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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.

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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.

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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%.

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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.

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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.

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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.

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Get a cup of coffee.

In this thread, I'll walk you through one of the greatest qualities a business can have: a LONG RE-INVESTMENT RUNWAY.

If a business can plow its profits back into itself, to grow at a good clip for a long time, it can make its owners fabulously wealthy. 2/

Imagine that Alice wants to start a chain of laundromats.

She does some research.

She figures out some good locations around town for these laundromats: strip malls with high traffic, close to large apartment complexes that don't provide in-unit washers/dryers, etc.

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For most of us, the path to financial freedom consists of:

(a) SAVING our money diligently, and
(b) INVESTING these savings intelligently.

Here are 4 key ideas to help you understand the interplay between SAVING and INVESTING. 2/

Key Idea 1.

SAVING is (usually) much more under our control than INVESTING.

If we look closely enough, most of us can probably find some expense we can cut. Some fat we can trim.

Or some way to make a little more money.

These are actions we can take to boost our savings.

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Get a cup of coffee.

In this thread, I'll help you understand how the TIMING of Cash Flows within a business can have a BIG impact on the returns that shareholders get from owning the business. 2/

Imagine a big, highly sought after, university.

There are many departments in this university. They are spread out across a large and lovely campus.

5000 students study in this campus. Many of them stay in dorm rooms. Some of these dorm rooms even have windows.

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Folks, today is July 22'nd. 22/7. Pi Approximation Day.

We all learned in school that 22/7 is a good approximation for pi.

But who came up with it? And how?

It happened ~2300 years ago. In ancient Greece.

Here's the story: 👇👇 2/

Before getting to pi, we should first understand the meaning of 2 geometry words: "perimeter" and "area".

Take a piece of paper. Draw any closed shape on it.

The "perimeter" of this shape is the *distance* the tip of your pen traveled as it traced out the shape.

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Get a cup of coffee.

In this thread, I'll walk you through how businesses die.

As Charlie Munger says: All I want to know is where I'm going to die, so I'll never go there.

In that spirit, we want to know how companies typically die, so we never take our portfolios there. 2/

I can think of 5 common ways companies die:

(1) Competition,
(2) Concentration,
(3) Leverage,
(4) Reputational Damage/Fraud, and
(5) Government Intervention.

Let's examine these one by one.

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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.

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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.

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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.

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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:

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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.

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.

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Get a cup of coffee.

In this thread, we'll analyze the "Devil's Card Game".

This is a super useful thought exercise. It can teach us several key concepts in economics, probability, betting, hedging, investor/market psychology, etc. 2/

So, what's the Devil's Card Game?

Here's a description. Please take a moment to read through it -- as it forms the basis for the rest of this thread.

(h/t Professor Henk Tijms, @Hendrikc44)

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Get a cup of coffee.

In this thread, I'll walk you through Income Statements:

a) What they are,

b) What key things about a business we can learn from them, and

c) Some important caveats we should keep in mind while reading them. 2/

An Income Statement is just a *record* of how much money a business made (or lost) during a particular period of time -- eg, a quarter or a year.

At its core, this is as simple as:

Profits for the period = Revenues - Costs

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The Founders, written by my friend Jimmy Soni (@jimmyasoni), is one of the best business biographies I've read.

It's the story of PayPal and the early days of the Internet -- featuring @elonmusk, @peterthiel, @DavidSacks, @mlevchin, etc.

Here are 7 nuggets from the book: 👇 2/

Nugget 1: LTV vs CAC

For the un-initiated:

LTV = Life Time Value of a customer, and
CAC = Customer Acquisition Cost.

In their early days, companies may have to spend significant amounts of money to acquire new users/customers.

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Get a cup of coffee.

In this thread, I'll walk you through the key elements of a Cockroach Portfolio.

As investors, we want our portfolios to produce reasonable returns without major drawdowns.

Here are some key concepts to help you *construct* such portfolios: 👇 2/

Imagine we have a company: ABC, Inc.

ABC's stock trades on the NASDAQ (ticker: $ABC).

Most years, this stock grows 10%, reflecting growing revenues and profits at the company.

But from time to time (say, once every 10 years), there's a big drawdown. The stock crashes 50%.