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10-K Diver Profile picture
@10kdiver
Jan 22, 2022 • 10 tweets • 5 min read • Read on X
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Folks, here's our latest Money Concepts episode.

We met on Sunday. We discussed several concepts related to compounding and exponential growth -- for ~1.5 hours.

If that seems too long, scroll down for some ~2 minute highlights!

callin.com/link/MHIxpuMaIc
Highlight #1

Compounding means *exponential* growth of wealth.

Examples of compounding: (1) A savings account that accrues interest, (2) a business that retains earnings and re-invests them to earn steady returns.

NOT an example of compounding: hourly wages.
Highlight #2

Buffett's early start is a big part of his > $100B net worth. He bought his first stock when he was just 11.

Thankfully, most of us don't need $100B to be happy in life. If our goal is simply to achieve Financial Independence, we can afford to start a little later.
Highlight #3

The Idea That "Great Investors Don't Use Excel"

Excel can help us do all kinds of sophisticated calculations.

But as Andy Benoit said so beautifully:

Most geniuses prosper not by deconstructing intricate complexities, but by exploiting unrecognized simplicities.
Highlight #4

Businesses that have low margins can still produce great returns for their owners -- IF they turn capital (eg, inventory) fast enough.
Highlight #5

ROIC vs ROIIC

ROIC is the return a business earns on *legacy* capital that it already has.

ROIIC is the return it will earn on *new* capital that we pour into it today.

For many mature businesses, ROIIC can be *much* smaller than ROIC.
Highlight #6

When deciding how much to pay for a business, we should take into account its future "compounding runway".

That is, for how much longer can the business continue to grow? How fast will this growth be? And how much capital will it take?
Highlight #7

Why do stocks/businesses grow exponentially?

It's the magic of retained earnings.

Good businesses often don't dividend out *all* their earnings. They *retain* a portion of it, and *compound* it at a decent rate.

That's their engine of exponential growth.
Highlight #8

Terry Smith's 3-Step Investing Process

Step 1: Find wonderful businesses,
Step 2: Buy them at reasonable prices, and
Step 3: Do nothing!

For more, here's a ~1.5 hour YouTube video:
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 Profile picture
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.
Read 32 tweets
10-K Diver Profile picture
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 Profile picture
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. Image
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 Profile picture
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 Profile picture
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 Profile picture
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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