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10-K Diver

@10kdiver

Dec 27, 2021 • 17 tweets • 7 min read • Read on X

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Folks, here's a recording of our latest Money Concepts episode -- where we discussed "Inflation" for an hour and a half.

If that's too long for you, no worries. Just scroll down. We've created a few ~2 minute "highlights" you can listen to.

callin.com/?link=tURmKhwt…

Highlight #1

The purpose of investing is NOT to grow our money.

It is to grow our *after tax purchasing power*.

More on this idea of growing after-tax purchasing power -- from Warren Buffett's 1980 Berkshire letter:

@SKNWilkinson

Highlight #2

Sir Steven Wilkinson shared with us his recollections of the 1970s, when he and his family lived through high inflation in the UK.

Astute observations on how governments and businesses tend to behave during inflationary times:

(h/t @SKNWilkinson, @goodandprosper)

Highlight #3

LIFO vs FIFO accounting during periods of high inflation

Highlight #4

Series I bonds: one way to protect part of our capital from inflation

@rationalwalk

More on Series I bonds:

Here's an excellent overview written by my friend, @rationalwalk:

rationalwalk.com/the-case-for-u…

Note:

I incorrectly said that Dec 31'st was the last date to buy $10K worth of these bonds for 2021.

The last date is actually Dec 29'th.

For more: freep.com/story/money/pe…

Highlight #5

Which businesses are immune to inflation?

ONLY those that can respond to inflation by:

a) raising prices, AND
b) earning higher returns on capital.

This is a "3 part" highlight.

Part 1 of 3:

Part 2 of 3:

Part 3 of 3:

For more insight, I recommend reading Warren Buffett's wonderful Fortune Magazine article: How Inflation Swindles The Equity Investor.

Buffett wrote this in 1977. It remains relevant today, and is one of the best pieces I've ever read on inflation.

Link: tilsonfunds.com/BuffettInflati…

Highlight #6

The impact of inflation on debt

Highlight #7

Basic macro-economics: the "negative feedback loop" between interest rates and inflation

Highlight #8

Businesses that have more control over their environment tend to be better protected against inflation.

It's far better to own a business that can *control* its environment than to own a business that's at the *mercy* of its environment.

Highlight #9

One of the great defenses, if you're worried about inflation, is not to have a lot of silly needs in your life.

-- Charlie Munger

That's the last one. I hope you enjoyed this highlights reel!

@getcallin

About Money Concepts

We're a virtual investing club. Our goal is to help each other become better investors.

We meet Sundays at 1pm ET via @getcallin, to discuss all things investing.

Join us. Get the app. Subscribe. Tell your friends.

It's FREE.

callin.com/?link=DftUtOET…

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More from @10kdiver

10-K Diver

@10kdiver

Jan 1, 2023

1/

Get a cup of coffee.

In this thread, I'll walk you through "Gambler's Ruin".

This is a classic exercise in probability theory.

But going beyond the math, this exercise can teach us a lot about life, business, and investing.

2/

In my mind, Gambler's Ruin is the math of "David vs Goliath" ("Skill vs Size") type situations.

Here, David is a "small" player. He only has limited resources. But he's very skilled.

Pitted against David is Goliath -- a "big" player who has MORE resources but LESS skill.

3/

The battle between David and Goliath rages on for several "rounds".

Each round has a "winner" -- either David or Goliath.

David -- because of his superior skill -- has a higher probability of winning any individual round. That's David's advantage over Goliath.

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10-K Diver

@10kdiver

Dec 11, 2022

1/

Get a cup of coffee.

In this thread, we'll explore the question:

As investors, how often should we check stock prices?

To answer this, we'll draw on key ideas and concepts from many different fields -- probability, information theory, psychology, etc.

2/

Imagine we have a stock: ABC, Inc.

Every day that the market is open, our stock either:

- Goes UP 1%, or
- Goes DOWN 1%.

For simplicity, let's say these are the only 2 possible outcomes on any given trading day.

3/

Suppose we think ABC is a "good" investment.

That is, the company has a wide moat, good returns on capital, decent growth prospects, etc. And the stock trades at a reasonable price.

So, we buy the stock -- expecting to make a very good return on it. Say, ~15% per year.

Read 40 tweets

10-K Diver

@10kdiver

Oct 23, 2022

1/

Get a cup of coffee.

In this thread, I'll walk you through 2 key portfolio diversification principles:

(i) Minimizing correlations, and
(ii) Re-balancing intelligently.

You don't need Markowitz's portfolio theory or the Kelly Criterion to understand these concepts.

2/

Imagine we have a stock: ABC Inc. Ticker: $ABC.

The good thing about ABC is: in 4 out of 5 years (ie, with probability 80%), the stock goes UP 30%.

But the *rest* of the time -- ie, with probability 20%, or in 1 out of 5 years -- the stock goes DOWN 50%.

3/

We have no way to predict in advance which years will be good and which will be bad.

So, let's say we just buy and hold ABC stock for a long time -- like 25 years.

The question is: what return are we most likely to get from ABC over these 25 years?

Read 23 tweets

10-K Diver

@10kdiver

Sep 11, 2022

1/

Get a cup of coffee.

In this thread, I'll walk you through the P/E Ratio.

Why do some companies trade at 5x earnings and others trade at 50x earnings?

When I first started investing, this was hard for me to understand.

So, let me break it down for you.

2/

Imagine we have 2 companies, A and B.

Let's say both companies will earn $1 per share next year.

And both companies will also GROW their earnings at the SAME rate: 10% per year. Every year. Forever.

3/

Suppose A trades at a (forward) P/E Ratio of 10. So, each share of A costs $10.

And B trades at a P/E Ratio of 15. So, each share of B costs $15.

Which is the better long term investment: A or B?

Read 31 tweets

10-K Diver

@10kdiver

Sep 4, 2022

1/

Get a cup of coffee.

In this thread, I'll walk you through a fundamental business concept that may be counter-intuitive to some of you:

Just because a business has made $1 of PROFIT, it does NOT mean the business's owners have $1 of CASH to pocket.

2/

To understand why, let's start with how PROFIT is defined.

PROFIT = SALES - COSTS

That is, we take all sales (or revenues) the company made during a quarter or year.

We back out all costs incurred during this period.

That leaves us with profits.

Seems straightforward.

3/

Here's the problem:

The way a "lay person" understands words like SALES and COSTS is completely different from the way an *accountant* uses these same words.

These discrepancies can create enormous confusion.

Read 20 tweets

10-K Diver

@10kdiver

Aug 28, 2022

1/

Get a cup of coffee.

In this thread, I'll walk you through a framework that I call "Lindy vs Turkey".

This is a super-useful set of ideas for investors.

Time and again, these ideas have helped me think more clearly about the LONGEVITY of the companies in my portfolio.

2/

Imagine we're buying shares in a company -- ABC Inc.

ABC is a very simple company. It earns $1 per share every year. These earnings don't grow over time.

And ABC returns all its earnings back to its owners -- by issuing a $1/share dividend at the end of each year.

3/

Suppose we buy ABC shares for $5 a share.

That's a P/E ratio of 5.

We know we get back $1/year as a dividend.

So, for us to NOT lose money, ABC should survive AT LEAST 5 more years.

If something happens and ABC DIES before then, we'll likely lose money.

Read 32 tweets

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