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10-K Diver

@10kdiver

Jan 25, 2022 • 7 tweets • 4 min read • Read on X

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Folks, here's our latest Money Concepts episode.

It's about the "magic of retained earnings" -- how businesses can create tremendous value by retaining part of their earnings and compounding it over time.

Scroll down for some ~2 minute highlights!

callin.com/link/KuNDjEYcDF

Highlight #1

The "Intrinsic Value" of a stock is the discounted present value of ALL future dividends from that stock.

And businesses that retain part of their earnings and compound it at a decent rate can deliver *exponential* growth in this intrinsic value over time.

Highlight #2

All companies eventually die.

IF a company NEVER pays a dividend from the time it is founded until its eventual death, then the Intrinsic Value of that company's shares is ZERO.

Even if the company produces growing earnings and cash flows for a period of time.

Highlight #3

Businesses typically use 3 kinds of capital: Equity, Debt, and Float.

It's NOT just insurance companies that have Float.

Payables to suppliers and employees, pre-paid revenue from customers, deferred taxes to the government -- are all examples of Float.

Highlight #4

Owner Earnings is a super useful concept that Buffett described in his 1986 letter: berkshirehathaway.com/letters/1986.h…

It's the amount of *cash* an owner can take out of a business each year -- IF the owner just wants to *maintain*, and NOT *grow*, the business's earnings.

Highlight #5

Many investors judge companies on "key performance metrics" -- ROE, ROIC, Inventory Turnover, etc.

But it's not enough to just *calculate* these metrics every quarter/year.

We have to *understand* the business well enough to correctly *interpret* these metrics.

@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/show/money-con…

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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.

Read 32 tweets

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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