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10-K Diver

@10kdiver

Jun 28

1/

Many people use the “Debt to Equity” ratio to tell whether a company has too much debt.

For example, if this ratio is less than 0.5, debt is “manageable”.

But if it’s over 1.5, there’s too much debt. So, the company is best avoided.

Etc.

Here’s the problem with that.

2/

Debt to Equity treats ALL debt the same way.

$1B that’s due 18 months from now is VERY different from the same $1B due 100 years from now.

But Debt to Equity treats them both the same.

3/

Likewise, $1B borrowed at 10% interest vs $1B borrowed at 0.2% interest.

As far as Debt to Equity is concerned, they’re both the same.

Read 11 tweets

10-K Diver

@10kdiver

Jun 26

1/

Get a cup of coffee.

In this thread, I'll walk you through a probabilistic thought experiment.

This will help you appreciate some key investing concepts:

- SURVIVAL is key,
- we need LONG TERM focus,
- the LUCK vs SKILL conundrum, and
- the CERTAINTY vs UPSIDE trade-off.

2/

Imagine we have 101 stocks in front of us.

Of these, 1 is "Safe". The other 100 are "Risky".

We know which is which.

The Safe stock grows 10% every year. Like clockwork. There's NO uncertainty around it.

3/

The Risky stocks are more uncertain.

But to compensate, they (seemingly) offer more UPSIDE.

Each Risky stock either *doubles* or *goes to zero* each year. There's a 50/50 chance of either outcome, and it's impossible to predict in advance which Risky stock will do what.

Read 25 tweets

10-K Diver

@10kdiver

Jun 12

1/

Get a cup of coffee.

Many of us are grappling with high inflation. We are worried about how inflation is going to impact our portfolios, and our costs of living.

In this thread, I'll walk you through why inflation is so dangerous for businesses and investors.

2/

Imagine we own a chain of coffee shops.

We sell $5M worth of coffee each year.

And each year, we pocket $1M of that $5M as profits.

So, we have:

Annual Revenues = $5M,
Costs = $4M, and therefore
Annual Profits = $1M.

3/

IF inflation is *zero*, let's say we'll repeat this performance each year.

That is, each year, we'll get to take out $1M of *cash* from our coffee shops.

That's great: a steady, reliable source of income.

Read 21 tweets

10-K Diver

@10kdiver

May 27

1/4

This is hands down my favorite Charlie Munger quote.

As investors, we want to:

- Buy high quality businesses,
- At low prices, and
- Hold them for long periods of time.

Munger argues that *high quality* and *long periods of time* are far more important than *low prices*.

2/4

There’s so much to unpack here!

I hope this helps:

3/4

Here’s the *math* behind Munger’s quote — you knew this was coming!

Read 4 tweets

10-K Diver

@10kdiver

May 22

1/

Protecting ourselves from inflation

Over the last few weeks, I've been asking myself:

IF high inflation is here to stay, what are some ways we can insulate ourselves from its impact?

Here are some thoughts:

👇👇👇

2/

For most of us, the path to financial independence consists of 3 steps:

- Earning consistently,
- Saving diligently, and
- Investing intelligently.

High inflation makes all 3 difficult to do.

3/

Let's take them one by one.

First, "earning consistently".

Many of us depend on our jobs to derive the bulk of our income.

But inflation can put our jobs in danger.

This can make it hard to "earn consistently".

Read 25 tweets

10-K Diver

@10kdiver

May 19

@AliTheCFO

Folks, I'm delighted to announce that Ali Ladha (@AliTheCFO) and I are launching a course together.

We're calling it BIBO: Business Investor, Business Operator.

Our goal: We want to help people make better financial decisions, by understanding business fundamentals really well.

Who This Course Is For

We think anyone who is fascinated by businesses will enjoy this course and learn something from it.

We're tailoring the course to 2 specific target audiences:

1) Small business owners/operators, and
2) New investors.

The Topics We'd Like To Cover

Here's what we came up with.

If you want us to include anything else, please let us know!

Read 7 tweets

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