In one sentence: Business has a language of a few key numbers, and the first of Phil's "big four" growth rates is the growth of book value (equity) per share, read from the balance sheet, with earnings per share introduced next.
Key ideas
- Investors, not traders. Phil separates investors from day traders and speculators, and says business language is numbers, but only a handful matter. Computers now do the arithmetic. [01:00–06:00]
- Take Phil's list on trust, then test it. Danielle worries the "five numbers" are just his opinion. Phil's answer: the names of the numbers are facts, the choice of which matter is his judgment, built on Buffett's approach. You get fluent by use, like a language. Beware people who sound fluent but don't know what the numbers mean. [06:00–12:30]
- Three financial statements. Balance sheet, income statement (profit and loss) and cash flow statement. [03:30–05:00]
- Balance sheet = assets minus liabilities. Assets are what the company owns at their value, and liabilities are what it owes. What remains is equity or book value: what would be left if the business were wound up. Phil compares it to a family's net worth. [12:30–15:00]
- The growth rate matters more than the level. A family's equity going from 66k to 100k to 150k is a growth story, even as the percentage slows. For a living company, how fast equity grows tells you more than its size. Debt-free firms that grow assets convert that straight to equity. [15:00–17:00]
- Graham's world: price against liquidation value. In the Depression Graham bought businesses priced as if dying. If you can buy for $100k something with $500k of book value, the chance of survival and growth is a free lottery ticket. Today's healthy businesses rarely sell at such discounts, so the value lies in future cash generation. Distressed industries (Phil mentions coal, natural gas) need a check on whether the problem is temporary. [16:00–20:00, 25:00–27:00]
- Lazy by design. Pabrai (reported as running a roughly billion-dollar fund with almost no staff) and Munger ("laziness bordering on sloth") invest in bursts. Research takes 10–15 hours at least, then you mostly wait. When price falls, you check whether your story still holds and often buy more. [20:00–25:30]
- Where to find the figure. Book value growth isn't printed in the filings. You calculate it from the balance sheet's equity line or use a tool. Free sites give only five years, which yields just four growth rates. Phil's own site gives 11 years (10 growth rates). He wants 20–30 years for a deep dive. [26:00–32:30]
- Use per share. Divide equity by shares outstanding. Companies can change the share count, which changes what each owner holds. So growth is measured per share. [32:30–34:00]
- The big four growth rates. Book value per share, earnings per share, operating cash per share and sales per share. [36:00]
- Income statement vocabulary. Sales/revenue is the top line. Subtract costs, interest and taxes to get net income, the bottom line. Net income divided by shares is EPS. [37:00–40:00]
- Growth rates are computed at several horizons. One-year growth is arithmetic (new ÷ old − 1, so $1.20 over $1.00 is 20%). Then look at 3-, 5-, 7- and 10-year averages to see the forest, not the trees. [40:00–43:00]
- Number of numbers. Phil says "five, actually six, and Pabrai has ten". The point is that it's a small set. [43:00]
How it maps to RuleOne
- The screen computes these growth rates from filings, so you don't need to chase them by hand. The stock pages show the 1-, 3-, 5- and 10-year horizons Phil describes.
- Look at equity on the balance sheet and EPS on the income statement through the financial statements on each stock page, or via EDGAR.
- The Big Five idea (module m4) begins here; sales, EPS, equity and cash are four of the five. The fifth is ROIC, covered later.
Buffett, Munger and Graham links
- Graham's net-current-asset ("net-net") idea is in The Intelligent Investor (ch. 15 and ch. 7) and Security Analysis. Buffett moved from that to buying growing businesses (see 001).
- Book value growth appears in Buffett's own scorecard: Berkshire's letters track book value per share as a gauge, and he later said it understates intrinsic value.
- Munger's "sit on your ass" investing (Poor Charlie's Almanack) matches the lazy-investor point.
Words to know
- Balance sheet: assets, liabilities and equity at a point in time.
- Book value / equity: assets minus liabilities.
- Top line / bottom line: revenue / net income.
- EPS: net income divided by shares outstanding.
- Per share: dividing a company-wide number by shares so you see what each owner gets.
Try this
Open a company on /stocks/, find the equity line on its balance sheet for the last 10 years, divide by shares outstanding, and calculate the year-by-year growth rate yourself. Compare with what the site shows for the 5- and 10-year book value per share growth.
Check yourself
- What is book value?
Answer
Assets minus liabilities: what would be left for owners if the business were wound up. - Why use per share numbers?
Answer
The company can change its share count (new issues, buybacks), which changes what each owner holds. - What does the "big four" list consist of?
Answer
Growth rates for book value per share, earnings per share, operating cash per share and sales per share. - How do you compute a one-year growth rate?
Answer
New value divided by old value, minus 1. For example $1.20 over $1.00 is 20%.
Short quotes
"Laziness bordering on sloth." (Phil quoting Munger, ~22:00, auto-transcribed)