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Danger Zone 9/16/13: E*Trade Babies

Online trading firms aim to exploit the gullibility of many retail investors by encouraging the myth that they can outperform professional money managers armed with vastly greater resources, experience and expertise. The E*Trade babies are the most glaring symbol of this myth. The symbol also reinforces the notion that investing is an easy task that takes no special effort or aptitude to succeed.
by David Trainer, Founder & CEO
excess cash
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Excess Cash – Valuation Adjustment

For most companies, we estimate the required amount of cash for normal business operations to be around 5% of sales. However, many companies hold cash or other liquid investments above and beyond this amount. We refer to this extra amount as excess cash. This surplus cash can be used for any number of purposes, including acquisitions, research and development, and cushioning the company against economic downturns. Excess cash is immediately available for distribution to shareholders, so we add a company’s excess cash to our calculation of shareholder value.
by David Trainer, Founder & CEO
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Excess Cash – Invested Capital Adjustment

Most companies hold some cash—or cash equivalents in the form of investments—above this required amount. Companies hold excess cash in order to cushion against economic downturns, prepare for acquisitions, or any number of other reasons. Sometimes, past profits pile up on balance sheets and are a form of excess cash. Excess cash is not needed for the operations of a company. It is removed from our calculation of invested capital.
by David Trainer, Founder & CEO
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“Index” Label Myths

The word “index” in an ETF label does not always mean that investors are getting the specific exposure they seek. Diligence on ETF holdings is necessary despite what the providers might have you believe. Below I dispel the following myths concerning index ETFs.
by David Trainer, Founder & CEO
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The Truth Behind AAPL’s Numbers

This article provides some empirical evidence behind my putting Apple (AAPL) in the Danger Zone last week because its return on invested capital (ROIC) is outrageously high. That fact underscores why valuing this company or any other with the expectation that such a high ROIC was sustainable would be a mistake.
by David Trainer, Founder & CEO
New Constructs
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How To Survive the Euro Crisis

As I wrote in “Don’t Be Fooled: Get Short Now”, the euro is not that different from Enron, WorldCom or the Madoff fund. All of these organizations were able to pretend they were profitable or solvent long after they were insolvent. Now markets are finally acknowledging the intractability of the Euro debacle.
by David Trainer, Founder & CEO