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10-K Diver

Jan 22 • 10 tweets • 5 min read

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:

@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.

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More from @10kdiver

10-K Diver

@10kdiver

Jan 22

1/

Get a cup of coffee.

In this thread, I'll walk you through the "magic of retained earnings".

This is the basic theory behind why stocks grow exponentially over long periods of time.

As investors, we'd do well to understand this theory -- and the assumptions it's based on.

2/

Warren Buffett's 2019 letter to Berkshire shareholders has a section titled "The Power of Retained Earnings".

In this section, Buffett describes how businesses can deliver enormous benefits to their owners by *retaining* and *compounding* a portion of their earnings:

3/

Let's break down this key insight from Buffett's letter.

Imagine we have a business that earns $100M per year.

Let's say this $100M neither grows nor shrinks over time.

Read 32 tweets

10-K Diver

@10kdiver

Jan 15

Get a cup of coffee.

In this thread, I'll walk you through 8 key concepts related to compounding and exponential growth.

To be a successful Jedi Knight, one must deeply understand the Force.

To be a successful investor, one must deeply understand the "force" of compounding.

Key Concept #1

What is Compounding?

Compounding means our WEALTH grows *exponentially* with TIME.

That is, if we wrote a formula for our WEALTH as a function of TIME, that formula would have TIME in the *exponent*.

Like so:

Key Concept #2

The biggest benefits of compounding come towards the end.

For example, take a savings account that starts with $1 and earns 10% per year -- compounded for 100 years.

In the FIRST 10 years, the account grows by ~$1.59.

In the LAST 10 years, it grows by ~$8,468.

Read 37 tweets

10-K Diver

@10kdiver

Jan 8

1/

Get a cup of coffee.

In this thread, I'll help you understand the Volatility Tax.

Whether you're a fundamentals-driven, buy-and-hold investor or an esoteric derivatives trader, this thread will help you hone your craft -- by sharpening your probabilistic reasoning skills.

2/

Imagine we have 2 stocks: A and B.

A is the ultimate steady compounder. Each year, the stock rises 15% -- like clockwork.

B is much more volatile. Some years, it RISES 50%. Other years, it FALLS 20%. The odds are 50/50 each year -- like a series of independent coin flips.

3/

Notice that, in any particular year, the *average* (or *expected*) return of B is the SAME as that of A.

That's because, in any year, the *average* of the 2 possible 50/50 outcomes for B (+50% and -20%) is (50 - 20)/2 = +15% -- the SAME as A's steady return.

Read 30 tweets

10-K Diver

@10kdiver

Jan 4

@getcallin

Folks, here are the highlights of our latest Money Concepts episode.

We met on Sunday via @getcallin. We talked about Financial Independence, diversification, value vs growth, and more.

👇👇👇

Highlight #1

The inspiring story of Mr. Ronald Read -- a janitor who amassed an $8M fortune by starting early, saving diligently, and investing responsibly.

With good planning and execution (and a bit of luck), Financial Independence can be within reach for most of us.

Highlight #2

There's a strong law of diminishing returns to diversification.

Read 9 tweets

10-K Diver

@10kdiver

Jan 1

Get a cup of coffee.

Let's kickstart 2022!

To that end, here are 22 key concepts to help you appreciate and achieve Financial Independence.

Concept #1.

What is Financial Independence?

It's a state of *self-sufficiency*. It's when you have enough money, and enough income-producing assets, that you and your family can live comfortably for the rest of your lives -- WITHOUT needing a job.

Concept #2.

Financial Independence is not really about spending MONEY how we like -- although, to an extent, that becomes possible.

It's about being FREE to spend our TIME how we like.

Read 25 tweets

10-K Diver

@10kdiver

Dec 28, 2021

@Gautam__Baid

Teaching People The Basics Of Investing

A short thread featuring my friend @Gautam__Baid, and his approach to this difficult problem

Suppose your friend Bob is new to investing.

He has just opened a Robinhood account.

But he has no knowledge of the fundamental concepts of investing -- how to analyze companies, how to pick stocks, etc.

Over time, Bob wants to learn these things.

How would you help him?

Well, there are tons of good resources that Bob can use to pick up the basics of investing.

There are excellent books.
Buffett's shareholder letters.
Lots of great YouTube videos.
Blogs.
Twitter threads.
Podcasts.
Etc.

Read 14 tweets

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