10-K Diver Profile picture
I teach finance and investing concepts via Twitter threads.
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8 Aug

Get a cup of coffee.

In this thread, I'll show you how to do a DCF analysis.

For those unfamiliar, DCF = Discounted Cash Flow.

Imagine you live in a small town.

The town has a charming little bakery: Cakes N' Bakes.

Cakes N' Bakes has been in existence for 20 years. It's centrally located -- close to the town square. And it's run by your good friend Dave.

One day, Dave invites you home for lunch.

Over lunch, Dave tells you that he's growing too old to run Cakes N' Bakes. He's been waking up at 4am and putting in 10 hour days for the last 20 years. Now he wants to relax a little and enjoy life.
Read 40 tweets
1 Aug

Get a cup of coffee.

In this thread, I'll help you understand stock splits.

I was actually going to talk about DCF calculations this week.

But on Thursday, Tim Cook (Apple's CEO, @tim_cook) announced that Apple is going to split its stock.

Based on how people reacted to this announcement, I realized there's a lot of confusion around stock splits.

Stock splits are actually pretty simple. There's no need for so much confusion.

So let's try to clear this up!

Side note to @tim_cook: I love you man, but it's not easy to prepare a thread like this on short notice. Next time, a heads up would be nice.😉
Read 33 tweets
25 Jul

Get a cup of coffee.

In this thread, I'll help you work out how much money you need to retire.

The goal is simple.

You want to accumulate a *large* portfolio of assets.

How large?

Well, you should be able to quit your job. And you and your family should be able to live comfortably for decades -- just off of the income generated by this portfolio.

This is the crux of the "FIRE" movement.

FIRE stands for "Financially Independent, Retired Early".

The basic philosophy is: keep your spending needs low. Save a large portion of your income. Invest these savings. With luck, you'll be able to retire early.
Read 39 tweets
18 Jul

Get a cup of coffee.

(Or, as the wise @JohnLegere says, get many cups of coffee!)

In this thread, I'll show you how to do CAGR calculations.

For those unfamiliar, CAGR = Compounded Annual Growth Rate. It's also called IRR (Internal Rate of Return).


Imagine that you bought 100 shares of Google ($GOOG) on Dec 31, 2015 (about 4.5 years ago).

At that time, $GOOG was trading at $758.88 per share. Today, it's at $1,515.55.

Assuming you're still holding on to your 100 shares, what's your rate of return on this investment?

Well, your initial investment was $75,888 (100 shares times $758.88 per share).

That $75,888 has now grown to $151,555 (100 shares times $1,515.55 per share).

This growth has happened between 2015-Dec-31 and 2020-Jul-17 -- a period of 1,660 days.
Read 25 tweets
11 Jul

Get a cup of coffee.

In this thread, I'll walk you through the basics of portfolio diversification.

Imagine that you're a journalist.

You just scored an interview with the world's greatest investor.

You're really excited.

It's the day of the interview.

You're escorted into the great man's office.

He's seated behind his desk. He greets you warmly. You exchange pleasantries.

It's time to begin the interview.
Read 33 tweets
3 Jul

Get a cup of coffee.

In this thread, I'll help you understand the calculations that go into mortgages.

This can help you take intelligent financial decisions -- how big a mortgage to take out, whether to pay it off early, etc.

Imagine that you're buying a house.

The house costs several hundred thousand dollars.

You probably don't have so much cash lying around.

So you have to take out a loan. This loan is called a mortgage.

You pay off the mortgage by making a series of monthly payments.

When you take out a mortgage, the key question is: how much will your monthly payment be?

This depends on 3 factors: the size of the loan, the duration of the loan, and the interest rate you're able to get.
Read 34 tweets
27 Jun

Get a cup of coffee.

In this thread, I'll help you understand the fundamentals of options.

Warning: this thread is extra long!

Let's start with the basics: what is an option?

An option is the right to buy or sell a stock in the future.

Which company's stock? At what price? How far into the future? All that is spelled out in the "options contract".

There are 2 kinds of options: calls and puts.

Calls give you the right to *buy* a stock in the future at a particular price.

Puts give you the right to *sell* a stock in the future at a particular price.
Read 47 tweets
27 Jun

This is a beautifully written thread about “the wisdom of crowds”, inspired by this piece by @mjmauboussin:


One question I have: is crowd wisdom better at estimating “derived quantities” or it is better at estimating “fundamental quantities”?

Best to take an example.

Suppose we have a room and a tile.

We want to estimate how many tiles are needed to tile the walls of the room. Then:

No. of tiles needed = Surface area of room / Surface area of tile.
Read 8 tweets
20 Jun

Get a cup of coffee.

In this thread, I'm going to show you a simple way to think about "LTV vs CAC" trade-offs.

For those unfamiliar:

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

Imagine that you just returned from a vacation to India.

While there, you observed that many Indians don't buy their milk from grocery stores.

Instead, they get fresh milk delivered each morning to their doorstep.

There's a "milk man" in town who keeps a bunch of cows.

Every morning, this milk man wakes up at 4am, milks the cows, and bottles the milk.

By 6am, he is out delivering fresh milk to customers all over town.
Read 30 tweets
13 Jun

Get a cup of coffee.

In this thread, I'll show you a simple way to understand and analyze stock buybacks.

Imagine that you're a part owner of a pizza shop.

The shop has 20 owners. You and 19 others. Each of you owns 5% of the shop.

Suppose the shop made $1M in 2019.

A simple way to distribute this profit would be to give each owner $50K:

(20 owners) * (50K/owner) = $1M total profit.

This is a "dividend policy". Each owner gets a dividend whether they want it or not.
Read 23 tweets
6 Jun

Get a cup of coffee.

In this thread, I'm going to walk you through the concept of "owner earnings".

Imagine that you're opening a coffee shop.

You find a nice corner location with lots of foot traffic. And you sign a lease. Your monthly rent, including all utilities, will be $5K.

Then you spend $100K on swanky furniture, fancy lights and other fixtures, etc.

Now the place looks really inviting. And you don't have to touch it for the next 10 years.
Read 26 tweets
31 May

Get a cup of coffee.

In this thread, I'll show you why "geometric thinking" is superior to "arithmetic thinking" while making investment decisions.

Let's start with an example.

There are 2 stocks, A and B.

A goes up 10% every year. Like clockwork.

B is more volatile. Half the years, it goes down 10%. But the other half, it compensates by going up 33%.

You have $10,000.

You have to pick a stock (A or B), put your entire $10K in it, and not touch it for 20 years.

Do you pick A or B?
Read 19 tweets
27 May
1) This thread by @jposhaughnessy beautifully describes how important it is to draw the right inferences from your observations/available data.

I want to connect this to a topic I feel has not been talked about enough -- the role of probabilistic inference in Covid-19 testing.
2) Most people in the US today don't know if they have Covid-19 or not.

Some estimates say 3% of the US population has it. Others say 30% of the population has it.

Nobody really knows for sure.
3) Of course, there are Covid-19 tests available.

But they're not perfect either.

Some estimates say they're only about 60% accurate. Others say they may be 80% accurate.

Nobody really knows for sure.
Read 18 tweets
24 May
1) Get a cup of coffee.

In this thread, I'm going to walk you through "The Kelly Criterion".
2) In 1956, John Kelly published a paper titled "A New Interpretation of Information Rate" in the Bell System Technical Journal.
3) In the paper, Kelly described a simple and elegant way for investors to strategically allocate capital in the face of uncertainty.

This is what is now known as the Kelly Criterion.
Read 46 tweets