Assets
An asset is a resource which has economic value and can be converted to cash. Examples include cash, inventory, factories or patents. Assets are shown on a company’s balance sheet, which is one of the financial statements provided by a company that is listed on a stock exchange.
Book Value
The book value of a company, often also called net asset value or shareholders’ equity, is the value of its total assets minus its total value of its total liabilities. Book value does not include value of its total off balance sheet assets and value of its total off balance sheet liabilities.
Broker
A broker charges a fee or commission for executing buy and sell orders submitted by an investor.
Contrarian investments
Investments that are at odds with the sentiment currently expressed by the market. An example was to invest in old economy stocks during the late nineties technology bubble.
Custodial services
The safeguarding of clients’ investments. ODL Securities provides custodial services to the clients of Lowes Wealth Management. ODL Securities is a member of the London Stock Exchange and is regulated by the Financial Services Authority in the UK, which has the most stringent financial regulations in the world.
Discounted cash flow model
The Discounted cash flow model is a valuation method which uses discounted projected free cash flows. Free cash flows represent the company’s operating cash flow (cash gained from the business’ day to day operations) after deducting the cost of maintaining and potentially increasing a company’s assets. Discounted means that one tries to account for the fact that the cash flows are in the future and thus worth less than if one were to receive this money today. It is important to note that since these cash flows are projected, they are not guaranteed but simply an estimate as to how much a company will make from its operations in the future. Lowes Wealth Management tends not to use this valuation method.
Discretionary portfolio management
An investment service whereby an investor's portfolio is administered entirely by a professional manager. The portfolio manager assumes responsibility for all investment decisions, reporting back to the client on a regular basis. The portfolio manager will discuss the client’s requirements (in terms of risk, liquidity etc) and manage the portfolio in accordance with these requirements. Once the client chooses a discretionary portfolio management service, the client has no need to participate in the investment process, except to review performance and objectives as required.
Diversification
A risk management technique that mixes a variety of investments within a portfolio. It is designed to reduce the volatility of the overall portfolio performance.
Dividend
Many companies distribute a part of their earnings to shareholders, on a quarterly or an annual basis. Lowes Wealth Management portfolios consist almost entirely of stocks that have been paying consistently high dividends for long periods.
Earnings
Earnings, also known as net profits (or the bottom line), represent the company’s net income, which is the revenue that is generated, minus all costs and taxes incurred by the company.
Exit charge
A fee an investor has to pay when withdrawing funds from an investment account. Lowes Wealth Management’s account has no exit charge.
Financial statements
Written reports on the financial condition of a company. Financial statements include a balance sheet, income statement, statement of changes in net worth and statement of cash flow. Companies listed on a stock exchange are required by law to issue financial statements on a regular basis and to ensure that the information provided is accurate.
Funds
Here we refer to assets in the form of money. (As opposed to ‘mutual funds’, which is an entirely different concept.).
Growth investment approach
A growth investment approach favours buying shares of companies considered likely to experience a rapid growth in earnings. Such companies are unlikely to figure in a value investors’ portfolio as a value investment approach will tend to view future earnings estimates with scepticism.
Index
An index (plural – indices) is typically a way of measuring the performance of an economy or one of its sectors. We use the most relevant indices to provide a benchmark against which the performance of our portfolios can be compared.
Intangible Asset
Intangible assets are assets with no physical existence. Intangibles are the counterpart to tangible assets such as cash and land. Examples include patents, licenses and goodwill. Lowes Wealth Management tends to attach a lower weighting to intangible assets when compared to tangible assets, as their true value is often difficult to accurately assess.
Intrinsic value
The intrinsic value is an assessment of the worth of a company today, taking into account a range of factors, with particular emphasis on its assets and earnings. A value investor will tend to focus on historical and current, as opposed to future estimates for earnings.
Liabilities
A company's legal debts or obligations, such as accounts payable (money owed to suppliers) or bank loans. Liabilities are shown on a company’s balance sheet, which is one of the financial statements provided by a company that is listed on a stock exchange.
Lock-in period
A time period for which investors must keep their money invested in an account or investment fund. Withdrawals within this period are either impossible or heavily penalized and thus expensive. Lowes Wealth Management’s account has no lock-in period.
M & A (Mergers and acquisitions)
M & A is a general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, whilst an acquisition is the purchase of one company by another.
Management fee
A fee paid to have assets managed professionally. It is usually expressed as a percentage of the total assets under management. Lowes Wealth Management charges 0.1% on the first of each month. Thus, for every USD $100,000 under management the cost will be USD $100 per month.
Margin of safety
The Margin of Safety is the difference between the intrinsic value of a company and that company’s market capitalization. This is normally expressed as a percentage of the market capitalization. Thus, a company with an intrinsic value of 100 but a market capitalization of 80 would have a margin of safety of 25%.
Market capitalization
Market capitalization is the value currently ascribed to the company by the stock market. This is derived by multiplying the price of an individual share by the total number of shares outstanding.
Minimum investment period
The minimum time period for which investors must keep their money invested in an account or investment fund. Withdrawals within this period are either impossible or heavily penalized and thus expensive. Lowes Wealth Management’s account has no minimum investment period.
Net asset value
The net asset value of a company, often also called book value or shareholders’ equity, is the value of its total assets minus its total liabilities. Net asset value does not include off balance sheet assets and off balance sheet liabilities.
Off balance sheet assets
Off balance sheet assets are assets that do not appear on the balance sheet (the account of a company’s assets and liabilities), such as a strong customer base or product portfolio. These assets can, however, be very valuable to a business and identifying them can be the key to recognizing hidden value.
Off balance sheet liabilities
Off balance sheet liabilities are liabilities that do not appear on the balance sheet, such as contingent liabilities or an unfunded pension liability. These liabilities can be a major burden to a business and identifying them can be the key to recognizing problems that the company is hiding, intentionally or otherwise.
Old economy stocks
Stocks of companies in long-term established industries such as oil and steel.
Portfolio
A portfolio consists of a collection of assets held by one institution or individual. Lowes Wealth Managements’ portfolios are equity portfolios, meaning they only contain equity. Portfolios in general can also include bonds, real estate and other assets besides equity.
P/BV (Price to Book Value Ratio)
The market capitalization of the company divided by its book value. At Lowes Wealth Management, we compare this figure with the industry average and the company’s own historical figures for valuation purposes.
P/E (Price to Earnings Ratio)
The market capitalization divided by the earnings of a company. At Lowes Wealth Management, we compare this figure with the industry average and the company’s own historical figures for valuation purposes.
Peak to Peak
This describes the way in which our performance fee is applied. Lowes Wealth Management first sets the peak at the level of the funds received from the client. If the value of the client’s account is higher on December 31st, a new peak is set at the higher level and the performance fee is then debited. On every subsequent December 31st, if the new account value is higher than the current peak, a new peak will be set and the performance fee debited. If the account value as of December 31st is not higher than the current peak, no new peak is established and no performance fee is debited.
Performance fee
A fee that is dependent on the performance of the client’s portfolio. At Lowes Wealth Management, our performance fee is 10% of net returns on a peak to peak basis each December 31st. This means that if you invest USD $250,000 on January 1st, and at the end of that year, after ALL charges, your account value is $280,000, then the performance fee will be $3,000 ($30,000 x 10%) leaving you with an account balance of $277,000.
Private equity consortium
An organization representing major investors which is looking to purchase or take a substantial stake in a company. Deals of this type are often negotiated directly between the company and the investor and thus do not take place on the public market.
Returns
The loss or gain on an investment. Returns are often quoted in percentages.
Risk
There are a number of possible definitions of risk. We consistently refer to risk as the chance of a loss of some or all of the invested capital. In our experience, this definition is the understanding of risk most often held by our clients.
Share / Equity / Stock
Used interchangeably, a share / equity / stock is a type of security that represents a part ownership of a company or institution and therefore a claim on a part of that firm’s net asset value and earnings.
Shareholders’ equity
The shareholders’ equity, often also called net asset value or book value, is the value of a company’s total minus its total liabilities. Shareholders’ equity does not include off balance sheet assets and off balance sheet liabilities.
Tangible Asset
A tangible asset is a physical asset. Examples include cash, inventory, plant, equipment and land. Tangible assets are often easier to accurately value than intangible assets.
Trading
Here we refer to the process of selling and purchasing shares.
Valuation Ratios
Ratios that are used to help assess the value of a company. These include the P/E and P/BV ratios.
Value investment approach
A value investment approach consists of investing in companies that are trading at a discount to their intrinsic value. This difference between the market capitalization and the intrinsic value is the margin of safety.
Value screen
This is the process of filtering the shares listed on a stock exchange using a range of factors designed to reveal companies that may be trading at a discount to their intrinsic value. For example, a simple value screen might sort US companies on the basis of low P/E and P/BV ratios.
Wealth management
The management of a client’s wealth by an investment professional.