Tweet

More from @10kdiver

10-K Diver

@10kdiver

25 Sep

@ruima

1/

Get a cup of coffee.

This is a thread that @ruima and I wrote jointly.

In this thread, we'll help you estimate how much "margin of safety" a company has when it's loaded with debt.

Understanding this will help you avoid Evergrande-type fiascos in your own portfolio.

2/

For both individuals and companies, "taking on debt" means "agreeing to a set of future financial obligations".

For example, when we take out a 30-year $400K mortgage at 3% interest, we're agreeing to pay the bank about $1686 per month, every month, for the next 30 years.

3/

Similarly, when a company like Home Depot issues a bond, they're agreeing to pay interest and principal according to a set schedule.

Like so:

Read 42 tweets

10-K Diver

@10kdiver

18 Sep

1/

Get a cup of coffee.

In this thread, I'll show you how to *correctly* calculate inflation-adjusted investment returns.

Here's the punch line: the *naive* procedure that many people use (ie, Real Return = Nominal Return minus Inflation) is not exactly correct.

2/

Imagine 2 scenarios.

Scenario A. We buy a stock. It grows at 10% per year over the next 10 years. During this time, there's NO inflation.

Scenario B. Our stock grows at *15%* per year over the same 10 years. But during this time, inflation runs at 5% per year.

3/

The question is: are we better off in Scenario A or Scenario B?

Or, are they both the same? After all, in both scenarios, if we back out inflation from the stock's growth, we get the same result: 10% - 0% = 15% - 5% = 10%.

What do you think?

Read 24 tweets

10-K Diver

@10kdiver

11 Sep

1/

Get a cup of coffee.

In this thread, I'll walk you through the basics of Capital Allocation.

The better we understand how capital moves in and out of a business, the better we can predict the business's future cash flows and its stock's long-term performance.

2/

Businesses generate *cash* through their operations.

For example, Apple generates cash by selling iPhones.

Starbucks generates cash by selling coffee.

Google generates cash by selling ads.

IBM generates cash by doing things I don't understand.

Etc.

3/

Capital Allocation is the step that comes *after* generating all this cash.

That is, once the cash is available, what does the CEO *do* with it?

What projects does he invest in? What acquisitions does he make? Does he return any cash back to shareholders? Etc.

Read 36 tweets

10-K Diver

@10kdiver

5 Sep

1/

Get a cup of coffee.

In this thread, I'll share with you some lessons I learned from playing the claw machine.

Claw machines tend to bring out many of our psychological biases and irrational tendencies.

As investors, we should put in conscious effort to overcome these.

2/

I grew up in India.

We were a family of 4 -- my parents, my sister, and I.

When I was a kid, the 4 of us got to spend a summer in the US -- visiting my aunt and uncle.

This was a lovely vacation! We toured the Grand Canyon, New York City, Las Vegas, and so on.

3/

That's when I first encountered a "claw machine".

We had gone to a mall. And there it was, next to the food court.

You dropped a quarter into it. And that gave you a chance to guide the "claw" -- to grab one of the enticing toys inside.

It seemed like a game of skill.

Read 31 tweets

10-K Diver

@10kdiver

28 Aug

1/

Get a cup of coffee.

In this thread, I'll walk you through the various connections between asset prices, interest rates, and inflation.

As an investor, it's useful to have a mental picture of how these pieces affect -- and are affected by -- one another.

2/

Suppose we have an investment opportunity.

This could be buying a stock, a bond, a private business, etc.

Let's say this opportunity will return $1M in cash to us after 1 year.

And not just that. This $1M will grow at 10% per year for the next 9 years, and 3% thereafter.

3/

This is a classic "cash flow model" that finance-y folk use all the time.

We have a business that promises to grow quickly for a while (in this case, at 10% per year for the next 10 years or so).

But after that, growth slows to a "terminal" crawl (3% per year).

Read 33 tweets

10-K Diver

@10kdiver

14 Aug

1/

Get a cup of coffee.

In this thread, I'll help you understand Generating Functions.

They're a super cool math technique you can use to predict the behavior of various financial models. Using just pencil and paper. No Excel!

2/

Imagine we have a portfolio that returns 10% per year.

And we save $50K per year -- which we add to this portfolio.

So, each year, the portfolio grows 10% via compounding, plus $50K of new money pours in.

Starting at $0, what will our portfolio be worth after 30 years?

3/

Many models in finance and investing follow a pattern like this.

They connect the previous year to the next year using a simple formula.

For our example, the formula is: compound the previous year's portfolio by 10% and add $50K => that gives us the next year's portfolio.

Read 25 tweets

Share this page!

10-K Diver

Try unrolling a thread yourself!

More from @10kdiver

10-K Diver

10-K Diver

10-K Diver

10-K Diver

10-K Diver

10-K Diver

Did Thread Reader help you today?

Like this author's thread?