12/25/2011

Morningstar’s Stock Tutorial





Personal Investment Choices
- Stock: 股票
- Bond: 债券
- Mutual Found: 共同基金
- Real Estate:不动产
- Bank Saving: 银行储蓄

Understanding Company, Stock/Shareholder and Bond/Creditor
- The main purpose of a Company is to take money from investors (creditors and shareholders) and generate profits on their investments.
- Creditors provide a company with debt capital (in terms of Bond), and Shareholders provide a company with equity capital (in terms of Share). Stock is an ownership interest in a company, while Bond, at their most basic, are loans. When you buy a bond, you become a lender to an institution, and that institution pays you interest. As long as the institution does not go bankrupt, it will also pay back the principal on the bond, but no more than the principal.
- Creditors are typically banks, bondholders, and suppliers. They lend money to companies in exchange for a fixed return on their debt capital, usually in the form of interest payments. Companies also agree to pay back the principal on their loans.
- Shareholders that supply companies with equity capital are typically banks, mutual or hedge funds, and private investors. They give money to a company in exchange for an ownership interest in that business. Unlike creditors, shareholders do not get a fixed return on their investment because they are part owners of the company. When a company sells shares to the public (in other words, “goes public” to be “publicly traded”), it is actually selling an ownership stake in itself.
The Great Compound Interest(复利)
- Compound Interest means making returned interest as investment and it can increase your money in a surprising rapid way. A simple way to know the time it takes for money to double is to use the rule of 72. For example, if you wanted to know how many years it would take for an investment earning 12% to double, simply divide 72 by 12, and the   answer would be approximately six years. The reverse is also true. If you wanted to know what interest rate you would have to earn to double your money in five years, then divide 72 by five, and the answer is about 15%.

Part II – Stock Market and Qualitative Corporate Analysis
Shorting:做空
Stock Index
-  A stock index is simply the price of a grouping or a composite of a number of different stocks, often with similar characteristics.
- Three of the most widely followed indexes are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite.
- The Dow Jones Industrial Average: it is composed of 30 large stocks from a wide spectrum of industries that are selected by the editors of The Wall Street Journal. It’s basically the average of the price of the 30 stocks, but had been adjusted a lot due to stock split like events.
- The S&P 500: it is a market capitalization weighted average stock index. The company list in maintained by the Standard & Poor’s company, a division of McGraw-Hill.
- The Nasdaq Composite: it is also a market-cap-weighted index, but it includes all companies listed in Nasdaq.

How to do Qualitative Analysis on Business? Ask and try to Answer questions:
- What is the goal of the business?
- How does the business make money?
- How well is the business actually doing?
- How well is the business positioned relative to its competitors?

Analyze Competitive Positioning of Business
- Find a business’s economic moat, which is a long-term competitive advantage that allows a company to earn oversized profits over time.
- Economic Moat Types:
Low Cost (due to scale or core technology)
High Switching Cost (user sticky)
Network Effect (ecosystem, scale/size matters, Matthew effect, winner takes over)
Intangible Assets (government approvals, brand names etc.)

How to Build Economic Moat?
- Creating real or perceived product differentiation
- Driving costs down and being a low-cost leader
- Locking in customers by creating high switching costs
- Locking out competitors by creating high barriers to entry or high barriers to success

Understand Strategic Positioning using Porter’s Five Forces
- Barriers to Entry. How easy is it for new firms to start competing in a market? Higher barriers are better.
- Buyer (Customer) Power. Similar to switching costs, what keeps customers locked in or causes them to jump ship if prices were to increase? Lower power is better.
- Supplier Power. How well can a company control the costs of its goods and services? Lower power is better.
- Threat of Substitutes. A company may be the best widget maker, but what if widgets will soon become obsolete? Also, are there cheaper or better alternatives?
- Degree of Rivalry. Including the four factors above, just how competitive is a company’s industry?

 Are companies beating one another bloody over every last dollar? How often are moats trying to be breached and profits being stolen away?

Porter’s five forces considered together can help you to determine whether a firm has an economic moat. The framework is particularly useful for examining a firm’s external competitive environment.

Part III – Accounting and Quantitative Corporate Analysis

关于财务报表,除了两点值得强调,其它值得注意的都是英语单词的中文翻译
一、财务恒等式:Assets – Liabilities = Equity  
二、Income Statement 与 Statement of Cash Flow的区别
- 根源在于Accrual Accounting(权责发生制)的会计原则,它要求companies to record revenue and expense when corresponding transactions occur, not when cash is exchanged
Operating Activities – 运营活动
Investing  Activities – 投资活动
Financing Activities – 融资活动
Capital Expenditure (a.k.a. CapEx) – 资本支出
Monetary Investment – 货币投资
Dilute – 稀释,用作除数的分母变大
Depreciation – 折旧摊销 (有形资产)
Amortization – 费用摊销 (无形资产)
Retained Interest – 未分配利润
Treasury Stock – 留存股票
公司财报分析指标:
- Efficiency
Inventory Turnover
Accounts Receivable Turnover
Accounts Payable Turnover
Asset Turnover
- Liquidity
Current Ration
Cash Ratio
- Leverage
Debt/Equity
Interest Coverage
- Profitability
Gross Margin
Operating Margin
Net Margin
Return on Assets
Return on Equity
 公司竞争优势定量分析:
- ROA (Return on Assets) = Net Income / Average Assets
= (Net Income / Revenue) * (Revenue / Average Assets)
= Net Margin * Assets Turnover
- ROE (Return on Equity) = Net Income / Average Equity
= (Net Income / Revenue) * (Revenue / Average Assets) * (Average Assets / Average Equity)
= Net Margin * Assets Turnover *  Assets-Equity Ratio
- ROIC (Return on Invested Capital) = Operating Profit After Tax / Invested Capital
= (Operating Profit * (1 – Tax Rate)) / (Assets – Excess Cash – Non-Interest-Bearing Current Liabilities)

Part IV Stock Investment Analysis and Strategies











Great company is different with great investment, your goal as an investor should be to find wonderful businesses, and invest in them at reasonable prices.

Company Valuation – determine the value of a company.
Measuring Business Value:
Market Capitalization = Outstanding Share Count * Share Price
Enterprise Value = Market Cap + Debt – Cash

There are actually two parts to the value of any business:
- The first part is the current value of all the business’s assets and liabilities, including buildings, employees, inventories, and so forth.
- The second part is the value of the profits the business is expected to make in the future.

There are two broad approaches to stock valuation. One is the ratio-based approach and the other is the intrinsic value approach:
- Valuation ratios compare the company’s market value with some financial aspect of its performance-earnings, sales, book value, cash flow, and so on.
- The ratio-based approach is the most commonly used method for valuing stocks, because ratios are easy to calculate and readily available. The downside is that making sense of valuation ratios requires quite a bit of context.
- Popular ratio-based measures:
Price / Sale
Price / Earning
Price / Book

Cash Return = (Free Cash Flow + Net Interest Expense) / (Enterprise Value)
- The other major approach to valuation tries to estimate what a stock should intrinsically be worth.
- A stock’s intrinsic value is based on projecting the company’s future cash flows along with other factors. You can compare this intrinsic or fair value with a stock’s market price to determine whether the stock looks underpriced, fairly valued, or overpriced.
- However, the main disadvantage is that estimating future cash flows and coming up with a fair value estimate requires a lot of time and effort.

Estimating a stock’s fair value, or intrinsic value using DCF model:
- The main idea behind a DCF model is relatively simple: A stock’s worth is equal to the present value of all its estimated future cash flows.
- Free cash flow represents the cash a company has left over after spending the money necessary to keep the company growing at its current rate.
- Many variables go into estimating those cash flows, but among the most important are the company’s future sales growth and profit margins.
- What cash flow to predicate and discount to present value? dividend payments -> free cash flow, because there are many firms that pay no dividends.
- How to do the discounting?
Present Value of Cash Flow in Year N =  CF at Year N / (1+ R)^N
CF = Cash Flow
R = Required Return (Discount Rate)
N = Number of Years in the Future
- The rate you would use to discount cash flows if using the “cash flow to the firm” method is actually a company’s weighted average cost of capital, or WACC. A company’s WACC accounts for both the firm’s cost of equity and its cost of debt, weighted according to the proportions of equity and debt in the company’s capital structure. Here’s the basic formula for WACC: (Weight of Debt) * (Cost of Debt)  +  (Weight of Equity)*(Cost of Equity)
- Computing the intrinsic value of a company: sum of all discounted (to present) future free cash flows

The math tricks behind DCF
- When counting the sum, we assume the company will generate cash flow all the time, but the growth number varies from near future to far future
- We usually assign specific growth ratios to 5-10 near future but assume equal (relatively) small ratio to long term growth
- Perpetuity Value: estimating the value of all cash flows after some specific year in one lump. It’s in fact the sum of geometric sequence with common ratio: (1+g)/(1+R)

Perpetuity Value = ( CFn * (1 +  g) ) / (R – g)
CFn = Cash Flow in the Last Individual Year Estimated
g = Long-Term Growth Rate
R = Discount Rate, or Cost of Capital
- Perpetuity value should also be discounted by to compute the present intrinsic value of a company

The main problem of DCF model to compute the intrinsic value is that, you have to determine many variable factors such as discount rate, growth rate for near future and long term. The estimating of these parameters are the real challenges for this model. To ensure your assumptions about these parameters make sense, you have to get familiar with those industries.

Stock Investing Strategy – Fat Pitch Strategy: Don’t Rush, Be Patient Till Enough Confident
- Locating Wide Moat Company
- Always Have a Margin of Safety
- Don’t Be Afraid to Hold Cash
- Don’t Be Afraid to Hold Relatively Few Stocks
- Don’t Trade Very Often

Investing Psychology: Mental Stuff that Leads to Investing Mistakes
- overconfidence
- selective memory
- self-handicapping
- loss aversion
- sunk cost
- anchoring: when estimating the unknown, we cleave to what we know
- confirmation bias
- mental accounting
- framing effect
- herding (羊群效应)

Part V Misc Tips and Great Investors
Portfolio Management
- diversification: don’t put your eggs in one basket
- if you own about 12 to 18 stocks, you have obtained more than 90% of the benefits of diversification, assuming you own an equally weighted
portfolio
- don’t weight each stock equally in your portfolio if you want to outperform market index
- consider including mutual fund to cover area that you are not familiar with

Options
- option is the right (but you can choose to exercise it or not at will when it expires) to sell (put option) or buy (call option) some thing (it’s stock for stock option) at a specific price (stated in the option contract)
- option makes shorting possible

Investing Tips
- Keep It Simple
- Have the Proper Expectations
- Be Prepared to Hold for a Long Time
- Tune Out the Noise
- Behave Like an Owner
- Buy Low, Sell High
- Watch Where You Anchor
- Remember that Economics Usually Trumps Management Competence
- Be Careful of Snakes
- Bear in Mind that Past Trends Often Continue
- Prepare for the Situation to Proceed Faster than You Think
- Expect Surprises to Repeat
- Don’t Be Stubborn (Stubborn VS Patient)
- Listen to Your Gut
- Know Your Friends, and Your Enemies
- Recognize the Signs of a Top
- Look for Quality
- Don’t Buy Without Value
- Always Have a Margin of Safety
- Think Independently

One Sentence Summary
- Invest in long term basing on quantitative and qualitative analysis, don’t speculate if you don’t want to rely on luck.

12/10/2011

Notes – Massive-scale online collaboration

There is a popular presentation on ted Titled as massive scale online collaboration given by Luis von Ahn.


Luis is a well known computer scientist who focuses on so called human computation technologies. He is famous for his previous projects CAPTCHA and reCAPTCHA. In fact, the word CAPTCHA is coined by him for “Completely Automated Public Turing test to tell Computers and Humans Apart”  in the paper: CAPTCHA: Using Hard AI Problems for Security .

CAPTCHA is publicly well known since we should already encountered them many times in our daily web life. But reCAPTCHA is not so well known but in fact we should also had faced it many times and this technology is solving some hard AI problems every day.

The motivation behind reCAPTCHA is that, there is about 200M CAPTCHA inputs per day and each input spends a people 10 seconds around. This is really a huge time and intelligence waste, so Luis want to leverage such kind of resource to accomplish some useful work – solving AI problems that can be divided into 10 seconds small chunks.

Fortunately, there do be one such problem – book digitizing: scan real books and turn scanned pictures into text. There are already many OCR (optical character recognition) technologies to do this automatically. But they are not good enough, it’s said that for books older than 50 years ago, OCR can’t handle +30% of them. So we can divide those OCR task into small pieces (usually, one word per piece) and let people solve them while they are doing CAPTCHA on Internet, which is called reCAPTCHA.

How it works? Each time a CAPTCHA is requested, the system send two pictures to people. One picture contains word that the system already knows but the other are not, and the unknown one comes from books that need to be OCRed. When receiving feedback from human, the system check whether the first picture/text matches, if yes, it has some confidence that the second picture/text also matches. To handle those cases that the second pair failed to match, the system will send the same picture multiple times and use the most popular answer as the final result.

This works very well and the reCAPTCHA is acquired by Google in 2009. But Luis didn’t stop there, now he is introducing another great ideas called Duolingo. The problem Duolingo wants to solve is translate the web into different languages and the challenges for this are:
- Lack of bilinguals
- Lack of motivation

The way to solve this problem is:learning by doing for language learners.

When doing language translation exercises, the learners are given real world sentences that come from the web translation problem. This solution is pretty good because it can solve the web translation problem because there are so many language learner in this world, and it also has positive feedback look to solve the motivation challenge:
- Learn with real content, thus learners has good exercise to improve their skills
- Fair business model for language education, thus learners can learn for free since he had contributed some valuable stuff while learning

Luis called his problem as duolingo and I think this project is very promising and super attractive.