 Good day, fellow investors! We continue with our summary of Ben Graham's The Intelligent Investor and today we'll discuss the second part of Chapter 11, Stock Analysis for the Lay Investor, How to Analyze Stocks. And these are the topics, valuations, what impacts those are the different per industry, long-term prospects, management, financial strengths, capital structure, dividends and current dividend rate, but more about that in Chapter 19. Capitalization Rate for Growth Stocks. What's the valuation for a growth stock? And Graham gives us a formula, industry analysis and a two-part appraisal process. So analyzing a company starts by analyzing future, estimating future revenues, future margins, future growth, future businesses, and then discounting that cash flow to the present value. And what you attach also to those future cash flows is always a valuation. What's the discount rate and what's the valuation on the future earnings? And Graham gives a great example about that. From his table in the book he shows how the earnings forecast for example of allied chemicals were 3.70, but the actual were on average 1.46. So that was much worse than what expected. And those averages go all around the place, they are very, very rarely, especially in this environment now, in the modern era, which was different than back then. So always take with a grain of salt all those analysis that give you a target price because you never know what can happen. And here Graham touches on a delicate side project. As you never know what can happen, the mainstream media tells you diversify, diversify, diversify, diversify. But Graham is more in favor of okay, find a few sectors, a few stocks that you will understand well, that you will cover over time better if those few sectors are a little bit diversified and then you will know how to take advantage of when those are cheap and take advantage when those are expensive. So be more specialized in something and this will lower your long term risk and increase the return. Diversification just gives you the average and when things go bad, it amplifies the risk. Now on factors affecting valuations, he looks at market multipliers and he says that it's not that good to apply different valuations to same earnings. For example, general long-term prospects were very positive for chemical companies back then, but not so positive for oil companies. However, in 1963 the expectations were good for chemicals. The result were that oil companies had much better returns, much better earnings from 1963 to 1970. And this is always the question, are you an absolute investor? Do you look an absolute returns business yields or relative returns? Oh, this is better. This is worse. This is worth overpaying or not. So Graham is more an absolute investor. Give me earnings. That is what gives me my returns. About the management, there is not much help there. The management might have a great business, so it can be bad management. Even an idiot can run the company and doing good. So you never know when the management is really delivering or adding value. So Graham focuses on changes in management where there is no risk because there is value, margin of safety. You can sell the assets and then the management, the new management might turn that around. But those are already more specific situations. On the financial strength and capital structure, the more cash, the more safety. But he also says if there is leverage, if you can time that well, the return might be exponential because the company is leveraged, the return on equity might be very, very high. So again, with Graham, he is a very sophisticated investor trying to do something for the lay investor, but he cannot avoid those things where you have to be sophisticated. And as for dividends, Chapter 19, really in detail about dividends. So we'll see about that later. Subscribe to the channel, please. Now let's go to the formula for long term growth stocks. This is it. The formula that Graham simplified, the value of a growth stock is the current normal earnings times 8.5 plus twice the expected annual growth rate. And in table here, he says expected growth rate, multiplier 8.5, expected growth rate, I don't know, 10% per year. Over the next seven years, multiplier is okay that it is 28.5. Five to seven years expected growth at 20% multiplier PE ratio 50 is okay, but there are very few companies that can grow that long, that high. Let's do an example. Facebook, the current earnings are $6 per share. Let's say they grow at 14.3 as Graham table gives us, then the price earnings ratio would have to be 37.1. This is 222 stock price. So will Facebook grow faster than 15% it's growing faster now or will it go slower? Let's go again on another example. 20% growth on Facebook, $6 earnings, 8 times 5 times 2 times 20 is 40, 6 times 48.5. The value of Facebook goes to 291 if they grow 20% over the next seven years. Will Facebook grow 20% over the next seven years? I don't know why I don't invest in Facebook. Well, I am long YouTube. I'm investing with daily videos. I'm long IGTV. I have my webpage on Facebook. So I'm already exposed to that and it wouldn't be proper diversification. So I'm hedged by not investing in Facebook, but investing in social medias with these videos. So that's just my perspective. You might want to see how Facebook fits you and there is even a video about Facebook that I made in December. Good timing then. On the industry analysis that you might find a lot of reports. Graham says that very few reports give you the insight, okay, this is now an unpopular industry, but this will change. And those are the reports you have to look at. Usually reports just regurgitate what happened in the past and plot the line in the future. And that's usually baked already in the price. So you have to see, okay, this is a popular sector that's going down, or an unpopular that's going up. Those are the reports you have to see. And that's something we try to focus on here on the channel. Further on the two part appraisal process, he says that one person should analyze the past and get to the value of the past. And one should analyze the future and estimate the current value based on future cash flows. The reasons are improvement, as the focus is just not just on current, it gives experience and insight. And it gives a body of recorded experience where you can always come back in the future when something happens to the stock. So this makes you better understand the possibilities and limitations to conclude with a quote, eventually, the intelligent analyst will confine himself to those groups in which the future appears reasonably predictable, or where the margin of safety of past performance, value over the current price is so large that he can take his chances chances on future variations. So in the subsequent chapters that we are going to analyze, we'll discuss much more examples that Graham will show. And I'm looking forward to that because the race to investing, learning, learning, investing knowledge has just begun. Thank you for watching, looking forward to the comments and I'll see you in the next video.