The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

Remember, only firms with very strong competitive advantages and low capital needs are able to sustain above-average growth rates for very long. If the firm is cyclical, don’t forget to throw in some bad years.

firms with promotional managers, managers who draw egregious salaries, or who exhibit any of the other red flags covered in Chapter 7 are definitely riskier

The stronger a firm’s competitive advantage—that is, the wider its moat—the more likely it will be able to keep competitors at bay and generate a reliable stream of cash flows.

Firms with more debt are generally riskier than firms with less debt because they have a higher proportion of fixed expenses (debt payments) relative to other expenses. Earnings will be better in good times, but worse in bad times, with an increased risk of financial distress.

Because the cash flows of cyclical firms are much tougher to forecast than stable firms, their level of risk increases.

Look at a firm’s debt-to-equity ratio, interest coverage, and a few other factors to determine the degree of a company’s risk from financial leverage.

calculate a perpetuity is to take the last cash flow (CF) that you estimate, increase it by the rate at which you expect cash flows to grow over the very long term (g), and divide the result by the discount rate (R) minus the expected long-term growth rate. In formula terms, this equals: The result of this calculation then must be discounted back t

the real cost of losing money is much worse than the opportunity cost of missing out on gains. That’s why the price you pay is just as important as the company you buy.

ranges all the way from just 20 percent for very stable firms with wide economic moats to 60 percent for high-risk stocks with no competitive advantages. On average, we require a 30 percent to 40 percent margin of safety for most firms.