Knowledgebase 2019 Part 3

## Thoughts on IPO’s and Secondaries

Little companies that are doing IPO’s or secondary distributions get ripped off by the underwriter investment bank. It’s not that investment banks are evil. You might as well call a wolf evil because he eats rabbits. It’s the nature of things.

Here’s why: Sure the investment bank gets a fee for sponsoring the IPO and arranging to sell all the shares. But it still has to get rid of all those shares, which normally it sells to its own clients. Now if it’s a big popular company like FB that is having the IPO, everyone wants shares, and all the investment banks compete for the prestige of taking part in the IPO. That gives the company having the IPO a lot of negotiating power.

However, if it’s a little company that no one has ever heard of that is having the IPO, how is the investment bank going get rid of millions of shares? The answer is to pressure the little company to sell its shares as cheaply as possible. Well below what they are worth. What matters to the investment bank is how its own clients who get the shares will do, not how the company who is having the IPO will do. And it’s not only worried about its clients! The underwriter will take some of the shares itself, for its own book, if the price is low enough.

The IPO company is a one-time customer. However, the favorite clients will hopefully be there indefinitely and the investment bank wants to keep them happy so that they will take IPO stock in the future too. That insures that they, the investment bank, can keep getting those IPO fees, etc. In addition, if the favored customers can make instant money on the IPO, that gives them a good reason to keep their banking and investing relationships at the investment bank.

So that’s why you’ll hear of stocks going up 30%, 40% or more on the day of the IPO. The underwriter (think Goldman Sachs, Morgan Stanley, etc.), succeeded in getting a great deal for its clients by pricing the stock very low. Remember that the underwriter’s customers don’t know anything about the company. They just know they are getting a stock cheap and that they will be able to sell it at a profit almost immediately. Pretty good deal for them, isn’t it?

How about secondaries? Why does the price often go down the day before the secondary? Well, the underwriters’ clients, who are promised cheap shares, don’t know beans about the company and don’t care. Joe Blow, who is promised 20,000 shares tomorrow at $4.00, sees a price of $4.60, or $4.50, or whatever, and sells his promised 20,000 shares short at that price, knowing that he’ll cover his short tomorrow with the shares he gets at $4.00. So he makes a fast profit of 50 or 60 cents in one day. Probably nearly EVERY ONE of the underwriters’ clients is doing that. Pretty good deal for them!

## Investing Ethically

I have occasionally not felt comfortable in investing in a company that everyone else liked. For example, I was uncomfortable with ZLTQ because it’s a weight-loss company, with all those before and after ads you are familiar with.

Then there’s HZNP, a little pharmaceutical company whose meds are combinations of cheap non-steroidal anti-inflammatories like ibuprofen, combined with cheap over-the-counter stomach-protectors like ranitidine and omeprazole, all generics. Then they charge huge amounts for the combination medicine (which people could easily take as two cheap generic over-the-counter meds). Their investor stuff is all about how good their marketing is, and how they are convincing doctors to prescribe these overpriced meds, not about how effective their medicines are. With a whole universe of great companies out there, is this really where I want to put my money?

I had the same problem with GILD, a company that a lot of people on this board, loved. Is it right to charge $80,000 for pills that cost maybe $1.00 to make, using the justification, basically, that they work? They should work. That’s the whole idea of a medicine. And they cure a chronic and potentially fatal disease. Does that mean that the company that makes an antibiotic that cures your pneumonia, which was going to kill you a lot quicker than hepatitis C, should therefore charge you $200,000 or $300,000 for the antibiotic? Or that the surgeon who removes your infected appendix (which was going to cause a very painful and miserable death) should charge $1,000,000, because he’s got you by the unmentionables? Is that the kind of world you want to live in? Is that the kind of company I want to invest in? Nope! It’s probably irrational, but those are just my feelings.


If you have the time, do a weekly graph on your stock, on old fashioned large graph paper. It helps you keep things in perspective. A drop from $51 to $49 doesn’t look so bad if you look back and see that it’s been between $52 and $48 for the past six weeks, or if you see that your stock rose from $40 to $51 in the previous two weeks and the “drop” to $49 is meaningless. (The problem with graphs that your computer makes is that a move from $10.00 to $10.05 will fill the whole space if that’s the whole move for the day or week. There’s no fixed scale.)

Graphing adds to my piece of mind. For example, when the price of ABCD hit $69.50 and finished the week at $66.50, I could look back and see that the week before the price had risen from $61.70 to $68.80, so this was just catching its breath and nothing to worry about.

It also gives me a quick visual look at where I’ve made recent purchases, as for every X dollars of purchase I put a little B, and a little S for the same amount of dollars of sales. So if I’m considering adding to a position I can quickly look at my graph and see that I just added 3X’s worth two weeks ago, and the price I bought them at. That may or may not influence my decision. (I do prefer to buy stocks that are going up rather than down, but if a stock is going down for absolutely no reason, I may add cautiously as well.)

I can also look at the graph and see immediately what the stock’s price action has been in the past several weeks or months.

## Professionally Managed Money

You can beat any mutual fund over the long run. Since they are investing many millions, if not billions of dollars, they can only invest in very large established companies, and hope to find a pricing anomaly.

I don’t know of any fund manager or hedge manager with a run like mine. It went through a number of recessions and lasted 19 years until I finally had a down year in 2008. But again, if a fund manager does real well for a year or two, not only does his fund get larger because of capital gains, his fund get flooded, swamped, with inflows of dollars and he can’t duplicate what he did when the fund was small.

Also they have lots of people looking over their shoulders for quarterly results (are they equaling their benchmark each quarter?). It makes it hard to get good results, I’m sure.

The average hedge fund gained 6.5% in 2013, when the S&P 500 gained 29.6%, and the best hedge fund manager was congratulated because he gained 25%. It shows how hard it is when you are investing billions of dollars, and how we can beat any mutual or hedge fund on a consistent basis. They are too big to invest in most of our type stocks. Also hedge funds invest in futures and currencies, which are zero sum games. When one wins, another loses and the sum comes to zero.

Money managers: A friend in his mid 70’s but in good health and still working part time) asked me for help. He had put all his assets to be managed for him by a broker or asset management company, and they had accomplished all of 3% for him in 2013, one of the best years for the market in recent memory. They invested 75% of his money in bonds (which paid almost nothing due to low interest rates, and then decreased in value in the latter part of the year when rates went up). The 25% they invested in dividend paying stocks made a net return of only 15%, giving him a total return of 3%.

My friend wants to take a quarter of the money and invest it himself. I said investing for himself was only going to work if he put time and energy into it, and if it was fun for him. If it’s an onerous chore, it’s better to let someone else do it. I suggested the Motley Fool to him, but since he was interested in income producing stocks I suggested Income Investor, and Stock Advisor once he got more comfortable. I also mentioned that MF has mutual funds and an asset management service if he decided he didn’t want to do it himself.

What I want to discuss was how asset managers could put anyone 75% in bonds? (Whatever his age was!) How can they ask to be paid for getting results that were one tenth of what the markets produced? I think that they must be covering themselves by investing super “conservatively.” No one can ever come back and sue them, no matter how bad their results, if they could say they invested “conservatively.”

And this was profoundly stupid! Interest rates were at epochal lows, so bond prices were at maximum high prices, and could only go lower when the Fed turned down the stimulation and interest rates started to rise. It had to happen. The handwriting was on the wall. But this didn’t stop them from putting my friend 75% in bonds, following some formula or something.

Lest you think that this was just because of my friend’s age, a couple of years ago a young guy in his thirties wrote in on the SA Investing Philosophy board to say that his asset managers put him 80%(!) in bonds… a guy in his 30’s!!! That’s malpractice it seems to me.

## Teaching Investing to Kids

You want to make it fun for the kids. I would consider first explaining what a stock is, and then presenting the stock market as the biggest and best game there is. Then I’d tell them what you look for in a company you invest in. I’d explain compounding growth by letting them multiply $100 by 1.2 or 1.3 ten times on a calculator, and then twenty times to see what that $100 would grow to in a company that could keep growing at 20% or 30%. I’d try to pick (and let them pick) companies that they are interested in, or could be interested in, even if they aren’t your first picks. You might consider making a competition between them for a year, say (with a small amount of real money), or for each of them to see how they do compared to the S&P, but warn them that growth stocks will go down more than the S&P in a down market. I’d say that one stock was too risky (you don’t want them to get in bad habits, even with limited funds). Probably 3–4 stocks each. I’d pay the commissions for them at first since they have small amounts of money and the commissions would take out too big of a chunk.

## Investment Primer:

We have members of this board with all different levels of investing experience, and from some recent questions, we have some members who are just starting out, and some with more experience. I prepared this primer for my wife, but you are all welcome to read it.

Difference between Stocks and Bonds

Bonds: If you “buy” a bond, it means you actually lend money to the company. You receive interest payments for the term of the bond and then get your money back at the end of the loan.

For example, if you buy a thousand dollar, 5.6%, 20-year bond from GM, that means GM owes you a thousand dollars which they will pay back in twenty years from the issue date, and will pay 5.6% per year interest in the meanwhile ($56 per year).

Bonds trade on exchanges on Wall Street, just like stocks, so if you want to sell the bond and get your cash before the due date you can sell it just like a stock. The price will vary though and won’t always be exactly $1000.

For example if interest rates are very low (like now), and all you can get from the savings bank is 1% or less, that 5.6% can look very good to someone who is interested in income.

She might say to herself “I’d be willing to pay $1040, $1050, or even $1080 for that bond. It still has 18 years to run, and I’ll get $56 per year in interest. That’s $46 per year more than I’ll get from the bank. I know that I’ll only get $1000 back in 18 years when the bond matures, but even if I pay $1080 I’ll more than make the difference back within the first two years.”

On the other hand, if interest rates are high, at 7% or 8% for a fully guaranteed treasury bond, for example, the same person might say, “I’m not willing to pay $1000 for a GM bond paying 5.6% when I can get a better rate from the Treasury. I’m only willing to pay $920 for it. That way the $56 per year I get will actually be 6.1% on the money I’ve invested. It’s less than I’d get on a 7% bond, but when the bond matures, I’ll get a full $1000 back and make $80 profit.”

Also if there is any question that the company may fail, the value of their bonds will fall in value, because they may not be able to pay you back that $1000.

Note that if it’s closer to the maturity date, the price that people will pay will be closer to $1000, because they are about to get $1000 for the bond.

A new company starting out, or one whose finances are shaky, in order to interest people in lending them the money, will have to offer their bonds paying a higher rate of interest, than say a company like General Electric, for example. The question is “Is this company sure to be able to pay back the $1000 in 20 years?”

I personally never buy bonds. You have no chance of profiting in the success of the company, but all the risk if the company fails or goes out of business. In twenty years the company’s stock could be worth 50 times what it is now, but the bond is just a loan, and you’ll just get back what you loaned them - which will be worth only a small fraction of what you actually loaned them due to inflation.

My father called bonds “guaranteed confiscation,” because the money was guaranteed to lose value over time.

Stocks: about which we will talk at length, are ownership of a piece of the company. If the company has a million shares and you own one hundred shares, you own one ten thousandth of the company. If the company is successful and increases in value, your shares will go up proportionally.

If a company has 1 million shares of stock and each share happens to be trading today for $80, the company is valued by the market at $80 times 1 million, or $80 million. This is called the Market Cap, which is short for market capitalization.

Since the market sets the price of the stock, the price, and thus the Market Cap, can be more, or it can be less, than what you think it’s worth. It varies from day to day with the stock price, and can go up or down depending on how people estimate the company’s chances for success, or just for irrelevant reasons such as a big mutual fund deciding to buy the stock or sell it, or even because a large holder of the stock decides to buy an apartment in New York, and thus sells $1.5 million worth of shares.

Several factors go into how the public values a stock. One is growth, another is profit, a third is how much publicity a company gets, and a fourth is how much the company is in the public eye. Let me touch on these:

Growth is very important and people will almost always pay more for a company that is growing rapidly, even, usually, if it isn’t yet making money. (That is, they’ll value the fast growing company higher for a given amount of sales and earnings than they will another company with identical sales and earnings but which is not growing. They value the first company higher because they figure it will be worth more next year).

Profitability. In the past I generally wouldn’t buy a company until it’s profitable, but now I make exceptions for super-rapidly growing companies with recurring revenue. Note that a company can be quite profitable, but can be making the same nice amount of money each year, or be growing very slowly. In this case it won’t be valued as highly as a rapidly growing company with the same current profits. Its P/E ratio – how high its stock is priced relative to its earnings or profits - will be lots lower. (More on P/E ratios later)

Publicity is important because people have to hear about a stock before they can buy it. The stock is like a product that needs advertising. For example, if a newsletter recommends a stock, or if a brokerage house like Morgan Stanley recommends a stock, the price will go up because more people will be bidding for the same supply of stocks after the recommendation. Believe it or not, there are even “newsletters” which make paid “recommendations” (recommendations for a fee, which are actually like advertisements)!

Public Eye. Everybody knows Google, for instance, and Amazon, so they will sell for higher multiples than a company, for instance, which automates the mortgage origination business. Everyone in the mortgage origination business may know about it, but that is a tiny fraction of the number of people who are familiar with Google or Amazon.

Size of the company. In general, smaller companies can grow faster and therefore often sell for higher valuations in relation to the size of their sales and earnings. In other words, they often sell at higher PE ratios. Part of the reason is “The Law of Large Numbers.” A little company, say with $20 million in sales, which is doubling each year but controls only a 1% share of its potential market, can double again next year, and the year after, and the year after that, and still have only an 8% share of its potential market. Maybe even less, if the potential market has grown in the meanwhile.

On the other hand, a big company with $20 billion in sales, which controls, say, a 40% share of its market, will have a very difficult time doubling its sales even once. (It’s hard to find $20 billion in new sales, and it’s almost impossible to go from a 40% share of the market to an 80% share).

Note that you can also easily find a small company that has no room to grow. If it sells widgets and has $20 million in sales, but there are only $30 million in worldwide sales of widgets, where’s it going to go? Or if it has nothing special about its widgets, how is it going to get more sales, etc.

Similarly, a larger company with $5 billion in sales, may be facing a $200 billion worldwide opportunity, and thus have plenty of growing room. Rules about size are not hard and fast.

Quarterly Reports:

Each company in their quarterly report gives a rundown of its quarterly results, and usually compares them to the same quarter a year ago.

This starts off with their Revenues, or Sales (the money they brought in from selling things).

This is followed by the Cost of Sales, which is how much it cost to make and ship whatever they are selling. What is left is their Gross Profit or Gross Margin. Then the Gross Margin Percent is what percent their Gross Profit made up of total revenue.

In other words, if they had $80 million in sales and their cost of sales was $30 million, their gross profit was $50 million, and their gross profit margin percent was 50/80 or 5/8 or 62.5%. It’s usually listed as a percent. Obviously, having a higher Gross Margin is better.

Then they list Operating Expenses, which are the cost of running the business, and are usually listed in categories like:

R&D – which stands for Research and Development and means pretty much what it says: the cost of research and of developing new products or improving the old ones.

S&M - or Sales and Marketing and includes salesmen’s salaries and commissions right through advertising

G&A – Which stands for General and Administrative, and includes everything from office rent and electric bills, legal and accounting expenses, and right through to the CEO’s salary.

Depreciation and Amortization – This is an accounting thing: If they bought or built a factory five years ago, they may be depreciating the cost over twenty years. That means they didn’t count (“write down”) all the expense in the year they built it (which would drop earnings that year enormously and not give a true picture of the business). Instead, they take 5% of the cost each year for 20 years for accounting purposes. This would be considered the “useful life” of the factory.

Other – This is miscellaneous. For example they sued someone for infringing on one of their patents and they received a payment. Or someone sued them, etc. Or they paid interest, or made interest on money the company had in the bank or had invested. It really is “other” and it’s usually minor.

Note that a lot of this is considered “fixed costs.” That is to say that doubling sales usually won’t require a doubling of salary expenses, or legal expenses, or accounting fees, or electricity in the home office. It won’t change depreciation or amortization, and probably the company will just increase research expenses marginally. That means that an increase in revenues can often increase profits by a larger percentage than the revenue rose, once fixed costs are covered.

What’s left after you subtract operating expenses is Operating Profit, or Operating Income. The importance of this number is that one year the company could have a tax loss carryover and have lower taxes and higher profits, and another year pay full taxes and have lower profit. But, operating profit gives the amount that the company actually makes in running the business. It’s sometimes referred to as profit before taxes.

The percent that operating profit is of total revenue is Operating Margin percentage. (In other words, operating profit divided by total revenue and expressed as a percentage. For example, if they had $80 million in revenues and $20 million in operating profit, their operating margin was 25%).

Another useful side-figure that is often referred to is EBITDA. (That stands for: Earnings Before Interest, Taxes, Depreciation and Amortization). It’s useful because it tells you how much money the actual business is making, and year-to-year comparisons can add to your understanding of the company’s business.

If you subtract taxes and interest paid from Operating Income, you get Net Income, which is what’s left at the end. This is a very important figure. Net income divided by the number of shares gives you Earnings Per Share, or EPS.

The above covers the majority of the basic terms you need to understand. I’ll talk about two other terms, adjusted earnings and diluted EPS below, but they are just modifications of the basics.

For example: Basic EPS is Net Income divided by the total number of shares outstanding. However there may be additional potential shares that are not currently outstanding.

For instance, consider if employees have been granted options to buy an additional 100,000 shares, and the company sold someone else warrants to buy 50,000 shares more, you have to add that additional 150,000 shares to your outstanding share count to get the number of Fully Diluted Shares.

Then Diluted EPS is the net income divided by the fully diluted share count. Diluted EPS is usually a smaller number than basic EPS because the earning are divided among more potential shares.

The company will always list Basic EPS and Diluted EPS (as well as basic shares outstanding and fully diluted shares), but when people refer to Earnings per Share, they are almost always referring to Fully Diluted EPS.

Adjusted earnings are another important term. The accountants preparing the quarterly reports have to follow what are called GAAP rules, which stands for “generally accepted accounting principles.” The problem is that some of the rules distort the true picture of how the company is doing, and others are just stupid.

Therefore, many, many companies give non-GAAP or “adjusted” results alongside the GAAP results. If the company had a large one-time expense or windfall, a legal expense or suit settlement, for example, they would remove these from the calculations to get adjusted results.

Also stock-based compensation, or option grants must be counted as an expense by GAAP rules, although there is no cash expense, and in spite of the fact that they are already counted by an increase in the diluted shares. Almost all companies remove this double counting expense in figuring adjusted earnings.

I ignore GAAP results almost entirely, and almost always use adjusted results, which usually make more sense and are more useful.

Now lets talk about the price to earnings ratio, or PE ratio. (The terms “PE” and “PE ratio” are used interchangeably). The PE tells you how highly the market is valuing the company for the amount of earnings that they have. Simply, it tells you how many times the price of the stock (the price of one share of stock) is of the EPS (the earnings for that one share of stock).

You get the PE ratio by dividing the price of the stock that day, by the earnings per share over a full year. If you base it on the previous four quarters (which is a common method), it’s called the trailing PE. On the other hand, if you base it on what you think it will be this year, or the next four quarters, it’s called the forward PE.

For example, if the stock is selling today at $80 per share, and the company made $4.00 per share last year, their trailing PE is 80/4 = a PE of 20.

Note that I specified that it’s the price today, because the PE changes from day to day according to the price of the stock. If tomorrow or next week the price of the stock has gone up to $88, the PE will be 88/4 = 22. Thus higher PE’s mean the stock is more expensive per dollar of earnings.

Let’s go back to that stock with earnings of $4.00, a price of $80, and a trailing PE of 20. If you think that next year their earnings will be up 25% to $5.00, you can say that their forward PE is $80/5 = 16, which is quite reasonable for a stock growing at 25%.

A company’s PE can be quite different for the same earnings, depending on what the expectations are for the company and how fast it’s growing and what industry it’s in. For example a high-flying Internet stock making $4 per share, that people expect to be increasing its earnings by 50% per year for the next five years, could have a PE of 50 instead of 20, and be selling at $200 per share instead of $80 per share. And a stodgy company that makes electric lawn mowers and makes about the same $4 every year, with maybe 5% growth, might be selling at $40 per share, which gives it a PE of 10.

Companies with very high PE ratios (like 100 or more, because people have very high expectations for them) often don’t turn out well as investments, although the company itself may do well. That’s because it takes a long while for the company to grow into its stock price. These are often called “story stocks” because they have a great exciting story, which makes investors bid up the price of their shares.

Some companies keep growing like that though and end up making a lot of money for investors. The trick is to know which ones.

I would advise you that if you are going to invest in stocks you really, REALLY, should read EACH of the earnings reports of the companies you invest in.

The earnings reports are actually made up five things:

The Press Release (also called “the Earnings Report”). This is the press release the company puts out in which they give the outline of what they did in the quarter, their revenues, earnings, adjusted earnings, progress during the quarter and financial tables. The basics are important, but there is often stuff that I skim.

Then most companies have a Conference Call in which they give more color on what the quarter was like, and then answer questions from analysts. This is VERY useful. You can tell a lot from the tone and from the questions and answers. You can listen to this live, or go back and listen to it recorded. You can find it on Yahoo Finance or on the company’s investor relation website.

The problem with the recording is that, while you can hear the voices, which sometimes is wonderful, if it was an hour conference, it takes an hour to listen to. Thus Seeking Alpha does a transcript of each call. It only takes 15 minutes to READ an hour conference. You can find the transcript on Yahoo Finance, or on Seeking Alpha (but not usually on the company’s investor relation website.

The company often now has an Investor Presentation, as well as the earnings report, which is updated each quarter, with discussion and pictures and graphs.

Finally there’s a government filing of the results, which if you’ve paid attention to the other three, you can probably skip unless you have serious questions. It’s available on the company’s website.


To help you out, if you are a relative beginner, I thought I’d give some definitions. Let’s begin:

TTM or ttm (sometimes it’s in caps, sometimes in small letters). This means “trailing twelve months” and refers to the previous four quarters that have been reported. If the reference is to TTM earnings and the last quarter reported was Dec 2023, that’s easy. It refers to the sum of the March, June, Sept, and Dec 2023 earnings. But what if they have already reported Mar 2024 earnings? Then you use the sum of June, Sept, and Dec 2023, and Mar 2024, earnings, but you drop off Mar 2023 (which would be a fifth quarter).

FCF stands for Free Cash Flow. The actual cash the company has made at the end of the year.

SaaS is software as a service. You don’t sell the software outright or lease it outright, you keep it on the Cloud and manage it for them.

ARR is Annual Recurring Revenue, and means what it says.

S&M is Sales and Marketing expense.

R&D is Research and Development expense.

G&A is General and Administrative Expense (telephone, electricity, CEO’s salary, etc.

Operating Expense, the sum of the above three.

GAAP is short for Generally Accepted Accounting Principles and refers to a set of fixed required accounting rules. These were created to avoid cheating on quarterly reports, but for all the good intentions, they unfortunately sometimes give bizarre and nonsensical results. For this reason, in addition to the GAAP results, which they are forced to give, most companies give:

Adjusted or non-GAAP results, which they feel (and I agree) give more consistent and more helpful results in allowing you to see how the company is doing from quarter to quarter. They are usually obtained by removing various non-cash expenses or gains, or extraordinary one-time gains or losses that don’t reflect how the underlying business is doing. (These can also be abused, but in my opinion are almost always preferable to GAAP).

YoY or yoy is short for Year-over-Year. Okay, but what does that mean? Well, for example, if you say March quarter results were up by 12% year-over-year, that means compared to March results a year ago. This is contrasted to sequentially.

Sequentially, which refers to the quarter just before. Thus, if you say March quarter results were up by 5% sequentially, that means compared to the December quarter results, the quarter just before. Investors like to see earnings and revenues going up sequentially as well as you, but sometimes it isn’t possible because you also have to take seasonality into account.

Seasonality? What the heck is seasonality? Think Christmas. If you are a major retail store a large part of your years results will come during the December quarter. But if you are a manufacturer, your big quarter is likely to come in the quarter before, the September quarter, when you are shipping out to the stores who are stocking up for Christmas. And some businesses renew a lot of contracts in December and get a lot of business then, or get orders when other companies are closing their books for the year in December. Companies that do business in China are light in the first quarter because of the Chinese New Year. Those who do business in Europe may be light in the Sept quarter because every one is on vacation in August in Europe. Outdoor construction companies will do less business in the middle of winter, etc, etc.

The PE ratio or PE. This is the Price of the Stock divided by the earnings over the past year (These are the trailing-twelve-month earnings, or TTM earnings). It tells you how many times bigger the price is than the earnings. Lower is better. For example, company ABC has a price of $91.70 and adjusted earnings of $3.52, so it’s PE is 91.70 divided by 3.52, which gives a PE of 26. That means the price is 26 times the earnings, or that the earnings are just about 4% of the price. Generally a faster growing company will get a higher PE because the price is bid up by investors anticipating future higher earnings. Also, a company with a lot of hype will often get a higher PE, again because investors bid the price up based on dreams. (For example, last time I looked, company DEF had a PE of about 90 or so, which is huge, although it was growing at a quarter of the pace of ABC, but DEF had a lot of hype and TV ads, etc).

PEG ratio. This is an attempt to see if the PE is appropriate by comparing it to the rate of growth, (PE divided by the estimated rate of yearly growth of earnings over the next five years). It’s a noble effort, except that guessing the rate of growth of earnings over the next five years has no more accuracy than estimating how many angels can dance on the head of a pin. To avoid this problem, I suggested the 1YPEG.

1YPEG, or One Year PEG. This is the PEG looking back over the past year: the PE divided by the rate of growth of earnings over the most recent twelve months. It has the major disadvantage of looking backward, but has the advantage of using a real number, not a guess, for the growth rate. And the rate of growth over the next year will probably approximate the rate of growth over the past year, more than some five-year guess. The 1YPEG is just a screen though, to tell you if the price is in a reasonable range, and not the end-all and be-all.

TTM Rate of Growth of Earnings is calculated by taking the earnings of the last four reported quarters, and seeing how much they have risen over the four quarters previous. For example, you’d get it by taking the sum of June, Sept, and Dec 2014, and Mar 2015, earnings, and divide it by the sum of the sum of June, Sept, and Dec 2013, and Mar 2014, earnings.

## How To Post in Italics, Bold, and make Tables – This is copied for the most part from the Fool’s instruction page.

In simple terms; “i” is for italic. “b” is for bold. “tt” is for monospace font. All of those follow the usual Fool posting conventions. The only one that’s slightly different is for charting or tables: “PRE”. (see below)

You use them like this:





Chart in monospace

Year  Chart Value  Chart Value2  Chart Value3
1969      45          56             45
1970      61          55             42
1971      83          44             31


You can avoid the “PRE” command by clicking the “Table Data” box directly under the “submit message” button, but that changes the entire post to Monospace and makes it a bit harder to read (especially if you have long lines of written text, which will cause the post to be really wide and force people to scroll back and forth to read it).

Most fonts use variable spacing (technically: Proportional spacing) so narrower letters don’t end up with a bunch of “white space” on each side. But variable pitch letters are a nightmare for column formatting, so you use “monospace.” Monospace means every letter is exactly the same width, whether it’s an “i” or a “w.” Note the difference between the “h” “i” and “j” in proportional spacing and monospace below:



POSTING IN ALL CAPS is considered mildly impolite, like shouting. It’s okay for emphasizing a word or two but not for the whole message. (I do sometimes use it to get everyone’s attention though, about stopping an Off-Topic thread).

I hope that you found this useful. I’ll attempt to get it placed in the sidebar.



Hi Saul,

First off thank you very much for posting this, it always helps me to take a more distant view. I’ve realized, much like in business, investing is about being able to not mistake the forest for the trees. Over the course of the past 3 years, with this forum and with my own decisions that led to losing a very significant share of what I started with (since now slowly recouping, I am at around +40% for 2023) I’ve learned important things:

  • If you feel great about investing, then you should be wary about the market situation. It’s not meant to feel easy, at all, ever.
  • If you feel bad about investing, it’s either a) you are realizing that you still know nothing, or b) the market is probably really oversold. In both cases above, do not act on your feelings.
  • Real success in investing comes from finding the right business for the long term, and avoiding hasty transactions at any point, until you feel you’ve reached a level of mastery of your frameworks AND emotions, which is unlikely to happen under 10-15 years of expertise

Those lessons are worth more to me than the money lost (mid 5 figures), because I do, oh so much, love learning.

All that being said, I do have a question about IPOs for you. It seems like for the clients of the banks, it is extremely easy to make money, and make money fast, at a low risk. Is my understanding correct ?
Have you ever thought of trying to access these IPO offerings ? Is that even possible, or something you would be interested in ? and, why - thought I know you always do provide your why. :slight_smile:

Looking forward to your, and other board members insights!


My broker doesn’t do IPO’s so it’s not possible for me. All IPO’s aren’t money makers though. There are some that go down from their IPO price, though it’s not common.


Hi Ysdrasill

I have found it is difficult for small investors to make money in the “easy money IPOs” because they are always super oversubscribed. When that happens, investors get their allocation from the investment banks, and your allocation is going to be tiny, if at all, rather than their biggest clients.

For example, I was a client of Morgan Stanley who co-led the IPO for SNOW. I put in my request to buy 100k of the stock at the IPO price (which I think was 120–sorry memory is hazy). You had to be an accredited investor, and such, which was fine.

At time of IPO, I got 0 shares. The stock debuted much higher (I think over 200 but I am not sure now). I called my Morgan Stanley guy and I asked why I got no shares, he said it was super oversubscribed and only the largest clients actually got shares. He shared a story that two CNBC anchors didn’t get shares and were unhappy too.

I complained that shouldn’t it be pro-rata, and if there’s a hundred million shares getting sold, I should get at least a share. But he said “it didn’t work that way” and even if it did, my allocation might have been less than a share given the aggregate interest.

The experience was repeated with multiple IPOs in that era. I learned that if an IPO stock is going to have a big first day pop, it’s going to be oversubsubscribed. If it’s oversubscribed, the big clients are going to take all that benefit, and the little guys aren’t going to have a chance.

I could be wrong, but this is my experience. As a result, I no longer use Morgan Stanley. The fees are high, and the trading platform was terrible. Use the big guys if you need them to pick the investments for you.

Hope this helps,


Thanks Saul, Rob, this is very insightful. So this is one of the last investing areas where retail investors like us can’t really partake. And I guess that is because it’s one of the most profitable ones ! But it also really isn’t investing, it’s gambling with a hand in the dealers pocket …


Insightful. In the past, and perhaps now, the number of shares of IPO’s offered to individual brokerage offices was based on the total $ holdings of the office. I had a good friend who sought out brokerage offices with large holdings in areas of mostly retired populations who were not interested in IPOs. He then transferred a portion of his accounts to each of three offices, one being in Sun City, AR; which almost always gave him access to the IPO shares at the offering. Graydrake


Thats super interesting, Graydrake. Would you mind mentioning which firm this was? I might try this approach in the future.


This was nearly 15 years ago; I do not recall the firm and the friend has since passed. I do recall, however, he worked with his local broker informally to identify the offices where IPO shares had a probability of being available. It seemed to be a bit trial and error, so some selections did not work out, but eventually he found some that were usually successful.