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10-K Diver

@10kdiver

Mar 1, 2022 • 10 tweets • 5 min read • Read on X

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Folks, here's our Money Concepts episode on the key investing lessons we can learn from Warren Buffett's partnership and shareholder letters.

It's ~1.5 hours of audio.

If that's too long for you, please scroll down for some key highlights!

Link: callin.com/link/rAPSwbkPAK

Highlight #1

Want to become a better investor in ~2 months?

Read 1 Buffett letter a day.

Start at 1965. End at 2021. That's 57 letters.

At 1 per day, it's a 2-month project that can dramatically improve our understanding of investing fundamentals.

Highlight #2

Of all Buffett's letters, the 2007 one is my favorite.

This letter has a section called "Businesses: The Great, The Good, and The Gruesome".

It explains -- in crystal clear terms -- what makes a business wonderful.

Here's that section from the 2007 letter:

Highlight #3

If the 2007 letter is my favorite, the 2013 letter is a close second.

In this letter, Buffett clearly lays out the differences between *Investing* and *Speculation*, using 2 investments from his own life -- a farm in Nebraska and a commercial property near NYU.

Here's that section from the 2013 letter:

Highlight #4

The concept of Owner Earnings -- and the key differences between "maintenance" and "growth" investments -- that Buffett described in his 1986 letter, have very much influenced my thinking.

Here's the Owner Earnings part of the 1986 letter:

If that was a little too abstract, here's an example using Intel -- and why I think Owner Earnings at Intel may be meaningfully lower than reported earnings:

@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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