Investing Glossary

Adverse Selection

The danger that the customers most eager to buy insurance are the riskiest ones. If an insurer prices poorly or loses its good customers, it can be left with a pool of bad risks — claims rise, losses mount, and the book spirals.

ANDA (Abbreviated New Drug Application)

The FDA filing used by generic drug companies to get approval without repeating full clinical trials — they only need to prove their drug behaves the same in the body.

Antibody

A Y-shaped protein the immune system makes to recognise and latch onto one specific target (an 'antigen'), such as a virus or a cancer-cell marker. Drug makers can mass-produce a single, identical version — a monoclonal antibody — engineered to hit a chosen target. These '-mab' drugs are the best-selling biologics in the world.

APE (Annual Premium Equivalent)

A standardised measure of new-business volume: 100% of regular annual premiums plus 10% of one-time single premiums. It lets you compare life insurers whose product mixes differ, and is the base on which VNB margin is calculated.

API (Active Pharmaceutical Ingredient)

The chemical in a drug that actually does the therapeutic work. Everything else in the pill (binders, coatings) is inactive filler called excipients.

Biosimilar

A near-copy of a biologic drug (made from living cells, like insulin or Herceptin). Unlike chemical generics, biosimilars cannot be chemically identical — they must prove 'similar' efficacy, making them harder and more expensive to develop.

Book Value

A company's assets minus its liabilities, as recorded on the balance sheet — its net worth on paper. For most of Berkshire's history, growth in book value per share was Buffett's headline measure of value creation.

Branded Generics

A generic drug sold under a proprietary brand name. Doctors prescribe by brand, not molecule name — this doctor-brand loyalty is a durable competitive moat.

CAGR (Compound Annual Growth Rate)

The single smoothed annual rate that takes an investment from its start value to its end value over several years. It strips out the year-to-year noise so you can compare returns on a like-for-like basis.

CDMO (Contract Development and Manufacturing Organisation)

An outsourced pill factory that makes drugs for pharma companies. CDMOs earn stable, long-term contract revenue without the patent risk of a branded drug company.

Circle of Competence

The set of industries and businesses an investor understands well enough to judge. Buffett's rule is not to have a huge circle, but to know precisely where its edge is — and to stay inside it.

Combined Ratio

An insurer's claims plus expenses divided by the premiums it earned. Below 100% means the insurer made an underwriting profit (it kept money even before investing the float); above 100% means underwriting lost money.

Conglomerate

A single company that owns businesses across many unrelated industries. Conglomerates fell out of fashion after 1970s empire-building destroyed value, but a disciplined one with a strong capital allocator can outperform.

Cost of Float

What an insurer effectively pays to hold policyholders' money. If underwriting runs at a loss, the float has a positive cost (like interest on a loan); if underwriting is profitable, the cost is negative — the insurer is paid to hold investable money.

CRO (Contract Research Organisation)

A specialist company that runs clinical trials, lab experiments, and R&D work on behalf of pharma clients. Asset-light, fee-based business model. Indian example: Syngene International.

Current Account Deficit (CAD)

When a country imports more goods, services and income than it exports. India runs a structural CAD because it imports large amounts of crude oil and gold, creating constant demand for dollars — a long-term source of downward pressure on the rupee.

Day-1 Price Erosion

When a generic drug launches in the US, multiple competitors often enter on the same day. Prices can drop 60–80% within months as companies undercut each other. A blockbuster generic that earns 40% margins in year 1 may earn only 15% by year 3 — so US generics revenue must be constantly refreshed with new launches.

DXY (US Dollar Index)

A measure of the US dollar's strength against a basket of major currencies (euro, yen, pound and others). When DXY rises, the dollar is strengthening globally — which usually pressures emerging-market currencies like the rupee and weighs on dollar-priced gold.

Earnings Yield

The inverse of the P/E ratio (earnings ÷ price), expressed as a percentage. It lets you compare a stock's earnings return directly against a bond's interest yield — a quick test of whether equities are cheap or dear versus debt.

EBITDA

Earnings Before Interest, Taxes, Depreciation and Amortisation. A measure of a company's core operating profitability, stripping out financing and accounting effects. Useful for comparing companies across industries.

EBITDA Margin

EBITDA expressed as a percentage of revenue. A 25% EBITDA margin means Rs 25 of operating profit for every Rs 100 of sales. Higher margins mean more pricing power or lower costs than competitors.

Economic Moat

A sustainable competitive advantage that protects a company's profits from rivals — like a castle's moat. Types include brand loyalty, network effects, switching costs, scale advantages, and regulatory barriers. Warren Buffett's core investing concept.

Embedded Value (EV)

A life insurer's true economic net worth: its net assets plus the present value of future profits locked into policies already sold. Because life-insurance profits emerge over decades, book value understates the business — EV is the better anchor for valuation.

Equity Risk Premium (ERP)

The extra annual return investors demand for holding risky stocks instead of safe government bonds. Expected stock return ≈ risk-free rate + ERP. When the premium is thin, stocks are expensive relative to bonds.

Expense Ratio

The share of premium an insurer spends running the business — commissions, salaries, marketing, technology. Loss ratio plus expense ratio equals the combined ratio. A low expense ratio (GEICO's is under 10%) is a durable cost moat.

FDA Warning Letter

A formal FDA notice that a company is seriously non-compliant with manufacturing standards. It blocks new drug approvals from that plant until resolved — and typically wipes 15–20% off the stock price.

FII / FPI (Foreign Institutional Investor)

Overseas funds that buy and sell Indian stocks and bonds. Their flows are large and fast: when they buy, they bring dollars in and push markets up; when they sell, they take dollars out, weakening the rupee and the market at the same time.

Form 483

A list of 'observations' issued by FDA inspectors after visiting a manufacturing plant. Not a ban, but a formal warning that must be addressed. Unresolved 483s escalate to Warning Letters.

Frequency and Severity

The two building blocks of an expected claim cost. Frequency is how often a claim occurs; severity is how much it costs when it does. Expected claim cost = frequency × severity, and it is the core of every premium an insurer charges.

Generic Drug

A copy of a brand-name drug with the same active ingredient, dosage form, and effectiveness, sold at a much lower price after the original patent expires.

GLP-1 (Glucagon-Like Peptide-1)

A natural gut hormone released after you eat that tells the pancreas to release insulin and signals the brain that you're full. 'GLP-1 receptor agonist' drugs like semaglutide (Ozempic/Wegovy) mimic this hormone to control blood sugar and suppress appetite, which is why they treat both diabetes and obesity.

Holding Company

A parent company that does not make products itself but owns controlling stakes in other companies. Its job is capital allocation: deciding where the cash thrown off by its subsidiaries should go next.

Import Alert

The most severe FDA action: blocks all shipments from a specific plant into the US market. Companies can take 12–36 months to get an Import Alert lifted.

Insurance Float

The pool of premium money an insurer collects upfront but has not yet paid out in claims. It legally belongs to policyholders, but until claims come due the insurer can invest it. If underwriting breaks even or better, this is investable capital the insurer effectively holds for free — or gets paid to hold.

Intrinsic Value

The discounted value of all the cash a business will generate over its remaining life. It cannot be calculated precisely, only estimated within a range. Buffett argues it, not book value or market price, is what an investor should ultimately care about.

Law of Large Numbers

The statistical principle that lets insurance work: any single claim is unpredictable, but across a large, diverse pool of policies the average claim cost becomes highly predictable. The bigger and more varied the pool, the more reliable the pricing.

Loss Ratio

The share of earned premium an insurer pays out as claims (and claim-handling costs). A 70% loss ratio means 70 paise of every premium rupee went to policyholders' claims. It is the single biggest driver of whether underwriting is profitable.

Market Capitalisation

The total market value of a company: share price multiplied by total shares outstanding. A Rs 1,00,000 Cr market cap means the market values the entire business at that amount today.

MR Network (Medical Representatives)

A pharma company's field salesforce that visits doctors to promote branded drugs. MR count is a proxy for prescription market reach — 10,000+ MRs is a moat that takes decades to build.

NDA (New Drug Application)

The full FDA application for a new, original drug. Requires complete clinical trial data proving safety and efficacy. Costs $1–2 billion and takes 10–15 years.

NLEM (National List of Essential Medicines)

India's list of ~360 medicines deemed essential to public health, all subject to NPPA price controls. Pharma companies with heavy NLEM exposure face more pricing risk than those focused on chronic or specialty drugs.

Nominal Return

The headline return you see on a statement, before adjusting for inflation. If your fund grew 12% but prices rose 6%, the 12% is nominal — it overstates how much richer you actually became.

NPPA (National Pharmaceutical Pricing Authority)

India's government regulator that sets maximum price caps on essential medicines. Sudden NPPA price cuts can reduce a pharma company's domestic revenue by 3–8% overnight.

Owner Earnings

Buffett's preferred profit measure: reported earnings plus depreciation and non-cash charges, minus the capital spending the business truly needs to maintain its competitive position. It approximates the cash an owner could pull out without weakening the business.

P/E Ratio (Price to Earnings)

Tells you how many years of current earnings you're paying for when you buy a stock. A P/E of 25 means you pay 25 years of today's profits upfront. High P/E = market expects strong growth; low P/E = slow growth or high risk.

Para IV Filing

A type of ANDA that challenges an existing patent, claiming it is invalid or won't be infringed. The first company to successfully file gets 180 days of exclusive generic sales — a temporary monopoly.

PAT (Profit After Tax)

The 'bottom line' — what's left for shareholders after paying all expenses, interest, and taxes. Also called net profit. This is the number used in P/E ratio calculations.

Patent Cliff

The sharp revenue drop an innovator drug company faces when a blockbuster drug's patent expires and generic competitors flood in. Example: Pfizer lost $10B+ in annual Lipitor sales within two years of patent expiry.

Peptide

A short chain of amino acids — smaller than a full protein but larger and more complex than a typical chemical pill. Peptide drugs like semaglutide sit between small molecules and biologics: harder to manufacture and copy than ordinary generics, but not as complex as antibody biologics.

Permanent Capital

Money a firm can invest with no fixed deadline to return it. Unlike a fund that must repay investors after ~10 years, permanent capital lets the holder buy and hold indefinitely and never become a forced seller in a downturn.

Persistency

The percentage of policyholders who keep paying their premiums instead of lapsing. The 13th-month and 61st-month ratios are watched closely: high persistency means the future profits baked into embedded value will actually be collected.

Protein

A large molecule built from chains of amino acids that fold into a precise 3D shape. The shape determines what the protein does, and it is dictated by the living cell that made it. Because that exact shape can't be reproduced by chemistry, protein-based drugs (biologics) can't be copied atom-for-atom — only approximated by a biosimilar.

Purchasing Power Parity (PPP)

The idea that, over the long run, exchange rates drift to equalise the price of the same basket of goods across countries. A currency in a higher-inflation country (like India) tends to depreciate against a lower-inflation one (like the US) by roughly the inflation gap.

Real Return

The return left after subtracting inflation — what your money actually buys you in extra goods. Real return ≈ nominal return − inflation. This, not the nominal number, is the true measure of wealth created.

Reinsurance

Insurance for insurers. A primary insurer transfers part of its risk to a reinsurer in exchange for a share of the premium, capping its exposure to catastrophes. Reinsurers (like Berkshire's Gen Re) are among the largest holders of float.

Risk-Free Rate

The return you can earn with virtually no risk — in India, the yield on a government bond. It is the baseline every other investment is judged against: a stock must be expected to beat this to be worth the extra risk.

ROCE (Return on Capital Employed)

Measures how efficiently a company generates profit from all the capital it uses — both equity and debt. ROCE above 20% is generally excellent. The best businesses compound ROCE above 25% for decades.

ROE (Return on Equity)

Profit generated for every rupee or dollar of shareholders' money invested. ROE above 15% is generally good. Watch out: high ROE driven by heavy debt is misleading — check ROCE alongside it.

ROIC (Return on Invested Capital)

The most rigorous measure of capital efficiency — profit generated on every rupee of capital deployed, after tax. ROIC consistently above the cost of capital (typically 10–12%) means the business is creating shareholder value.

Underwriting Cycle

The multi-year swing in insurance pricing. When capital is plentiful, insurers compete and cut rates ('soft market'); after big losses drain capital, rates spike ('hard market'). Disciplined insurers write less business in soft markets and more in hard ones.

Underwriting Profit

The money an insurer keeps from premiums after paying all claims and expenses, before any investment income. It exists only when the combined ratio is below 100%. An insurer with underwriting profit is being paid to hold its float.

Value of New Business (VNB)

The present value of all future profit an insurer expects from the policies it sold this year. VNB margin (VNB ÷ new premium) shows how profitable that new business is. Rising VNB is the clearest sign a life insurer is compounding value.

Working Capital

The money tied up in day-to-day operations: raw materials, work-in-progress inventory, finished goods, and receivables (money customers owe you). High working capital businesses need more cash to grow.