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Century Management
Glossary of Terms
Accrued Interest
Bond interest
accrues daily based on a 360-day year. The accrued portion is that which
has been earned since the last interest payment date. Bonds which earn
interest on the date of payment only are said to trade "flat." Income
bonds do not accrue interest either.
ADJ
The letters "ADJ" after an index (Example: S&P 500
ADJ) adds the dividends in the total return as well as appreciation.
All Century Management performance composites include dividends as part
of the total return.
Adjustable Rate
Interest rate
or dividend which is adjusted periodically, usually based on a standard
market rate such as that prevailing on Treasury Bonds or notes. Typically,
such issues have a set floor or ceiling which limit the adjustment.
Annualize
Converting the rate
of return from a period of less than one year to an annual (yearly)
basis. For example, a security which returns 1% a month returns 12%
on an annualized basis. Also known as annualized rate or annualized
return. The term is similar to "run rate".
Average Capital
Base
The
average capital base represents the average paid-in capital for the time
period. The formula for average capital base is: Average Capital Base =
Beginning Market Value + Sum of (Each Change in Capital X (Days Left in
Period / Total Days in
Period))
Bear Market
A
market in which prices of a certain group of securities are falling or
are expected to fall. Although figures can vary, a downturn of 15%-20%
or more in multiple indexes (Dow or S&P) is considered an entry into
a bear market.
Bull Market
A
market in which prices of a certain group of securities are rising or
are expected to rise. Typically, this is a period of optimism in the
market.
Call
Feature
Right to redeem debentures prior to maturity at a stated price which usually
begins at a premium to par (100 percent) and declining annually. Of late, new
convertible issues are non-callable for at least two years, except under very
limited circumstances.
Capitalization
The
sum of a corporation's long-term debt, stock and retained earnings. Also,
the market price of an entire company, calculated by multiplying the
number of shares outstanding by the price per share (this is called market
capitalization, or "market cap").
Capital
Expenditures
Capital to maintain and expand plant and equipment.
Cash
Flow
Cash flow equals earnings plus depreciation. This is cash flow after taxes
but before capital expenditures. If you deducted capital expenditures, it would
be free cash flow (see "Free Cash Flow").
CFA
Chartered Financial Analyst. Sponsored by the CFA Institute, formerly
known as the Association for Investment Management and Research (AIMR),
it is the highest professional credential that a securities analyst can
have in our industry. The expertise gained from this program is stock
and bond analysis, as well as portfolio management. It requires three,
6-hour exams in three years on such topics as financial accounting and
quantitative analysis, and three years' experience as an investment professional.
As of August 2001 there are 37,150 CFA's. You can search the CFA
Institute web site to look up the complete details regarding this
credential.
CFA
Institute (formerly known as AIMR)
The Association for Investment Management and Research (AIMR), which changed
its name on May 9, 2004 to the CFA Institute, is an international, nonprofit
organization of more than 50,000 investment practitioners and educators in
over 100 countries. Founded in January 1990, AIMR was created from the merger
of the Financial Analysts Federation (FAF) and the Institute of Chartered Financial
Analysts (ICFA). The FAF was originally established in 1947 as a service organization
for investment professionals. The ICFA was founded in 1959 to examine candidates
and award the Chartered Financial Analyst (CFA) designation.
The CFA Institute's
mission is to serve its members and investors as a global leader in
educating and examining investment managers and analysts and sustaining
high standards of professional conduct. The CFA Institute's membership
is global in scope, and its activities are worldwide.
The Research Foundation
of CFA Institute sponsors practitioner-oriented research through funding
and publishing a diverse assortment of monographs, tutorials, and research
papers to broaden investment professionals' knowledge and understanding
of their field.
The CFA Institute
offers services in three broad categories: Education through seminars
and publications; Professional Conduct and Ethics; and Standards of
Practice and Advocacy.
CFA Institute's members
are employed as securities analysts, portfolio managers, strategists,
consultants, educators, and other investment specialists. These professionals
practice in a variety of fields, including investment counseling and
management, banking, insurance, and investment banking and brokerage
firms.
CFP
Certified Financial Planner. Sponsored by the Certified Financial
Planner Board of Standards, the CFP certification is now available in
11 countries. The CFP credential has become recognized as the global
symbol for competent and ethical financial planning advice. The expertise
gained through this certification process includes knowledge on risk
management, investments, retirement planning, tax planning, and estate
planning. A two-day, 10-hour exam is required as well as three years
of client experience (with bachelor's degree; five years without). As
of August 2001, there are 37,573 Certified Financial Planners. You can
search the CFP Board web site to look up the complete details regarding
this credential.
ChFC
Chartered Financial Consultant. This professional designation is sponsored
by The American College, in Bryn Mawr, PA. Charted Financial Consultants
must complete a minimum of eight courses and 16 hours of supervised examinations.
They must also fulfill stringent experience and ethics requirements. Over
38,000 individuals have been awarded the ChFC designation since its inception
in 1982. Individuals who earn this designation can provide expert advice
on financial planning, wealth planning, estate planning, income taxation,
life and health insurance, business taxation and planning, investments,
and retirement planning.
CM
This is the acronym for Century Management. CM is a licensed, registered investment
advisory firm. The firm was started in 1974 by Arnold Van Den Berg. The
legal name for the firm is Van Den Berg Management Inc. DBA Century Management.
The CM corporate office is located at 805 Las Cimas Parkway, Suite 430,
Austin, Texas 78746. Telephone is 800-664-4888 or 512-329-0050. More information
on CM can be found on this website.
CM
Value I Equities Only
"CM equities only" represents the return from the equities
within
the CM Value I Composite.
CM
Value I Total Account
Includes all asset classes such as equities, fixed income, money
market funds and cash within our CM Value I Composite (also known or
referred to as the CM Standard Composite).
CM
Value I Composite (also known or referred to as the Standard
Composite)
This consists of the accounts of every client both past and present
who has had an account with Century Management, for which the investment
management charge was fee based and the brokerage fee was transaction
based, since the company's inception in September, 1974. The performance
of the accounts in this composite is based on all buys, sells, dividends,
interest, deposits, and withdrawals for each and every client of record.
CM Value
II Composite (also known as CM Bundled Composite )
This consists of the accounts of every client both past and
present who has had an account with Century Management, for which the
investment management charge was fee based and the brokerage fee was
asset based, since 1984. The performance of the accounts in this composite
is based on all buys, sells, dividends, interest, deposits, and withdrawals
for each and every client of record.
Convertible Preferred
Similar to a convertible bond, except it represents equity in the corporation.
Unlike interest payments, dividend income is not a pre-tax income item
for the issuing corporations. Corporations holding convertible preferred
are entitled to an 85 percent exclusion of dividends.
CRPS
Chartered Retirement Plans Specialist. Sponsored by the College for Financial
Planning, this designation covers the design, installation and administration
of retirement plans for the business community. This designation is awarded
after successful completion of the program and final exam. You can search
the College for Financial Planning web site to look up the complete details
regarding this credential.
Current Yield
Stated interest
or dividend rate expressed as a percentage of the market price of the
convertible security.
Cyclical
Industry
An
industry whose performance is closely tied to the overall economy and
thus highly sensitive to business cycles. Examples are autos, chemicals,
construction, paper, steel and heavy equipment.
Derivatives
A security, such as an option or futures contract, whose value
depends on the performance of an underlying security. Futures contracts,
forward contracts and options are the most common types of derivatives.
Derivatives are generally used by institutional investors to increase
overall portfolio return or to hedge portfolio risk.
Dollar
Cost Averaging
A method of accumulating assets by investing a fixed amount
of dollars of securities at set intervals. The investor buys more shares
when the price is low and fewer shares when the price is high. The overall
cost is lower than it would be if a constant number of shares were bought
at set intervals.
DJIA Index
The
30 stocks now in the Dow Jones Industrial Average are
all major factors in their industries, and their stocks are widely held
by individuals and institutional investors. The Dow Jones Industrial
Average accounted for more than 28% of the investable U.S. market, as
measured by the DJ .U.S. Total Market Index ($8.9 trillion as of December
31, 2002). The Dow Jones averages are unique in that they are price weighted
rather than market capitalization weighted. Their component weightings
are therefore affected only by changes in the stocks' prices, in contrast
with other indexes' weightings that are affected by both price changes
and changes in the number of shares outstanding. When the averages were
initially created, their values were calculated by simply adding up
the component stocks' prices and dividing by the number of components.
Later, the practice of adjusting the divisor was initiated to smooth
out the effects of stock splits and other corporate actions.
Discounted Cash
Flow
Value of future expected cash receipts and expenditures at a common date, calculated
by using an Internal Rate of Return. The Internal Rate of Return method finds
the average return on investment earned through the life of the investment.
It determines the discount rate that equates the present value of future cash
flows to the cost of the investment.
Earnings Per Share
(EPS)
Portion of a company's profit allocated to each outstanding share of common
stock. For example, a corporation that earned $10 million last year and has
10 million shares outstanding would report earnings of $1 per share. This figure
is calculated after paying taxes and after paying preferred shareholders and
bondholders.
Earnings Yield
Relationship of earnings per share to the current price. Earnings divided by
price. This is the inverse of a P/E ratio. The earnings yield allows one
to compare the relative attractiveness of stocks, bonds and money market
instruments. Example: if a company has a P/E ratio of 20, it has an earnings
yield of 5%.
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. The advantage
of looking at a company's earnings before interest, taxes, depreciation,
and amortization is that it will make an apple to apple comparison between
those companies that have debt and those that do not, as well as those
companies that fall under different tax brackets. This will allow you to
look at the operating earnings of a company before the expense of interest
costs or taxes.
Ernst & Young,
LLP
Ernst & Young is one of the world's leading professional services
and accounting organizations. Ernst & Young audits 18.4% of Business
Week's Global 1,000 companies.
Free Cash Flow
Money that is left after all expenses, which include taxes, interest, and capital
expenditures. Therefore, this is money that is not needed to run the business.
This is extra and can be paid out in the form of a dividend, it can buy
back stock, or it can be reinvested into the company if it will show a
good return.
Fundamental
Analysis
A method
of evaluating securities that involves closely examining a company's financial
and operating condition, especially sales, earnings, growth potential,
assets, debt,
management, products and competition.
Global Investment
Performance Standards (GIPS)
The Global Investment Performance Standards (GIPS) are ethical standards to
be used by investment Managers for creating performance presentations that
ensure fair representation and full disclosure. Global standardization of investment
performance reporting will allow investors to compare investment managers and
will allow managers to compete for new business in foreign markets.
Greater Fool
Theory
The theory that an investor will purchase overvalued securities
because there will almost always be a "fool" willing to purchase
these securities at an even higher price. According to the greater fool
theory, questionable securities are not purchased because of their quality,
but with the hope of quickly selling it off to another investor (the
greater fool), who is also hoping to quickly flip it. Unfortunately,
speculative bubbles always burst eventually, leading to a rapid depreciation
in share price due to selling off.
Gross Domestic
Product (GDP)
The monetary value of all the goods and services produced by an economy over
a specified period. It includes consumption, government purchases, investments
and exports minus imports. This is perhaps the best indicator of the economic
health of a country. Growth of the U.S. economy is measured by the change in
inflation-adjusted GDP.
Gross National
Product (GNP)
An
economic statistic which includes GDP plus any income earned by residents
from their overseas investments, minus income earned within the domestic
economy by overseas residents. Basically, it's the total amount of money
citizens of a country earn internationally.
Gross
of Fees
This means before any fees are taken from the account, including
those charged by investment advisor, custodian and broker.
Index
A
benchmark against which investment or economic performance is measured.
Examples include both the Standard & Poors 500-stock index and the
Consumer Price Index.
Margin
of Safety
Difference between the price an investor pays for a security and the securities
private market value or intrinsic value. For example, if the "Widget Company" has
a private market value of $100 per share and the investor pays only $40 dollars
per share in the open market, then the investor has a built in margin of safety
in the amount of $60 per share. Using a margin of safety helps reduce the risk
level of a portfolio.
Market Capitalization
(aka: Market Cap)
Total
dollar value of all outstanding shares. It's calculated by multiplying
the total number of shares times the current market price. This term
is often referred to as market cap. Market cap is a measure of a company's
size. Brokerages vary on their exact definitions, but the current approximate
classes of market capitalization are:
Mega Cap - Market cap of $200 billion and greater
Big/Large Cap - $10-$200 billion
Mid Cap - $2 billion to $10 billion
Small Cap - $300 million to $2 billion
Micro Cap - $50 million to $300 million
Nano Cap - Under $50 million
Market Bubbles,
Speculation & Manias
A
speculative market or stock in which the values rise very rapidly then
fall sharply. A temporary market condition created through excessive
buying, and an unfounded run-up in prices occurs. Speculative bubbles
are generally a result of the "bandwagon effect". Investors,
seeing an upward trend in prices, quickly enter long positions in an
attempt to participate in the stocks' profitability. Typically, these
bubbles are followed by even faster sell-offs once prices begin to decline.
It's called a bubble because it will eventually burst. A good example
of this was the dot-com bubble of the late 1990s.
NASDAQ
The NASDAQ Composite Index measures all NASDAQ domestic and
international based common type stocks listed on the NASDAQ Stock Market.
Launched in 1971, the NASDAQ Composite Index is a broad based index.
Today, the Index includes over 3,000 securities, more than most other
stock market indices. The NASDAQ Composite is calculated under a market
capitalization weighted methodology index. To be eligible for inclusion
in the Composite, the security's U.S. listing must be exclusively on
the NASDAQ Stock Market (unless the security was dually listed on another
U.S. market prior to January 1, 2004 and has continuously maintained
such listing).
Net
of Fees
This means after all fees have been taken from the account, including
those charged by investment advisor, custodian and broker.
Nikkei Index
The
leading and most respected index of Japanese stocks. It is published
by Nihon Keizai Shimbun-Sha, a well-known financial newspaper publishing
firm.
Price/Earnings
Ratio (P/E)
Price of a stock divided by its earnings per share. Also known as "Earnings
Multiple" or "Multiple" because it shows how much investors
are willing to pay per dollar of earnings. It gives investors an idea of how
much they are paying for a company's earning power. The higher the P/E, the
more investors are paying and, therefore, the more earnings growth they are
expecting.
- Leading P/E
A leading PE ratio is calculated by dividing the current price of the stock by
the company's estimated earnings per share for the coming fiscal year. You
are evaluating the stock based on what you (or analysts) feel the company
is expected to earn in the next year. Note that Value Line (and many other
investment advisors) calculate PE ratios based on the previous 6 months earnings
per share and estimated earnings per share for the next 6 months.
- Median P/E
The median PE ratio is a Value Line concept calculated by taking a rounded
average of four middle values of the range of average P/E ratios for the
company over the past 10 years. PE ratios change almost everyday (because
the price of a stock changes almost every day); Value Line averages those
daily ratios for a year, collects the previous 10 year averages, orders
them from highest to lowest, then picks the middle 4 in that order and
averages those four. Value Line philosophizes that if the current PE is
slightly below or equal to the median PE, then the company is fairly valued
(unless facts suggest a change in the companies fundamentals. A current
PE higher than the median PE might suggest the company is overvalued.
- Relative P/E
The relative PE ratio is also a Value Line concept. It is calculated by taking
a company's current PE ratio and dividing it by the median PE ratio of
ALL stocks that Value Line follows. Supposedly it is meant to help an investor
judge a stock PE ratio as to how it compares to the market as a whole.
Value Line suggests comparing a stock's current relative PE ratio with
it relative PE ratios over the past 10 years to see how this company has
performed relative to how the market has performed. A value of 1 would
mean that the stock has matched the market over that time period. A value
below 1 would imply that the company has not performed as well as the market.
A value over 1 suggests that the company has outperformed the market.
- Trailing P/E
A trailing PE ratio is calculated by dividing the current price of the stock
by the company's earnings per share over the past fiscal year. This ratio
assumes that earnings are reflected in the price of the stock (you are
evaluating the company based on what has already happened). A question
to ask yourself when you look at a trailing PE is whether earnings are
calculated based on operating earnings (which do not include one time write
offs/charges) or net earnings (which do).
Private
Market Value (PMV)
The price at which sophisticated and informed investors are willing to pay
to buy and sell a company. The sellers want the highest price and the buyers
want the lowest price. By the time each party has consulted their accountants,
lawyers, and business advisors, the price each side is willing to agree upon
is Private Market Value. This is also referred to as the intrinsic value, appraised
value, or enterprise value of a company.
Recession
Downturn in economic activity, defined by many economists as at least two consecutive
quarters of decline in a country's Gross Domestic Product.
Russell 3000
Index
Measures
the performance of the 3,000 largest U.S. companies based on total market
capitalization, which represents approximately 98% of the investable
U.S. equity market.
Capitalization Statistics (as
of reconstitution, June 30, 2003; Market-cap data updated May 30, 2003)
Range: $286.8 billion to $116.6
million
Average: $3.7 billion
Median: $622.3 million
Russell 2000
Index
Measures
the performance of the 2,000 smallest companies in the Russell 3000 Index,
which represents approximately 8% of the total market capitalization
of the Russell 3000 Index.
Capitalization Statistics (as
of reconstitution, June 30, 2003; Market-cap data updated May 30, 2003)
Range: $1.2 billion to $116.6
million
Average: $443.5 million
Median: $351.8 million
S&P
400
Standard & Poor's Midcap 400 index is a capitalization-weighted index that
measures the performance of the mid-range sector of the U.S. stock market.
The index was developed with a base level of 100 as of December 31, 1990.
S&P
500
Standard & Poor's 500 index is a capitalization-weighted index of 500 stocks.
The index is designed to measure performance of the broad domestic economy
through changes in the aggregate market value of 500 stocks representing all
major industries.
Time-Weighted
Return
A "time-weighted" rate of return eliminates the effects
of client-initiated additions and withdrawals that are beyond the control
of the manager. The result is an accurate and unbiased measure of investment
performance that is the same with or without cash-flows.
In calculating a
time-weighted return, a portfolio is evaluated each time there is a
cash flow transaction in the account (i.e., new purchases and sales,
dividend and income payments, deposits or withdrawals). The performances
of periods between cash flows are linked together to reflect a return
for the whole period. Daily transaction data is used in the linking
of each cash flow so that we may achieve the most accurate return calculation.
Unemployment
- Structural
Unemployment
resulting from changes in the basic composition of the economy. These
changes simultaneously open new positions for trained workers. An example
of structural unemployment is the technological revolution. Computers
may have eliminated jobs, but they also opened up new positions for those
who had the skills to operate the computers.
Unemployment
- Cyclical
Unemployment
resulting from changes in the business cycle. An example of cyclical
unemployment is layoffs and cutbacks resulting from a recessionary economic
phase.
Value Line
Index (aka: Value Line Investment Survey)
The
Value Line Index is a comprehensive source of information on approximately
1,700 stocks, more than 90 industries, the stock market and the economy. An
equal-weighted stock index containing 1,700 companies from the NYSE,
American Stock Exchange, NASDAQ and over-the-counter market. Also known
as the Value Line Investment Survey. As this is an equal-weighted index,
each of the 1,700 stocks is assigned identical weights in the calculation.
Value Line is one of the most respected investment research firms.
Value Line
Median P/E
The
median is the middle value in a distribution, above and below which lie
an equal number of values. The Value Line is an index of 1,700 stocks.
Therefore the Value Line Median P/E represents the mid-point of these
1,700 stocks. In calculating the median P/E, Value Line uses two quarters
of forward earnings and two quarters of past earnings in its calculations,
as opposed to the S&P, which uses four quarters of forward earnings.
This will have a smoothing effect on the numbers reported by Value Line
and should help prevent under and overstatement of earnings. By using
the Value Line Median P/E, one can get a better look at how the average
company is performing.
Warrant
Option to buy
a stock at a stated price, extending up to ten years. Warrants themselves
bear no dividend and no voting rights.
Yield to Maturity
The rate of return on a bond which takes into account the market price, interest
payments and time until date of maturity.
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