yeah we want to make sure they match up yeah we want to make sure that that were getting something and whats tough for people in in trying to pick a stock this is why this is such a great um you know a great should i say it was you know podcast or whatever discussion is if i were to bring up google right now lets see if i can bring it up on my computer uh what is about bucks a share or so at this recording so and change some and change and so fifteen hundred dollars lets just round it up fifteen hundred dollars people say oh my gosh thats expensive uh is there value there well you know what youre paying but you dont even know what youre getting right right um the one thing i would say is what youre not getting from google is youre not getting a dividend are you okay theyre not going to pay you any part of their earnings so right there that tells me do i want a dividend now value greg is in the eye of the beholder too values in the eye of beholder we all feel differently about it you know on my shelf back there somewhere ive got some basketballs and you know its the smallest part because thats my college basketball career but i have an ncaa tournament watch up there its just a little watch you got a silver you know face and uh if i sold that on ebay id probably get bucks for it you know memorabilia something like that oh cool nc because you only get one if you played in the tournament right right dont you cant just you know you have to and so uh maybe its bucks uh if you offered me a hundred thousand dollars for that i wouldnt give it to you to me its more valuable if you order me would give it to you you know if you offered me a million sold no even for a million dollars i wouldnt do it so theres a personal part of this too so lets look at so so we know the price of google so what we do at you know when we teach this is we do this based on criteria and i bring up a website here lets bring one up here hey real quick while youre doing that you bring up their criteria so that you take the emotional pieces out is that fair thats absolutely fair because if you see something running up in price you can get pretty excited about buying it uh like two lipomania you ever heard of tulip mania where of course back in the tulips they had a hyper inflation of uh tulips and people were paying these insane prices for a flower whatd they get paid a huge price would you get a flower right right and so we dont want to pay these and and sometimes you are looking for growth and sometimes you place the bet and make it even bigger for me i i have very strict uh criteria so ill give you an example um a couple of numbers i want to see what the enterprise value is now what is that well you know enterprise value is when you look at all of the stocks or receiving all the shares and times by their price get whats called market cap so if i wanted to buy out you know do a total buyout of uh you know google here which is going to be an insane amount of money i look at their market cap because thats what im getting im getting the im getting the shares so you know how many shares are there and whats their market cap then id look at their financials and say what kind of uh debt do you have and what kind of cash do you have because really if you buy a house as a rental property you know youre going to have any repairs that are there on there theyre now yours you know the good stuff you get good with the bat any second mortgage you might be inheriting there um you know any expenses of maintenance and salaries to take care of the property you inherit so enterprise value helps me understand what im getting so just real quick for the listener like to the average person theyre not going to have any idea where to find that so theres just websites that will yeah there are theres theres all kinds any financial website well give this i dont mind naming names on that i use one often called finbox that i like its about a month subscription something like that but you can find them you know theres probably free ones as well that uh whatever you want to do you know so this is public information this isnt anytime back door yeah i dont have any uh i dont have any insider trading abilities i mean every quarter they put these numbers out and uh the if youre going to be publicly traded you file whats called a 10q per quarter every quarter and you can see these numbers and then the people the number crunchers put them on websites but lets say i go to my my little fin box here and i say well lets look at uh google we might not have time to do both you know lets look at google and ill come over here and ill just type in uh enterprise value so lets type that in enter price value in the search and i look at the enterprise value of google is about billion dollars so theyre about half as big as apple okay uh billion dollars and what that does is it takes you know what it would take to buy all of google take your if you bought every share of google um it cost you billion dollars then youd add in how much debt they have uh any other liabilities you know equity stuff like that then you pull out their cash and any investments they have you wind up with this enterprise value of so that gives me an idea of what im getting now another thing i want to know is are they making any money right and so id look at something called ebitda for me and thats wonky but it basically means how much money they make in before you pull out taxes and you know depreciation and interest and stuff like that is are they making money so think about that if im going to pay for this i kind of want to know what im getting as a company in terms of their financial statement and i also want to know how much money they make so think of it this way and i i love i i always go back to this put your little box like a jackinthebox you have a little crank that you turn out you know and and it uh plays the little song and it takes a year to play that song a whole year to play that song in the end of the year when the top pops up instead of a clown its cash so i want to know how much cash comes out i want to know what the cost of the box is now if i know the price and what it produces then i can find out whether its valuable or not does that make sense yeah youre going to make turn that into a ratio to determine yeah yeah and and i wasnt very good with math greg i struggled in school with math it was not uh the easiest subject for me so i struggled pretty bad with it and what really helped me when i ed learning fundamental analysis you know this idea of value is i said look its just two numbers compared to each other rather than this division so for example you have the price which is what you pay and you have the earnings which youll receive the value right price is what you pay earnings is what youre going to receive uh the growth that the company would experience that would also be mine if i buy it right so price is what i pay and the growth is what i receive the debt that the company holds well when i buy a company i buy the the savings but i also buy the debt and so thats really in a big picture how we do this so a number that i use and not to be too detailed and too wonky but if you say well do one on google how would you do this the challenge always is the same and its kind of like andy i want to do what you do you know my mom will say hey can i invest in my investments well im going to exploit time decay with an inverted diagonalized and condor mom you want to do that tomorrow in the options market with me so there is a level of education we say well andy tell me how you do this a person that wants advice will lose because theyll never be able to do it they cant do it they have to go to a broker and have someone pick the stock but if someone says andy show me how to do this well that takes education so my criteria that i like is i like to look at that enterprise value and i like to look at those earnings that ebitda and i like to look at those two and we combine those numbers in a ratio so ill just do uh eb over ebitda so enterprise value over earnings before you know interest and taxes and depreciation type stuff and i can see here that google is thats that ratio okay now ill just tell you for me personally um i like it lower than that i like it lower than to really get me excited to say wow that would be a lot of money theyre producing for a smaller enterprise value right a lot your ratio there you prefer it and under yeah i feel if im bullish on if im bearish i would find the same thing and be over anything in the middle is kind of mediocre right so a person if theyre listening say well this is i you lost me andy you know youre talking jargon now thats robert kiyosakis number one rule dont talk jargon um then what i do is i say well i i have when i listen to a podcast or read a book like when i read jim rickards book i just had a big list of stuff i didnt understand and i put it on my list of stuff to learn right when there was a word i didnt understand i said well i can either take advice from people which is scary because then i have no power or i can learn and so uh so thats a big how i would deal that from what youve taught us so far you could go to uh i forget the name of that website finbid any anybody you know theres any of them yahoo finance yeah any of them and i could take google ev value or eb number yeah you can google that you know its its enterprise value over ebitda but theres many you could use price earnings you know theres theres many that you can learn about thats just happens to be one i care yeah what were talking about were talking about what you do yeah but me being a schmuck i could just go to yahoo finance type in google eevee and a number will pop up and youd find it somewhere yeah the website i use to find it that makes it easy to find i use one called fin box that i really like its like bucks a month i dont get a commission if someone goes and buys you know and people can get what they want yahoo finance probably has that number uh readily available for free if you want to hunt for it so i type those numbers in i get the numbers and i just turn it into a ratio the the ev number the the value number is on top yup and if its or below maybe i consider it a little closer i look a little further yeah i i say gee thats something that fits my criteria you know i spoke earlier about finding a spouse well id like someone has a sense of humor they better if theyre married to you or i right someone whos very patient would be a bonus for me right blind works really good i think you know i think thats a key i i might not want to have marshy get her eyes checked she might have an exit strategy if she gets yeah my wife wanted to get uh laser estrogens absolutely not oh no not happening not happening but youve got that silky smooth voice oh there you go but yeah those are and thats just one of many ways to determine and the word here if if you were to ask me in a in a way that people would understand in a big pitch you say andy how do you determine value of a company i would say first id say well i have a certain criteria that i use and i would give people a clue theyd say well okay so hes got stuff in his head that it has to measure up to a certain standard and then the next step would say well what are some of those things and if you want to go deeper youd say well some of those things he cares about the price because you know i got to know what im going to pay but i also care about what i get so thats another level okay so the criteria is based on how much i pay and what im going to get okay well what do you mean what are you going to get well im going to get the earnings im going to get the growth but im also going to get the debts and so ill diving in the numbers that will really teaching me what type of company im about to own otherwise im just a house flipper otherwise im just a day trader looking only in a chart hoping to buy low and sell high if i want to be a true investor and look at this like warren buffett as company ownership you can read books like the intelligent investor and youll find his criteria that he uses in his criteria he cares a lot about earnings he cares a lot about growth he says if you give me those two things i can begin to to see what the value is okay so i i want to just go back you theres two things that were crazy important here and one is its probably not real wise to just take a name of a company and look up the ev and the ebitda because its way too slow and theres way too many companies so its better instead to find a software or a website where you can type in an ev an eve but a ratio of or less and let that that software kick out to you all these companies that meet that criteria i really yeah i really like the metaphor of matchcom yeah i really like that metaphor is okay i can go to every singles bar you know in my hometown and look at each of these people one at a time and then i can say okay does she have a sense of humor does she have does she like old movies does she like to be fit does she like to go to the gym does all that stuff that i might care about and thats gonna take me a long time right im gonna really you know fi work hard but if i go to matchcom and say okay here are my interests heres my educational background heres my religious background heres my political beliefs and they can say oh heres people with commonality with all that stuff youre looking for man no wonder that thing is getting people married right and left and they might even stick together i dont know if they do or not but but that is uh really the same approach that i would take is for example we just looked at at google and we found their enterprise value of billion and then we looked at okay compare that to their earnings we came up with a ratio of what was it and and its interesting because they are part if you look at uh others in that uh heres one dhi group there are only six uh the communication services sector is so in comparison uh you really have to believe that google is going to make a lot more money in the future to justify theyre going to have to have their ebay to go up way high to give you the same amount of cash and earnings that some other companies are making because their stock price is so high right now and that doesnt mean google wouldnt go higher but from a business standpoint warren buffett is i dont see him buying google right now um and he probably wouldnt buy more shares of apple because its twice what he paid for it now is is when he bought it like at a share so uh so yeah its not just about watching that chart and saying oh look at this going maybe ill catch it while its going up further a true investor is going to say what business am i really buying right if you treat it like buying a business i i dont even like the term buying stocks because if you really understand it youre really buying a business you know warren buffett owns fruit of the loom theres no stock price there because hes in the underwear business its not even publicly traded he owns dairy queen not publicly traded geico not publicly traded hes in the insurance business hes in the ice cream dairy queen business hes in the underwear business hes in the seas candy business well hes also in the beverage business with cocacola that one happens to have a stock price because its traded but hes going to look at it at evaluating on earnings and and uh and growth as he always has as he always has so thats how i dont know if that confused people but hopefully you think in your mind whatd you take from this podcast okay what is value price is what i pay value is what i get and so the more i can analyze what it is that i get the better decision ill make so go back to that marriage and dating analogy okay you know the ring is what i pay with you know this is what i get when i offer up that ring um what do i want the more i get to know that person um the better off im going to be doing my research i probably dont want to have a drink get my beer goggles on and go elope ive got my research done yeah that did not work yeah so the more we learn about these numbers whether its a price earnings ratio or a price to sales or price to tangible book or peg or ebo or ebitda or any fancy terms by learning those terms and learning that jargon now i get a chance to feel really good about what i buy instead of just listening to a broker or jimmy christmas heaven forbid i get on robinhood and sending my money to those guys making them lots of cash uh under the guise of advice and thats whats that what scares me is people say oh im just putting my money in 401k other people handle that stuff well thats the choice you make is investing a life skill for you or is it a skill for hire you know and its your choice you know i like to drive myself around i could hire a chauffeur but i like to drive and i think its probably more economical for me to drive i like to tie my own shoes i like to brush my own teeth but theres other things i do prefer higher so its really about what you want to learn do you believe that investing is a skill for hire if you do youll pay for it dearly if you say no investing is a life skill i should know about money half my life i spend working the other half i spend retired on investing yeah i think ill you know put as much into my financial education i did like college because thats a more important your lot part of your life your retirement life is much more important in your working life much more important absolutely hopefully cool stuff yeah thank you for teaching us i just want to be really clear for anyone listening that they can they can take what youve just taught us and they can do this at home right now they can go to a website and they can type in all this yeah its there over ebitda can you spell ebitda no you make me spell that its e is in earnings b is in before i is in interest t is in taxes d is in depreciation and a is in amortization okay so there you go enterprise value over ebitda but thats thats what i use well thats a for people right thats thats where i would begin and and i look at pegs as well i care about price i care about earnings i care about growth the problem is most people hear those terms they tune out because i dont know what that means and thats their problem because its a lot like my son who takes piano lessons if he were to say i said son you want to take piano lessons and they say well i dont know how to play the piano well thats why you take the lessons right and i say well you know peg i dont understand pic well thats why you take the lesson so that you can so the biggest thing is well i cant play the piano well take some lessons well no i cant take lessons because i dont play the the you know well i dont know what ebitda is so i guess i wont take the lessons because i just dont know what it is right you dont go to the hospital because youre well you because youre sick you dont go to church because youre perfect you go to church to improve and become more perfect so uh so yeah i think uh talking a little bit about this is good and its good but uh you know i will say this if a person googles eevee over ebitda and s learning theyre not ready you know theres more to it than just that sure so yeah thats a good point were not saying learn evie over ebitda now go invest now youre warren buffett right right but we are saying what a great place to very much so very much so thats something that everybody listening right now can do yeah the the broader uh class youre taking if we were the label the class would be a class on what we call fundamental analysis so what does that word mean well analysis means you look at something carefully you analyze it you look at something carefully just like when youre dating youre going to analyze very very carefully whats her background or his background what do you know do you want you want a homeless guy or you want someone with a little money is that important to you or no is it love or money or both right what do you want so analyze me analyze means fundamental means theres just certain things that it stands on like in basketball you gotta learn the fundamentals if if you play well right and so a fundamental analysis simply says were look were going to look at the basic things that make a company valuable in this case it was earnings right and enterprise value thats what it really was right well great thank you so much andy i really appreciate your time and i and i share your sentiments on uh you know its interesting theres always going to be a battle between person between freedom and security right freedom of movement and and security and theres always going to be battle between individual liberties and communism and so in the social good and finding that right balance is where our our at least you know our world is right now whether you live in the united states or singapore or china or wherever you know is it worth giving up your civil liberties for the greater good of the health uh is it worth giving it privacy you know those are exchanges that everybody has to decide um you know im kind of an extremist i like what uh uh what they say in new hampshire you know give me liberty or give me death like live free or die so i tend to i tend to say let corona riders get me i i like my privacy but thats just my opinion im right there with you man yeah all right well until next week thank you so much thank you greg really great to be with you look i love these conversations howdy too i learned something new every time awesome all right well see you next week eddie Music Music '
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