In order to understand how to invest as a Buffett value investor you need to understand how to value a business.
In this lesson we’ll describe a small business, how money flows through the business, and how to value a business.
When you become an investor of a stock, you are actually becoming a part “owner” of the company that stock represents. So, in order to be a successful owner you need to understand business. Understand: Warren Buffett does not invest in stocks, he invests in businesses. Whether you are investing in 1 share or 2 million shares, you need to look at each stock as owning a business. You must grasp this concept in order to become a value investor.
KEY INVESTING VOCABULARY
Net Income – The total profit of a business when expenses are subtracted from the total revenue generated (gross income).
Earnings – When everything is subtracted out from the income (i.e. rent/mortgage, employee salary, re-investments into the business, debt payments, business owner’s salary, etc.), what’s left is the earnings per share of the business.
Revenue – Revenue is the money that is generated from the customers.
Cost Of Revenue – Is the cost of what it took to generate the revenue. This is also referred to as cost of goods (the cost to produce what you are selling).
Net Income Before Taxes – The net income before subtracting the taxes owed from the revenue.