Glossary

6.1Intrinsic Value

An estimate of what a business is worth based on fundamentals.

6.2Margin of Safety

The gap between intrinsic value and price, expressed as a percentage.

6.3DCF

Discounted Cash Flow — a valuation that sums discounted future cash flows.

6.4Owner Earnings

Cash an owner could pull out of the business after maintaining its position.

6.5Residual Income

Book value plus profits earned above the cost of equity, discounted to today.

6.6EPV

Earnings Power Value — the value of normalised earnings capitalised at the cost of capital.

6.7Graham Formula

A simple formula linking EPS and growth to an intrinsic value estimate.

6.8Peter Lynch Value

A PEG-based heuristic that translates growth into a fair value.

6.9SMA

Simple Moving Average — the equal-weighted average of recent closing prices.

6.10EMA

Exponential Moving Average — a moving average weighted toward recent prices.

6.11CAGR

Compound Annual Growth Rate — the smoothed annualised return.

6.12Drawdown

The peak-to-trough decline in portfolio value.

6.13Benchmark

A passive reference series used to evaluate a strategy's performance.

6.14Point-in-Time Universe

The list of stocks that were really in an index on a given historical date.

6.15Look-Ahead Bias

Using information in a backtest that was not yet available at the simulated date.

6.16Survivorship Bias

Optimism baked into a backtest that ignores stocks which failed or were delisted.

6.17TTM

Trailing Twelve Months — the most recent four reported quarters combined.

6.18Annual Fundamentals

Financial figures based on the company's fiscal year.

6.19Entry Rule

A condition group that opens or tops up a position in a backtest.

6.20Exit Rule

A condition group that closes part of a position.

6.21Final Exit Rule

The condition group that closes the remainder of any open position.