When we share their quotes, we spread real wisdom. Their words carry calm thinking, smart habits, and strong investing energy. And good energy is contagious: it inspires us to think clearly, act wisely, and grow with confidence.

Charlie Munger

Charlie Munger is one of the most intelligent and trustworthy men in the investment world.

We can all learn a lot from Charlie Munger, and his book Poor Charlie’s Almanack is a must-read.

In this article, you can find 50 of Charlie Munger’s best (investment) quotes full of investment wisdom:

1. Investing is where you find a few great companies and then sit on your ass.

2. The big money is not in buying or selling, but in the waiting.

3. Like Warren, I had a considerable passion to get rich, not because I wanted Ferrari’s - I wanted the independence. I desperately wanted it.

4. We have a passion for keeping things simple.

5. Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you’ve won.

6. Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.

7. If investing wasn’t hard, everyone would be rich.

8. You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.

9. The desire to get rich fast is pretty dangerous.

10. Those who keep learning will keep rising in life.

11. There is no way you can live an adequate life without making mistakes.

12. Acknowledging what you don’t know is the dawning of wisdom.

13. No wise pilot, no matter how great his talent and experience, fails to use a checklist.

14. There is no better teacher than history in determining the future. There are answers worth billions of dollars in 30$ history books.

15. A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.

16. It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred gratification gene, you’ve got to work very hard to overcome that.

17. You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.

18. One of the greatest ways to avoid trouble is to keep it simple... the system often goes out of control.

19. Knowing what you don’t know is more useful than being brilliant.

20. If a business earns 18% on capital over 20 or 30 years, even if you pay a high-looking price, you’ll end up with a fine result.

21. Forgetting your mistakes is a terrible error if you’re trying to improve your cognition. Reality doesn’t remind you. Why not celebrate stupidities in both categories?

22. You need patience, discipline, and agility to take losses and adversity without going crazy.

23. Everywhere there is a large commission, there is a high probability of a rip-off.

24. It takes character to sit with all that cash and to do nothing. I didn’t get to the top where I am by going after mediocre opportunities.

25. We both (Warren Buffett) insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think.

26. Another thing, of course, is that life will have terrible blows in it, horrible blows, unfair blows. It doesn’t matter. And some people recover and others don’t.

27. Live within your income and save so you can invest. Learn what you need to learn.

28. Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.

29. I would argue that passion is more important than brainpower.

30. A great business at a fair price is superior to a fair business at a great price.

31. Our game is to recognize a big idea when it comes along when one doesn’t come along very often.

32. Simplicity has a way of improving performance by enabling us to better understand what we are doing.

33. In my whole life, I have known no wise people who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—at how much I read. They think I’m a book with a couple of legs sticking out.

34. Remember that reputation and integrity are your most valuable assets and can be lost in a heartbeat.

35. We recognized early on that smart people do very dumb things, and we wanted to know why and who so that we could avoid them.

36. I met the towering intellectuals in books, not in the classroom, which is natural. My family was into all that stuff, getting ahead through discipline, knowledge, and self-control.

37. Some people are extraordinarily good at knowing the limits of their knowledge because they have to be.

38. Opportunity comes to the prepared mind.

39. To this day, I have never taken a course anywhere in chemistry, economics, psychology, or business.

40. If something is too hard, we move on to something else. What could be simpler than that?

41. The best thing a human can do is to help another human being know more.

42. Most people are too fretful; they worry too much. Success means being very patient but aggressive when it’s time.

43. The first rule of compounding: Never interrupt it unnecessarily.

44. One person told me, ”I have a list of 300 potentially attractive stocks & I constantly track them, waiting for just one of them to get cheap enough to buy.” Well, that’s a reasonable thing to do. But how many people have that kind of discipline? Not one in 100.

45. I think that one should recognize the reality even when one doesn’t like it; indeed, especially when one doesn’t like it.

46. People calculate too much and think too little. Thinking is a surprisingly underrated activity in investing. People who cannot be alone with their own thoughts for a long time are terrible candidates to become successful investors.

47. We don’t care about quarterly earnings and are unwilling to manipulate in any way to make some quarter look better.

48. To get what you want, you have to deserve what you want. The world is not yet a crazy enough place to reward a whole bunch of undeserving people.

49. The iron rule of nature is: you get what you reward for. If you want ants to come, you put sugar on the floor.

50. All I want to know is where I’m going to die so I’ll never go there.

Warren Buffett

Warren Buffett is the best investor in the world.

Warren Buffett is one of the most successful investors ever. People trust him because he explains money and business in a calm, simple way.

His book The Essays of Warren Buffett is loved by many investors. It shares his best ideas about patience, value, and making smart choices.

In this article, you can find his 50 of his best investment quotes:

1. Lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless.

2. Many management teams are just deciding they’re gonna buy X billions over X months. That’s no way to buy things. You buy when selling for less than they are worth. ... It’s not a complicated equation to figure out whether it is beneficial or not to repurchase shares.

3. The difference between successful people and really successful people is that really successful people say no to almost everything.

4. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.

5. Never invest in a business you cannot understand.

6. Your premium brand had better be delivering something special, or it’s not going to get the business.

7. One can best prepare themselves for the economic future by investing in their own education. If you study hard and learn at a young age, you will be in the best circumstances to secure your future.

8. The most important thing to do if you find yourself in a hole is to stop digging.

9. One thing that could help would be to write down the reason you are buying a stock before your purchase. Write down “I am buying Microsoft at $300 billion because...” Force yourself to write this down. It clarifies your mind and discipline.

10. Only when the tide goes out do you discover who’s been swimming naked.

11. Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.

12. Price is what you pay. Value is what you get.

13. Read 500 pages like this every day. That’s how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it.

14. Risk comes from not knowing what you’re doing.

15. If a business does well, the stock eventually follows.

16. Since I know of no way to reliably predict market movements, I recommend that you purchase Berkshire shares only if you expect to hold them for at least five years. Those who seek short-term profits should look elsewhere.

17. Someone’s sitting in the shade today because someone planted a tree a long time ago

18. The best thing that happens to us is when a great company gets into temporary trouble... We want to buy them when they’re on the operating table.

19. Speculation is most dangerous when it looks easiest.

20. Stay away from it. It’s a mirage, basically... The idea that it has some huge intrinsic value is a joke in my view.

21. The best chance to deploy capital is when things are going down.

22. The stock market is a no-called-strike game. You don’t have to swing at everything—you can wait for your pitch.

23. There is nothing wrong with a ‘know nothing’ investor who realizes it. The problem is when you are a ‘know-nothing’ investor, but you think you know something.

24. This does not bother Charlie and me. Indeed, we enjoy such price declines if we have funds available to increase our positions.

25. Too-big-to-fail is not a fallback position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity.

26. There are all kinds of businesses that Charlie and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do.

27. You can’t buy what is popular and do well.

28. We never want to count on the kindness of strangers in order to meet tomorrow’s obligations. When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.

29. We will reject interesting opportunities rather than over-leverage our balance sheet.

30. We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

31. What is smart at one price is stupid at another.

32. What we learn from history is that people don’t learn from history.

33. When stock can be bought below a business’s value, it is probably the best use of cash.

34. When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.

35. When we own portions of outstanding businesses with outstanding management, our favorite holding period is forever.

36. When you have able managers of high character running businesses about which they are passionate, you can have a dozen or more reporting to you and still have time for an afternoon nap. Conversely, if you have even one person reporting to you who is deceitful, inept, or uninterested, you will find yourself with more than you can handle.

37. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.

38. Widespread fear is your friend as an investor because it serves up bargain purchases.

39. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

40. You can’t borrow money at 18 or 20 percent and come out ahead.

41. You can’t produce a baby in one month by getting nine women pregnant.

42. The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd nor against the crowd.

43. You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. You only have to be able to evaluate companies within your circle of competence.

44. The size of that circle is not very important; knowing its boundaries, however, is vital.

45. You’re just hoping the next guy pays more. And you only feel you’ll find the next guy to pay more if he thinks he’s going to find someone that’s going to pay more. You aren’t investing when you do that; you’re speculating.

46. Buy into a company because you want to own it, not because you want the stock to go up.

47. Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts, or the opinions of media pundits.

48. Half of all coin flippers will win their first toss; none of those winners have an expectation of profit if he continues to play the game.

49. Predicting rain doesn’t count; building the ark does.

50. Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.

That’s it for today. Did you like this? Which is your favourite quote and why? Please let us know in the comments!

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!



Team Young Hamilton

Disclaimer

As a reader of Young Hamilton, you agree to our disclaimer. You can read the full disclaimer here.

Then close your laptop, breathe, and enjoy your weekend. A calm mind makes smarter decisions, and today is the perfect day to start.

1️⃣ Some things I’ve learned about money

Money is a resource to achieve happiness.

Print these rules out and look at them every week.

2️⃣ Pay yourself first

To become wealthy, always pay yourself first.

3️⃣ One simple investment quote

You can borrow someone’s idea, but you can’t borrow their conviction.

Even in the industry, I see it every week: professional investors skip their homework too.

Deadlines, noise, and pressure, and suddenly the basics are forgotten.

That is why staying disciplined matters.

A few simple checks, done consistently, often beat the “experts.”

4️⃣ Stock market movies

Movies are a great way to relax.

Here is a great stock market movie you should watch: ‘The Big Short’.

Why?

The movie shows how markets break when people stop thinking.

It also teaches the value of calm, independent judgment, the core skill every long‑term investor needs.

5️⃣ Example of a Quality Company

It’s a big mistake to think that Ferrari ($RACE) is a car company. In reality, Ferrari is a luxury company.

That’s it for today. Did you like this? Please let us know in the comments!

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!



Team Young Hamilton

Disclaimer

As a reader of Young Hamilton, you agree to our disclaimer. You can read the full disclaimer here.

We teach you five simple stock‑market truths before your coffee gets cold.

1️⃣ The psychology of a market cycle

This time isn’t different; markets always swing.

2️⃣ Be rational

Herd behavior kills you as an investor.

Be as rational as possible and do your own homework.

3️⃣ One simple investment quote

The economy is a lagging indicator for the stock market. In general, the stock market is ahead of the economy by 6 months.

“Every economic recovery since World War II has been preceded by a stock market rally. And these rallies often start when conditions are grim.” – Peter Lynch

4️⃣ Different kind of moats

You want to invest in companies with wide economic moats (strong competitive advantage).

Here you can find a great framework from Morningstar:

5️⃣ Example of a Quality Company

A lot of Quality Companies are active in an oligopolistic market.

American Express is a strong, simple business. People trust it. They use it every day.

It earns steady money from loyal customers and smart fees.

The brand is clear, the model is easy to understand, and the company keeps growing without drama.

That is why it is seen as a quality stock.

That’s it for today. Did you like this? Please let us know in the comments!

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!



Team Young Hamilton

Disclaimer

As a reader of Young Hamilton, you agree with our disclaimer. You can read the full disclaimer here.

His rules are easy to understand and help you make smarter choices without stress or hype. When you follow the Oracle of Omaha, you learn a mindset that makes you more confident and steady every time you invest.

Learn from these 10 timeless lessons:

Principle 1: The longer you invest, the better.

Today, Warren Buffett’s net worth is equal to more than $141.2 billion. More than 95% (!) of this wealth was created after his 65th birthday. The power of compounding is truly beautiful.

Principle 2: Do not borrow money to invest

“My partner Charlie Munger says there are only three ways a smart person can go broke: liquor, ladies and leverage” - Warren Buffett

Principle 3: Boring companies are usually great investments

Invest in what you understand. When you don’t understand what you buy, you are not able to make good and rational investment decisions. Boring companies are usually great investments. Good investing is like watching paint dry.

Principle 4: Invest in companies with integer management

The interests of management and shareholders should be aligned. When a management team with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.

Principle 5: Buy quality businesses

In the long term, earnings growth is the main determinant for increasing stock prices. Invest in robust companies with a healthy balance sheet and high margins that can grow their earnings attractively.

Principle 6: Be disciplined

Every investment strategy will underperform the market from time to time. As an investor, you are running a marathon, not a sprint. Write down your investment goals and stick to the plan.

Principle 7: Market fluctuations are your friend

The best thing that can happen to investors who will still be buying shares in the next 10 years is falling stock prices.

Use it to your advantage.

Principle 8: Invest in companies that can reinvest a lot in organic growth

Organic growth is the most preferred source of growth. When you invest in companies that can reinvest their earnings in organic growth for years or even decades, the earnings of the company will explode over time.

Principle 9: Your best ideas should have the largest weight in your portfolio

When you know what you own, overdiversifying can be harmful to your results. Buffett’s top holdings include Apple (22.60%), American Express (17.43%), Coca-Cola (11.56%), Bank of America (9.52%), and American Express (6.64%), the core of his long-term winning strategy.

Principle 10: Pricing power is crucial

A company with pricing power can pass increasing costs to its customers. Companies with pricing power are usually characterized by high gross margins. When a company has a very high and stable gross margin, it is usually also a good indication that the company has an economic moat.

That’s it for today. Did you like this? Please let us know in the comments!

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!

Team Young Hamilton

Disclaimer

As a reader of Young Hamilton, you agree with our disclaimer. You can read the full disclaimer here.

Each book gives you clear ideas you can use right away. Pick one, start reading, and feel your investing confidence grow fast.

In this thread, you can find a list of premium books that will change your investment career forever.

1. The Joys of Compounding (Gautam Baid)

So much wisdom on every single page. Gautam teaches you about the passionate pursuit of lifelong learning. Compounding takes place in every aspect of your life: positive thoughts, good health, good habits, wealth, and so on.

2. The Snowball (Alice Schroeder)

If you think you can become like Warren Buffett, think again. Learn about the remarkable life of Warren via this great book.

3. Why does the stock market go up (Brian Feroldi)

Are you new to investing, and do you want to understand the basic dynamics of the stock market? In that case, Brian’s book is a must-read for you.

4. Expectations investing (Michael Mauboussin)

Rather than forecasting cash flows, investors should begin by estimating the expectations embedded in a company’s stock price. Mauboussin provides you with a great framework to make better investment decisions.

5. Richer, Wiser, Happier (William Green)

Over the years, William has interviewed the greatest investors in the world. Via this book, you learn how the world’s greatest investors act and think.

6. The little book that beats the market (Joel Greenblatt)

This is one of the classics in finance literature. In this book, Greenblatt explains how investors can outperform the market by simply and systematically applying a formula that seeks out good businesses at bargain prices.

7. The Psychology of Money (Morgan Housel)

People make a lot of irrational decisions that cost them a lot of money. This book teaches you how to think about money and make better sense of life’s most important topics.

8. One Up On Wall Street (Peter Lynch)

Legendary investor Peter Lynch managed the Magellan Fund between 1977 and 1990 to retire at age 46. During this period, Lynch realized an annual return of 29.2% (!). In this book, Peter teaches you about his investment philosophy.

9. The Little Book of Sideways Markets (Vitaly Katsenelson)

Vitaly is one of the best value investors I know. Avoid common investment mistakes and learn why volatility and sideways markets are a stock picker’s best friend.

10. The Education of a Value Investor (Guy Spier)

Guy Spier has spent almost $700k to lunch with Warren Buffett. Guy Spier invests in undervalued quality companies. In this truly great book, Guy details his career from Harvard MBA to managing his own Aquamarine Fund.

That’s it for today. Did you like this? Please let us know in the comments!

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!

Team Young Hamilton

Disclaimer

As a reader of Young Hamilton, you agree with our disclaimer. You can read the full disclaimer here.

In this series, we will teach you 5 things about the stock market in less than 5 minutes.

If you are reading this and like #QualityTuesday, feel free to share it with Family and Friends.

Subscribe now

Share

1️⃣ Be greedy when others are fearful

What if you invested in the S&P500 every time the US news channel CNBC reported that the stock market was in turmoil?

In that case... your average return after 1 year would be equal to 40% with a win rate of 100%.

It pays off to be greedy when others are fearful and fearful when others are greedy.

2️⃣ Investing isn’t gambling

Investing isn’t gambling.

Act like an owner and think on the long term.

3️⃣ One simple investment quote

Do you want to invest successfully? Read as much as you can.

4️⃣ Statement of Cash Flows

Do you want to learn more about the Statement of Cash Flows?

Take a look here:

5️⃣ Example of a Quality Company

All companies within Morningstar’s wide moat index:

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!
Team Young Hamilton

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

A high ROIC is key for value creation and it’s a great way to look at a company’s competitive advantage.

In this article we’ll teach you everything you need to know about one of the most important metrics in the world of finance.

Subscribe now

The power of compounding

Let’s start with an example. Suppose that there are 2 companies:

• Company A: ROIC of 5% and reinvests all its profits for 25 years

• Company B: ROIC of 20% and reinvests all its profits for 25 years

Can you guess how much company A and B would be worth if you invest $10.000 in both (assumption: valuation remains constant)?

In this example, an investment in company A would be worth $33.860 while an investment in company B would increase to $953.960!

This simple example beautifully shows the importance of ROIC and the power of compounding.

Now you’re convinced of the importance of ROIC, let’s explain this financial metric to you.

What is Return On Invested Capital (ROIC)?

Capital allocation is the most important task of management.

If you want to look at how efficient management allocates capital, you can take a look at the ROIC.

When a company has a ROIC of 15%, it means that for every $100 in capital the company has on its balance sheet, $15 in NOPAT is generated.

You want to invest in companies with a high ROIC as this means that the company is allocating capital efficiently.

As a rule of thumb, the ROIC should be higher than 10% and preferably higher than 15%.

Why ROIC matters

Did you like the first example in this article? Let’s use a second one.

In this example, we have 2 companies: Quality Inc. and Dividend Inc.

Both companies generate a NOPAT (profit) of $100 million per year and need $500 million to operate (invested capital). Furthermore, both companies have a ROIC of 20%.

Dividend Inc. has no growth opportunities and distributes all earnings as a dividend to shareholders. As a result, Dividend Inc. will distribute $100 million to shareholders each year and will still make $100 million in profits 20 years from now.

On the other hand, Quality Inc. is active in a secular growth market and is able to reinvest all its earnings in organic growth. This means Quality Inc. pays no dividend to shareholders and reinvests everything in itself.

After 1 year, Quality Inc. has $600 million in capital (the starting capital of $500 million + $100 million in reinvestment). On this invested capital of $600 million, Quality Inc. generates a ROIC of 20%. As a result, Quality Inc.’s earnings grew to $120 million (20% * $600 million).

In year 2, Quality Inc. again reinvests it’s earnings of $120 million in organic growth. As a result, Quality Inc.’s invested capital grew to $720 million (the $600 million it already had + $120 million in reinvestment). The earnings of Quality Inc. grew to $144 million (20% * $720 million).

Can you guess how many profit Quality Inc. would make if they would be able to this for 20 consecutive years?

The correct answer is $3.8 billion!

As a result, a high ROIC in combination with plenty of growth opportunities is the golden egg for investors. It will result in exponentially increasing earnings for a company if management makes good capital allocation decisions.

Growth only creates value when ROIC > WACC

It is very important to understand that growth only creates value when the Return On Invested Capital (ROIC) of a company is higher than the Weighted Average Cost of Capital (WACC).

The formula to calculate the WACC of a company can be seen hereunder. Simply put, the Weighted Average Cost of Capital is equal to the firm’s average cost of capital (cost of equity + cost of debt).

Source: Investopedia

It is very intuitive to state that what the company earns on its investments (ROIC) should be higher than what the company needs to pay to finance these investments (WACC).

Let’s give another example to clarify this:

Company A has a ROIC of 5% and a WACC of 10%. The company’s NOPAT is equal to $10 million and they are offered a new project which would generate $1 million in NOPAT.

When company A would accept this project, they will need $20 million in capital to execute this project ($1 million / 5%).

Company A has a WACC of 10% and as a result they will need to pay $2 million ($20 million *10%) to finance this project.

As a result, company A should pay $2 million to finance the project while it will only generate $1 million in NOPAT. It goes without saying that company A shouldn’t accept this project because they would lose money on it.

On the other hand, Company B has a ROIC of 20% and a WACC of 10%. The company’s NOPAT is also equal to $10 million and they are offered the identical project as company A which would generate $1 million in NOPAT.

When company B would accept this project, they will need $5 million in capital to execute this project ($1 million / 20%).

Company B has a WACC of 10% and as a result they will need to pay $0.5 million ($5 million *10%) to shareholders and debtors to finance the project.

So company B should pay $0.5 million to finance the project while it would generate $1 million in extra NOPAT. As a result, company B should accept this project.

Excluding goodwill and cash

Some people prefer to exclude goodwill and cash out of the invested capital to calculate the ROIC.

In that case, the formula for ROIC goes as follows:

When you use this variant of the formula, the ROIC will be higher than in the traditional formula.

This variant is especially relevant to calculate how much a company should reinvest in itself in order to grow at a certain rate.

The underlying reasoning behind this is that you don’t need goodwill or cash in order to grow.

Reinvestment needs

When you want to calculate how much a company should reinvest in itself in order to achieve a certain rate, you can use this formula:

Let’s say that a company has a ROIC of 20% and wants to grow its NOPAT with 10% per year.

In that case, the company should reinvest 50% of its NOPAT (10%/20%) in order to grow with 10% next year.

It goes without saying that having a high ROIC is interesting because it results in lower reinvestment needs for the company. The best companies in the world are able to grow attractively (> 10% per year) while reinvestment needs are very low to achieve this growth.

When a company needs to reinvest less, they can use their cash flow for other things like dividends and buying back shares.

ROIC = proxy for a moat

You aren’t convinced yet that the ROIC of a company is important? Well, you can use it to measure a company’s competitive advantage too.

In general, there are 2 crucial conditions for a company to have a moat:

1. The company is earning profits that are greater than their weighted average cost of capital (WACC)

2. The level of profitability has maintained high and constant for a reasonable period of time

A consistent and high ROIC is a great indication that the company has a sustainable competitive advantage. By only focusing on companies with a high ROIC when picking stocks, you already exclude a lot of value traps.

A high and consistent ROIC is the result of a sustainable competitive advantage.

Why? Because it indicates that competitors and (potential) new entrants are not able to go into competition with this company. This allows them to stay very profitable and operate at attractive margins.

Conclusion

The ROIC is one of the most important financial metrics for quality investors as it indicates how efficiently management is allocating capital.

You want to invest in companies with a high and consistent ROIC. When a company has a robust ROIC which is higher than their WACC every single year over the past decade, it is a great indication that the company has a competitive advantage.

As a quality investor, you are seeking for compounding machines. These stocks have a high and consistent ROIC with plenty of reinvestment opportunities. This will allow the company to grow its free cash flow exponentially.

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!
Team Young Hamilton

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

In this series, we will teach you 5 things about the stock market in less than 5 minutes.

1️⃣ US Stock market returns

In the long term, stocks always go up.

Here are the yearly returns since 1928:

2️⃣ The decline of long term investing

Great investors think on the long term.

If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.

3️⃣ One simple investment quote

Isaac Newton, one of the greatest mathematicians and physicists in the world, lost a lot of money in the South Sea Bubble.

Bubbles and manias happen all the time. Focus on the fundamentals of the companies you own and don’t get seduced by moonshots.

If it seems too good to be true, it probably isn’t.

4️⃣ Free webinar

Next Thursday we are giving a free webinar about investing.

You want to attend?

Register here:

Register for the webinar

5️⃣ Example of a Quality Company

Pool Corporation ($POOL) is trading at it’s cheapest valuation since 2010.

It’s a great company with great capital allocation:

That’s it for today.

You are not a Partner of Young Hamilton yet?

You can do so here:

Join Young Hamilton

Happy Compounding!
Team Young Hamilton

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

In this article, you’ll find 15 quality stocks with skin in the game.

This means the company is run by their founders and/or in which a controlling family owns a significant share.

Company 1: Copart ($CPRT)

Copart provides vehicle suppliers, primarily insurance companies, with a variety of services to process and sell salvage vehicles through auctions.

• Profit Margin: 31.1%

• ROIC: 23.5%

• Earnings Yield: 4.0%

• Expected yearly EPS Growth (next 3 years): 11.0%

• CAGR since IPO: 20.2%

Company 2: Arista Networks ($ANET)

Arista Networks provides cloud networking solutions for data-centers and computer environments.

• Profit Margin: 28.5%

• ROIC: 29.4%

• Earnings Yield: 4.2%

• Expected yearly EPS Growth (next 3 years): 20.6%

• CAGR since IPO: 33.1%

Company 3: LVMH ($MC)

LVMH is a diversified luxury goods group. The Company produces and sells wine, cognac, perfumes, cosmetics, luggage, watches, and jewelry.

• Profit Margin: 18.7%

• ROIC: 15.7%

• Earnings Yield: 4.4%

• Expected yearly EPS Growth (next 3 years): 9.2%

• CAGR since IPO: 13.6%

Company 4: Lifco ($LIFCO-B)

Lifco provides dental products, machinery and tools, sawmill equipment, contract manufacturing, vehicle interiors, and environmental technology.

• Profit Margin: 13.7%

• ROIC: 15.3%

• Earnings Yield: 3.5%

• Expected yearly EPS Growth (next 3 years): 3.6%

• CAGR since IPO: 33.3%

Company 5: Evolution AB ($EVO)

Evolution operates as a gaming company. The Company develops, produces, markets and licenses fully integrated B2B live casino solutions to online casino operators.

• Profit Margin: 56.7%

• ROIC: 21.5%

• Earnings Yield: 5.1%

• Expected yearly EPS Growth (next 3 years): 14.7%

• CAGR since IPO: 72.3%

Company 6: L’Oréal ($OR)

L’Oreal manufactures cosmetics. The Company offers mascara, lip gloss, foundation, eyeshadow, primer, nail polish, lipstick, face powder, blusher, and concealer, as well as skin, hair, and body care products.

• Profit Margin: 14.2%

• ROIC: 15.2%

• Earnings Yield: 3.4%

• Expected yearly EPS Growth (next 3 years): 8.6%

• CAGR since IPO: 14.3%

Company 7: Nike ($NKE)

Nike designs, develops, and markets athletic footwear, apparel, equipment, and accessory products for men, women, and children.

• Profit Margin: 12.9%

• ROIC: 19.7%

• Earnings Yield: 3.0%

• Expected yearly EPS Growth (next 3 years): 9.2%

• CAGR since IPO: 16.8%

Company 8: Ferrari ($RACE)

Ferrari NV designs and manufactures sports cars. The Company offers new and used vehicles, warranty programs, financial supports, and maintenance, as well as watches, apparels, earphones, caps, and other accessories.

• Profit Margin: 19.5%

• ROIC: 18.9%

• Earnings Yield: 2.8%

• Expected yearly EPS Growth (next 3 years): 11.5%

• CAGR since IPO: 26.1%

Company 9: Moncler ($MONC)

Moncler S.p.A. manufactures apparel products. The Company provides sporting garments for mountaineering.

• Profit Margin: 19.2%

• ROIC: 17.6%

• Earnings Yield: 4.4%

• Expected yearly EPS Growth (next 3 years): 6.4%

• CAGR since IPO: 20.1%

Company 10: Monster Beverage ($MNST)

Monster Beverage markets and distributes energy drinks. Monster Beverage serves customers worldwide.

• Profit Margin: 24.9%

• ROIC: 18.5%

• Earnings Yield: 2.8%

• Expected yearly EPS Growth (next 3 years): 16.1%

• CAGR since IPO: 19.3%

Now let’s dive into the top 5.

Read more

Palantir’s stock price.

Is it still an interesting stock after the big rally? Let’s find out.

Palantir - General Information

• 👔 Company name: Palantir Technologies

• ✍️ ISIN: US69608A1088

• 🔎 Ticker: PLTR

• 📚 Type: Owner-Operator

• 📈 Stock Price: $158.1

• 💵 Market cap: $384.9 billion

• 📊 Average daily volume: $6.4 billion

Onepager

Here’s a onepager with the essentials of Palantir:

15-Step Approach

Now let’s use our 15-step approach to analyze the company.

At the end of this article, we’ll give Palantir a score on each of these 15 metrics.

This results in a Total Quality Score.

1. Do I understand the business model?

We use technology every day. So you’re probably familiar with the big tech companies.

But Palantir may not ring a bell. It mainly works behind the scenes.

What does the company do? Analyzing data.

It’s one of the world’s most powerful data analytics companies.

The company was founded in 2003 to help governments spot patterns in data to prevent threats.

Today, it runs on three key platforms:

• Palantir Gotham: Built for governments to track crime, terrorism, and fraud

• Palantir Foundry: Helps businesses make smarter decisions with data

• Palantir Apollo: Keeps Palantir’s software running (Gotham & Foundry) smoothly

The company makes money from contracts:

• Government Contracts (55.3%): Their tools are trusted by the U.S. military, law enforcement, and allies worldwide

• Commercial Contracts (44.7%): Companies in healthcare and energy use Palantir’s software to solve tough problems

2. Is management capable?

Five people co-founded Palantir:

• Alex Karp: Co-Founder and CEO

  • Karp has a philosophical approach and focuses on the long-term strategy

  • He owns 2.4% of the company

• Peter Thiel: Co-Founder and Chairman

  • You might know him as the billionaire investor behind PayPal and an early investor in Facebook

  • Thiel owns 4.4% of total shares outstanding

• Stephen Cohen: Co-Founder, President, and Secretary

  • Helped build Palantir’s main platforms and kept its technology advanced

  • Cohen owns 0.6% of Palantir

• Nathan Gettings and Joe Lonsdale: Co-founders who are not involved in the company anymore

This quote tells you a lot about the philosophy of Palantir:

“We told the Wall Streeters that we will focus on building the long-term health of our company. Not everyone on Wall Street has a short-term focus. Nevertheless, it remains one of the most destructive, corrosive attributes of an otherwise interesting and largely functioning system.” - Alex Karp

The Co-Founders named the company after the palantíri in The Lord of the Rings. These are magical stones used for communication and seeing distant events.

In total, insiders own 7.5% of the company.

3. Does the company have a sustainable competitive advantage?

Palantir has a moat based on high switching costs.

Imagine you’ve used your iPhone for years, saved all your photos, and downloaded tons of apps.

Switching from Apple to Android would be a huge hassle, right?

Palantir is like that for governments and businesses. Once they start using Palantir’s software, they build systems and processes around it.

Moving to a different company’s software would take time, effort, and money.

Furthermore, Palantir also benefits from network effects, a strong brand name, and pricing power.

Companies with a sustainable competitive advantage are often characterized by the following:

• Gross Margin: 80.0% (Gross Margin > 40%? ✅)

• Return On Invested Capital (ROIC:) 47.8% (ROIC > 15%? ✅)

Palantir had a negative ROIC until 2022, as it was still unprofitable until then.

4. Is the company active in an interesting end market?

Palantir is active in an interesting end market.

Palantir is active in Big Data.

This market is expected to grow at a CAGR of 14.9% until 2030, according to Grand View Research.

The Analytics as a Service (AaaS) market is expected to grow even faster: 25.6% (!) per year until 2030.

Palantir’s Foundry platform can benefit from this secular trend.

Here are the main competitors for Palantir:

• Snowflake: Provides cloud-based data warehousing and analytics

• Splunk: Specializes in real-time data monitoring and analysis

• IBM: Provides AI-powered analytics for big data across industries

• Microsoft (Azure): Integrates big data and data warehousing for analytics

5. What are the main risks for the company?

Here are the main risks for Palantir:

• Dependence on government contracts

• Privacy concerns: Their sensitive data raises privacy and ethical questions

• Dependence on Co-Founders

• High costs: The big price tag on Palantir’s software limits its customer base to large organizations

• Complexity: Their software requires significant training and adaptation

• Public perception: Surveillance and data misuse could harm Palantir’s reputation

• Rich valuation levels (see later)

6. Does the company have a healthy balance sheet?

We look at three ratios to determine the healthiness of the balance sheet:

• Interest coverage: / (Interest Coverage > 15x? ✅)

• Net Debt/FCF: Net Cash Position equal to 1.5% of Market Cap (Net Debt/FCF < 4x? ✅)

• Goodwill/Assets: 0.0% (Goodwill to assets < 20%? ✅)

Palantir has a very healthy balance sheet.

7. Does the company need a lot of capital to operate?

The less capital a business needs to operate, the better.

Here’s what things look like for Palantir:

• CAPEX/Sales: 0.6% (CAPEX/Sales? < 5%? ✅)

• CAPEX/Operating Cash Flow: 1.2% (CAPEX/Operating CF? < 25%? ✅)

Software companies like Palantir are typically very capital-light businesses.

8. Capital allocation

Capital allocation is the most important task of management.

Here’s what things look like for Palantir:

• Return on Equity (ROE): 13.9% (ROE > 20%? ❌)

• Return on Capital (ROIC): 47.8% (ROIC > 15%? ✅)

The capital allocation metrics aren’t optimized yet. I expect ROIC and ROE to rise even more in the future.

9. How profitable is the company?

The higher the profitability of the business, the better.

Here’s what things look like for the company:

• Gross margin: 80.0% (Gross margin > 40%? ✅)

• Net Profit Margin: 22.5% (Net Profit Margin > 10%? ✅)

• Average FCF/Net income past 5 years: 104.5% (FCF/Net income > 80%? ✅)

Palantir’s Profit Margins are increasing year after year:

10. Does the company use a lot of Stock-Based compensation?

Stock-based compensation is a cost for shareholders and should be treated accordingly.

Preferably, we want SBCs as a % of Net Income to be lower than 10%.

Palantir:

• SBC of a % of Net Income: 104.5% (SBC/Net income < 10%? ❌)

Stock-based compensation as a percentage of Net Income exceeds 100%.

For Quality Investors, this is a red flag. We will treat this as a cost in our reverse DCF.

11. Did the company grow at attractive rates in the past?

Let’s look at what recent history tells us:

• Revenue growth past 5 years (CAGR): 30.7% (revenue growth > 5%? ✅)

• EPS growth past 5 years (CAGR): / (EPS growth > 7%? ❓)

Palantir has grown at very attractive rates in the past.

Please note that Palantir has only been profitable since 2023.

12. Does the future look bright?

Let’s look at what the estimates are:

• Exp. Revenue growth next 2 years (CAGR): 39.9% (revenue growth > 5%? ✅)

• Exp. EPS growth next 2 years (CAGR): 44.2% (EPS growth > 7%? ✅)

• Long-term growth estimate EPS (CAGR): 40.2% (EPS growth > 7%? ✅)

This outlook looks very attractive. It’s important to know that analysts are usually too optimistic.

Now let’s look at the valuation.

13. Does the company trade at a fair valuation level?

We always use three methods to look at the valuation of a company:

• A comparison of the Forward PE multiple with its historical average

• Earnings Growth Model

• Reverse Discounted-Cash Flow

A comparison of the Forward PE multiple with its historical average

The first thing we do is compare the current forward PE with its historical average over the past 10 years.

This is a shortsighted method, but it already gives a quick indication.

Today, Palantir trades at a forward PE of 212.6x (!) compared to a historical average of 112.9x.

That’s very expensive.

Even if we use the expected EPS of 2027, Palantir still trades at 135x earnings.

Earnings Growth Model

This model shows you the yearly return you can expect as an investor.

You can explore more about the Earnings Growth Model here.

Here are the assumptions I use:

• EPS growth: 15% per year over the next 10 years

• Dividend Yield: 0.0%

• Forward PE to decline from 212.7x to 30.0x

Expected yearly return = EPS Growth + Dividend Yield +/- Multiple expansion (contraction)

Expected yearly return = 15% + 0.0% + 0.1((30.0x – 212.7x)/212.7x)) = 6.4%

An expected yearly return of 6.4% is lower than what we would want as a Quality Investor.

Reverse DCF

Charlie Munger once said that if you want to find a solution to a complex problem, you should invert. Always invert. Turn the problem upside down.

This is exactly what a reverse DCF does. As an investor, we don’t make assumptions.

We look at what assumptions the market has made and see whether they are reasonable.

The expected Free Cash Flow of the next 12 months equals $1,930.7 million.

We subtract the Stock-Based Compensation ($739.5 million) to arrive at FCF in year 1 of $1,191.2 million.

The reverse DCF indicates that Palantir’s FCF should grow by 46.0% (!) each year for the next ten years.

These expectations are very, very demanding.

Palantir:

• Forward PE: 212.7x (lower than its 10-year average? < 112.9x? ❌)

• Earnings Growth Model: 6.4% (Yearly return? < 10%? ❌)

• FCF-Growth Reverse DCF: 46.0% (Realistic growth expectations? ❌)

14. How did Owner’s Earnings evolve in the past?

Over time, stock prices tend to follow the Owner’s Earnings of the company.

Owner’s Earnings = EPS Growth + Dividend Yield

That’s why we want to invest in companies that managed to grow their Owner’s Earnings at attractive rates in the past.

Palantir:

• CAGR Owner’s Earnings (5 years): / (CAGR Owner’s Earnings > 12%? ❓)

The company has just become profitable. Therefore, we can’t calculate the Owner’s Earnings Growth.

15. Did the company create a lot of shareholder value in the past?

We want to invest in companies that managed to compound at attractive rates in the past.

Ideally, the company has returned more than 12% per year to shareholders since its IPO.

Here’s what the performance of Palantir looks like:

• YTD: +110.3%

• CAGR since IPO in 2020: +77.1% (CAGR since IPO > 12%? ✅)

Quality Score

Finally, let’s bring everything together and give the company a Total Quality Score.

As you can see in the table below, Palantir gets a Total Quality Score of 7.6/10:

Palantir is an amazing business. But the valuation level and the SBC are two big red flags for me.

That’s why I’m not considering it for the Portfolio.

Everything In Life Compounds
Pieter

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Finchat: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Today, you will receive a full investment case of 114 (!) pages about Fair Isaac Corporation

This is a wonderful company that definitely deserves your attention.

Compound with René

This investment case was made by Compound with René.

He was so kind to share the investment case with us.

You can check out his work here:

Compound with René

Read more

A high ROIC is key for value creation and it’s a great way to look at a company’s competitive advantage.

In this article we’ll teach you everything you need to know about one of the most important metrics in the world of finance.

The power of compounding

Let’s start with an example. Suppose that there are 2 companies:

• Company A: ROIC of 5% and reinvests all its profits for 25 years

• Company B: ROIC of 20% and reinvests all its profits for 25 years

Can you guess how much company A and B would be worth if you invest $10.000 in both (assumption: valuation remains constant)?

In this example, an investment in company A would be worth $33.860 while an investment in company B would increase to $953.960!

This simple example beautifully shows the importance of ROIC and the power of compounding.

Now you’re convinced of the importance of ROIC, let’s explain this financial metric to you.

What is Return On Invested Capital (ROIC)?

Capital allocation is the most important task of management.

If you want to look at how efficient management allocates capital, you can take a look at the ROIC.

When a company has a ROIC of 15%, it means that for every $100 in capital the company has on its balance sheet, $15 in NOPAT is generated.

You want to invest in companies with a high ROIC as this means that the company is allocating capital efficiently.

As a rule of thumb, the ROIC should be higher than 10% and preferably higher than 15%.

Why ROIC matters

Did you like the first example in this article? Let’s use a second one.

In this example, we have 2 companies: Quality Inc. and Dividend Inc.

Both companies generate a NOPAT (profit) of $100 million per year and need $500 million to operate (invested capital). Furthermore, both companies have a ROIC of 20%.

Dividend Inc. has no growth opportunities and distributes all earnings as a dividend to shareholders. As a result, Dividend Inc. will distribute $100 million to shareholders each year and will still make $100 million in profits 20 years from now.

On the other hand, Quality Inc. is active in a secular growth market and is able to reinvest all its earnings in organic growth. This means Quality Inc. pays no dividend to shareholders and reinvests everything in itself.

After 1 year, Quality Inc. has $600 million in capital (the starting capital of $500 million + $100 million in reinvestment). On this invested capital of $600 million, Quality Inc. generates a ROIC of 20%. As a result, Quality Inc.’s earnings grew to $120 million (20% * $600 million).

In year 2, Quality Inc. again reinvests it’s earnings of $120 million in organic growth. As a result, Quality Inc.’s invested capital grew to $720 million (the $600 million it already had + $120 million in reinvestment). The earnings of Quality Inc. grew to $144 million (20% * $720 million).

Can you guess how many profit Quality Inc. would make if they would be able to this for 20 consecutive years?

The correct answer is $3.8 billion!

As a result, a high ROIC in combination with plenty of growth opportunities is the golden egg for investors. It will result in exponentially increasing earnings for a company if management makes good capital allocation decisions.

Growth only creates value when ROIC > WACC

It is very important to understand that growth only creates value when the Return On Invested Capital (ROIC) of a company is higher than the Weighted Average Cost of Capital (WACC).

The formula to calculate the WACC of a company can be seen hereunder. Simply put, the Weighted Average Cost of Capital is equal to the firm’s average cost of capital (cost of equity + cost of debt).

Source: Investopedia

It is very intuitive to state that what the company earns on its investments (ROIC) should be higher than what the company needs to pay to finance these investments (WACC).

Let’s give another example to clarify this:

Company A has a ROIC of 5% and a WACC of 10%. The company’s NOPAT is equal to $10 million and they are offered a new project which would generate $1 million in NOPAT.

When company A would accept this project, they will need $20 million in capital to execute this project ($1 million / 5%).

Company A has a WACC of 10% and as a result they will need to pay $2 million ($20 million *10%) to finance this project.

As a result, company A should pay $2 million to finance the project while it will only generate $1 million in NOPAT. It goes without saying that company A shouldn’t accept this project because they would lose money on it.

On the other hand, Company B has a ROIC of 20% and a WACC of 10%. The company’s NOPAT is also equal to $10 million and they are offered the identical project as company A which would generate $1 million in NOPAT.

When company B would accept this project, they will need $5 million in capital to execute this project ($1 million / 20%).

Company B has a WACC of 10% and as a result they will need to pay $0.5 million ($5 million *10%) to shareholders and debtors to finance the project.

So company B should pay $0.5 million to finance the project while it would generate $1 million in extra NOPAT. As a result, company B should accept this project.

Excluding goodwill and cash

Some people prefer to exclude goodwill and cash out of the invested capital to calculate the ROIC.

In that case, the formula for ROIC goes as follows:

When you use this variant of the formula, the ROIC will be higher than in the traditional formula.

This variant is especially relevant to calculate how much a company should reinvest in itself in order to grow at a certain rate.

The underlying reasoning behind this is that you don’t need goodwill or cash in order to grow.

Reinvestment needs

When you want to calculate how much a company should reinvest in itself in order to achieve a certain rate, you can use this formula:

Let’s say that a company has a ROIC of 20% and wants to grow its NOPAT with 10% per year.

In that case, the company should reinvest 50% of its NOPAT (10%/20%) in order to grow with 10% next year.

It goes without saying that having a high ROIC is interesting because it results in lower reinvestment needs for the company. The best companies in the world are able to grow attractively (> 10% per year) while reinvestment needs are very low to achieve this growth.

When a company needs to reinvest less, they can use their cash flow for other things like dividends and buying back shares.

ROIC = proxy for a moat

You aren’t convinced yet that the ROIC of a company is important? Well, you can use it to measure a company’s competitive advantage too.

In general, there are 2 crucial conditions for a company to have a moat:

1. The company is earning profits that are greater than their weighted average cost of capital (WACC)

2. The level of profitability has maintained high and constant for a reasonable period of time

A consistent and high ROIC is a great indication that the company has a sustainable competitive advantage. By only focusing on companies with a high ROIC when picking stocks, you already exclude a lot of value traps.

A high and consistent ROIC is the result of a sustainable competitive advantage.

Why? Because it indicates that competitors and (potential) new entrants are not able to go into competition with this company. This allows them to stay very profitable and operate at attractive margins.

Conclusion

The ROIC is one of the most important financial metrics for quality investors as it indicates how efficiently management is allocating capital.

You want to invest in companies with a high and consistent ROIC. When a company has a robust ROIC which is higher than their WACC every single year over the past decade, it is a great indication that the company has a competitive advantage.

As a quality investor, you are seeking for compounding machines. These stocks have a high and consistent ROIC with plenty of reinvestment opportunities. This will allow the company to grow its free cash flow exponentially.

Everything in life compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Analyzing Good Businesses is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

The best investors in the world use a strict and rational framework to analyze stocks.

In this article, I’ll teach you how to analyze stocks like a professional.

Start reading about the company

After you found a company which might be interesting, you should start with reading everything you possible can about the company.

Let’s say that you want to analyze S&P Global. You start by looking at the following sources:

• The company’s annual report

• It’s latest investor presentations

• Their latest Capital Markets Day / Investor Day

• Analyses about the company on Seeking Alpha

After you’ve read a few hours about the company, you’re already able to form a first impression.

If the stock still looks interesting, you can dive deeper and write a full investment case.

Investment case

The beautiful thing about writing investment cases is that you can use the same structure for each case.

This also means that the more investment cases you write, the better you’ll get at it.

We’ll show you step by step how you can do this.

1. Business profile

First things first: it all starts with the business profile.

How does the company make money? Do I understand the products/services the company sells?

If the business profile doesn’t look attractive to you or you don’t understand it properly, you can stop looking into the company right away.

Always invest within your circle of competence.

2. Revenue split

After you’ve taken a look at the business profile of the company, you can go on and look at the revenue split.

In which different segments does the company make money? And how does the geographical split look like?

3. Management and shareholder structure

You want to invest in companies which are led by great managers.

It’s always interesting to look at the track record of current management. Preferably, you want to invest in companies with skin in the game.

When insiders are heavily buying into their own stock, it’s a great sign too.

4. Moat

A moat is crucial for quality investors.

You want to invest in clear market leaders with strong pricing power. Those companies are often characterized by high and stable gross margins as well as high and stable Returns On Invested Capital.

S&P Global has a wide moat without doubt. Together with Moody’s and Fitch, they are the clear market leader in bond ratings. S&P Global has a lot of pricing power too. On average, they increase their prices with 4% per year.

If you want to learn more about moats, take a look here: 👑 What you need to know about moats

5. SWOT Analysis

Identifying the strengths and weaknesses as well as the opportunities and threats of a company is crucial to make good investment decisions.

Invest in companies with a lot of strengths & opportunities but with only limited weaknesses & threats.

• Main strengths/opportunities S&P Global:

  • Sustainable competitive advantage

  • Pricing power

  • Active in a strong secular trend

  • Capital light business model

  • High profitability

• Main weaknesses/risks S&P Global

  • High valuation

6. Capital intensity

The best companies don’t require too much capital to grow.

That’s why you should always look at the capital intensity of a company before you consider investing.

The CAPEX/Sales and CAPEX/Operating Cash Flow are 2 great metrics to look at the capital intensity of a company.

Seek for companies with a CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 15%.*

S&P Global has a very low capital intensity:

• CAPEX/Sales: 0.8%

• CAPEX/ Operating Cash Flow: 2.6%

* Please note that when a company is investing heavily in future growth, the growth CAPEX can be very high. This is no problem for quality investors as long as the growth investments create value (ROIC > WACC)

7. Capital allocation

Capital allocation is the most important task of management.

When a company generates free cash flow, it can allocate this cash as follows:

• Reinvest in the business

• M&A

• Dividends

• Share buybacks

In an ideal world, you want to invest in companies which can reinvest most of their free cash flow in their own business at attractive rates of return.

The Return On Invested Capital (ROIC) is a great way to see how efficiently a company is allocating its capital.

You want to invest in companies with a ROIC > 15%. When a company has a high and consistent ROIC, it’s also a great indication that the company has a moat.

S&P Global has a very high and consistent ROIC. This indicates that the company is allocation capital efficiently.

8. Balance sheet

Only invest in companies which are in good financial health.

A healthy balance sheet allows companies to be flexible and capitalize on opportunities.

Just like Terry Smith, I like to look at 2 ratios to determine the healthiness of a balance sheet:

• Interest Coverage Ratio

• Net Debt / Free Cash Flow

The Interest Coverage Ratio (EBIT/Interest payments) indicates how easily a company can pay back the interests on its outstanding debt. You want this number to be higher than 10.

The Net Debt / Free Cash Flow shows you how many years it would take a company to pay down all its debt when it would use all available free cash flow. You want this number to be lower than 4.

For S&P Global, Interest Coverage and Net Debt / FCF are equal to 15.3x and 3.6x respectively.

If you want to learn more about how to analyze a balance sheet, take a look here: 🔍 How to analyze a Balance Sheet

9. Profitability

As a quality investor, you seek for companies which are very profitable.

The gross margin and free cash flow margin are 2 of the best metrics to look at the profitability of a company.

You can calculate the gross margin as follows:

The higher the gross margin, the better.

A gross margin of 37.2% means that a company needs $0.628 to produce its products while it can sell them for $1.

The free cash flow margin can be calculated as follows:

The free cash flow margin shows the percentage of sales which are translated into pure cash for the company. When a company has a FCF margin of 30%, for every $100 the company sells, $30 of cash is generated.

S&P Global’s gross margin and FCF margin are equal to 65.5% and 29.9% respectively.

10. Historical growth

The best companies are active in an attractive end market.

As a result, looking at the historical growth of a company can already tell you a lot.

Seek for companies with the following criteria:

• Yearly revenue growth over the past 5 and 10 years: > 5%

• Yearly earnings growth over the past 5 and 10 years: > 7%

When a company has been able to grow its revenue and EPS at an attractive rate in the past, it already gives you an indication that the company might also be able to do so in the future.

These are the number for S&P Global:

• Revenue growth (CAGR): 13.0% (past 5 years) and 7.6% (past 10 years)

• EPS growth (CAGR): 13.6% (past 5 years) and 13.8% (past 10 years)

11. Outlook

In the long run, stock prices will follow the evolution of the intrinsic value.

The intrinsic value is driven by 2 key factors: EPS growth and dividends.

Seek for companies which are active in a secular trend (urbanization, aging, cybersecurity, obesity, digital payments, …) as it will be easier for these companies to grow at an attractive rate.

Just like you preferred companies which managed to grow their revenue with more than 5% and EPS with more than 7% in the past, you want these companies to be able to continue to grow at these attractive rates in the future.

Here’s the outlook for S&P Global:

As you can see, S&P Global wants to grow its organic revenue with 7-9% per year and it’s EPS with 10-15% per year. These are attractive numbers.

12. Valuation

Quality investors look for wonderful businesses at a fair price.

The best way to value a company is by using a (reverse) discounted cash flow model. As this topic would bring us too far, we will elaborate on this in another article.

A great way to get a first grasp about a company’s valuation is by comparing its current price-to-earnings ratio with the average P/E of the past 5 years.

The forward P/E of S&P Global is equal to 27.8 compared to 27.2 for the 5-year average. This indicates that S&P Global looks slightly overvalued in comparison with its own historical average.

Here you can find the evolution of S&P Global’s forward P/E ratio:

If you want to learn more about valuation, take a look here: Everything you need to know about valuation.

13. Peer comparison

You also want to compare the company you are looking into with its main rivals.

To do this, you can compare all characteristics we’ve already mentioned in this article (revenue split, quality of management, moat, capital allocation, capital intensity, healthiness of balance sheet, profitability, valuation, …).

Preferably you want to invest in the best company in a certain industry. A market leader with substantially lower capital intensity, higher margins and better capital allocation compared to its peers.

A comparison of S&P Global’s P/E Ratio (white line) with Moody’s P/E Ratio (blue line) can be found here:

14. Historical stock price performance

As a quality investor, you don’t want to buy the next big thing. Instead, you want to buy companies that have already won.

That’s exactly why looking at the historical value creation of a company already tells you a lot. You want to buy companies which managed to compound at an attractive rate in the past.

S&P Global’s stock price grew at a CAGR of 13.9%.since 1989, which is satisfactory for us.

Conclusion

That’s it for today. To conclude:

• Start with reading as much as you possibly can about the company

• Analyze the stock:

  • Business profile: make sure you understand the business model

  • Revenue split: map out the company’s revenue split

  • Management & shareholder structure: invest in companies with a capable and integer management

  • Moat: seek for companies with a sustainable competitive advantage

  • SWOT: map out the strengths/opportunities and weaknesses/threats

  • Capital intensity: the lower the capital intensity, the better

  • Capital allocation: capital allocation is the most important task of management

  • Balance sheet: the healthier the balance sheet, the better

  • Profitability: the higher the profitability, the better

  • Historical growth: seek for companies which managed to grow their revenue and EPS with more than 5% and 7% respectively

  • Outlook: invest in companies active in a secular trend

  • Valuation: buy wonderful businesses at a fair price

  • Peer comparison: compare the company you’re looking into with its main rivals

  • Historical value creation: seek for companies which already managed to perform very well in the past

That’s it for today.

As these articles take a lot of time to write and I’ve already written more than 100 articles completely for free. It would be lovely to get your support.

You can support us by liking and/or reacting on this article, send us an email or share this article with friends and family. You guys are the best!

Everything in life compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Analyzing Good Businesses is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Those who understand it, earn it. Those who don’t, pay it.

Learn everything you need to know about the power of compounding in this article.

A penny that doubles every day

Let’s say that you have the choice between two sums of money:

• $1 million in cash

• A penny that doubles every day for a month

Which one would you choose?

POLL

I would choose

$1 million in cash

5%

A penny that doubles 31 days

95%

1305 VOTES · POLL CLOSED

Does the above sound like a difficult question to you?

Let’s give you a hint.

A penny that doubles every day would be worth $0.16 on day 5 and $5.12 on day 10.

You will probably know that a penny that doubles for a month will be worth more than $1 million. Why else would I ask you this question?

Well, a penny that doubles 30 times would be worth more than $10.7 million!

Here’s the math:

Please note that in this example it took until the 27th day (!) for the penny to be worth more than $1 million.

The fact that it took until the 27th day shows you why patience and a long-term perspective are crucial to give the power of compounding the opportunity to work for you.

Compounding works like magic for investing, but also for other aspects in life.

When you get 1% better every single day for a year, your yearly growth would be equal to 37.7x.

Not convinced yet about the power of compounding? Here are a few other examples:

• If you would invest $1 per day for 200 years at 7% per year, you would have more than $6 billion (!) dollar

• When you put 1 grain on the first square of a chessboard, and double it on each square until the 64th one, you would have 1.4 trillion metric tons of rice. This is more than 2000x the global production of wheat per year

• The cost of Columbus’ journey in 1492 was approximately $30.000. When this $30.000 would have been invested until today at 4% per year, it would be worth more than $33,000,000,000,000 ($33 trillion)!

Compounding explained

You’ve already learned that compound interest is the eighth wonder of the world.

Compounding works like a snowball. It starts very slow, but the longer you keep rolling, the bigger it gets.

Let’s say that you invest $10,000 and you are able to compound your money at 7% per year.

In year 1, you’ll make $700 ($10,000 * 7%). As a result, the value of your portfolio is equal to $10,700.

In year 2, you’ll make more than $700. Why? Because you also make money on the $700 you earned the year before. As a result, you’ll make $749 ($10,700 * 7%) in year 2 and the value of your portfolio increases to $11,449.

After 10 years, you’ll even make $1,286.92 (!). This is almost twice as much as in the first year.

When you would invest for very long periods of time (> 20 years), something magical happens.

Remember that you made $700 in year 1 and $1,286.92 in year 10.

Here’s what happens if you keep investing:

• In year 20, your yearly profit will increase to $2,531.57

• In year 30, your yearly profit will increase to $4,979.98

• In year 40, your yearly profit will increase to $9,796.37

• In year 50, your yearly profit will increase to $19,270.95

If you would keep your $10,000 investment for 50 years, your investment would almost be worth $300,000!

Furthermore, your yearly profit of $19,270.95 would almost be twice as much as what you invested in the first place.

Formula compound interest

On the internet, there are a lot of compound interest calculators you can use. The Calculator Site is a good example.

Here’s an example where you would invest $10,000 at 9% per year for 40 years while adding $200 per month to your investment account (total investment of $106,000 over 40 years).

When you would do this, you would have $1.3 million after 40 years, as you can see here:

Obviously, you can also calculate it yourself.

Here is the formula for compound interest:

If you would invest $10,000 for 20 years at a yearly return of 9%, it would look as follows:

In the table below, you can find out how many times your wealth compounds at various combinations of yearly returns and years.

When you can for example achieve a yearly return of 12% for 30 years, your money will increase 30-fold (!).

Start as early as possible

You’ve learned that the longer you can compound your money, the better.

This also means that the sooner you start investing, the longer compounding can work like magic for you.

Let’s use an example to make this even more clear.

In our example we have 2 men who start investing:

• Ben

  • Starts investing at age 21

  • Monthly investment: $200

  • Stops contributing money at age 30 (added money to his account for 9 years)

• Joey

  • Starts investing at age 30

  • Monthly investment: $200

  • Keeps investing until age 67 (added money to his account for 37 years)

In total, Ben will have contributed $21,600 while Joey will have contributed $88,800 to their investment account.

When Ben and Joey both keep their investment until age 67 and manage to compound at an average annual return of 11%, Ben would have $2.1 million while Joey would have grown his account to $1.2 million.

This means that Ben would have almost twice as much money as Joey while he contributed only one-fourth of what Joey contributed!

Never interrupt compounding

Charlie Munger once said that the first rule of compounding is to never interrupt it unnecessarily.

You don’t believe Charlie?

You should. Let’s use one more example:

• Olivier

  • Starts investing at age 21

  • Monthly investment: $200

• Emma

  • Starts investing at age 21

  • Monthly investments: $200

  • Stops investing at age 30 and starts again at age 40

This is how their wealth would like if they both keep investing until age 67 and achieve a yearly return of 11%:

• Olivier: $3,3 million

• Emma: $1,1 million

As you can see, Olivier would have 3 times as much money as Emma just because Emma decided to stop investing for 10 years.

Conclusion

That’s it for today. Here’s what you should remember:

• Compound interest is the eight wonder of the world

• Start investing as early as possible

• You can calculate compound interest via this formula:

  • Final amount = beginning amount * (1 + yearly return)^number of periods

• Never interrupt compounding unnecessarily

Whenever you’re ready

That’s it for today.

Compounding Quality is all about securing your financial future.

Whenever you’re ready, here’s how I can help you:

• 📈 Access to my Portfolio with 100% transparency

• 📚 Access to my ETF Portfolio

• 🔎 Full investment cases about interesting companies

• 📊 Access to the Community

• ✍️ And much more!

Join here

Everything in life compounds

Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Analyzing Good Businesses is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

The Cash Flow Statement is one of the most important statements in a 10-K.

In this article, I’ll teach you how to analyze a Statement of Cash Flows in a few minutes.

What is a Cash Flow statement?

A cash flow statement shows you how much cash goes in and out a company over a certain period.

The purpose of this statement is to track how much cash is moving through a business.

You want to invest in companies that generate cash and manage their cash position very well.

Every cash flow statement consists of 3 parts:

• Cash Flow from Operating Activities

• Cash Flow from Investing Activities

• Cash Flow from Financing Activities

In this article, we’ll use an example to make everything clear:

Difference with an income statement and balance sheet

There is an important difference between a cash flow statement and an income statement and balance sheet.

A balance sheet and income statement use ACCRUAL ACCOUNTING. This is a method where revenue and expenses are recorded when an accounting transaction occurs.

A cash flow statement uses CASH ACCOUNTING. As a result, the cash flow statement only records transactions when money effectively enters or exits the company.

This a very important difference.

Now you know the difference between accrual accounting and cash accounting, we’ll dig into each section of the Cash Flow Statement.

Cash Flow from Operating Activities

This section shows all cash the company generated from its normal business activities.

In other words: it shows you all the cash a company earned from selling its normal products and/or services.

When a beer company generates $2 per beer in operating cash flow and sold 2 million beers in a certain year, its cash flow from operating activities would be equal to $4 million.

The cash flow from operating activities is comparable to net income, but it filters out a few income and expense posts that didn’t cause actual cash to enter or exit the company.

You can calculate the cash flow from operating activities as follows:

Non-cash charges

A non-cash charge is a write down or accounting expense that does not involve a cash payment.

A few examples of non-cash items:

• Depreciation and amortization

• Asset impairment

• Deferred income tax

• Write-downs of goodwill

• Stock-based compensation

Working capital

Working capital is the money a company has available to meet its current, short-term obligations.

As can be seen in the formula, working capital consists of 3 parts:

• Accounts receivable: the money customers owe the company

• Accounts payable: the money the company owes its suppliers

• Inventory: the value of the goods that the company hasn’t sold yet

The less working capital a company needs, the better.

Why? Because it means that a company doesn’t need much cash to fund its ongoing business activities.

A few companies even have a negative working capital. This means that its suppliers are funding the ongoing business activities of the company as the accounts payable are larger than the accounts receivable + inventories.

Changes in working capital

Remember that from going to net income to operating cash flow, you only needed to take the changes in working capital into account.

Let’s show the formula again to refresh your mind:

Why do you only need to take the changes in working capital into account? Because when a company needed $5 million to fund its operations last year and it also needs $5 million to fund its operations this year, there were no cash changes.

Changes in working capital:

• Accounts receivable: negative if it increases.

  • Why? Because clients not paying you immediately can be seen as giving a small loan to your customers for a short period

• Inventory: negative if it increases

  • Why? Because you aren’t earning money on products in your inventory

• Accounts payable: positive if it increases

  • Why? Because if you don’t pay your suppliers immediately, your suppliers are giving a ‘free loan’ to you

Example Cash Flow from Operating Activities

You don’t understand everything completely yet? No worries.

An example will make everything a lot more clear. Let’s use these numbers:

Cash Flow from Investing Activities

The Cash Flow from Investing Activities gives you an overview about the company’s investment related income and expenditures.

The Cash Flow from Investing Activities consists of 3 major parts:

• Capital expenditures (CAPEX)

  • The cash a company spends to buy, maintain or improve its fixed assets (buildings, vehicles, equipment, land, …)

• Mergers & Acquisitions

• Purchase/Sale of marketable securities

  • Marketable securities are assets that can be liquidated to cash quickly. These securities can be bought and sold on a public stock exchange

You can calculate the cash flow from investing activities as follows:

Example Cash Flow from Investing Activities

Now let’s make everything concrete again with our example:

Free cash flow

After you’ve taken a look at a company’s cash flow from operations and cash flow from investing activities, you can calculate the free cash flow.

The free cash flow of a company is one of the most important financial metrics.

If you want to learn more about free cash flow, take a look at this article: What you need to know about free cash flow.

Cash Flow from Financing Activities

Last but not least, the Cash Flow from Financing Activities measures the cash movements between a company and its owners (shareholders) and its debtors (bondholders).

This section gives you an insight about how the company is financing its business activities.

The Cash Flow from Financing Activities consists of 3 major parts:

• Borrowing and repaying debt

• Issuance of stocks and share buybacks

• Dividends

You can calculate the cash flow from financing activities as follows:

Example of Cash Flow from Financing Activities

Now you know the formula to calculate the Cash Flow from Financing Activities, we can calculate it for our example:

Changes in cash balance

Finally, you can calculate the total changes in the cash balance:

In our example:

It is a good sign when the cash at the end of the year is higher than the cash at the beginning of the year.

Why? Because it means that there is a positive difference between the cash that has entered the company and the cash that has left the company over a certain period.

Conclusion

That’s it for today. Here’s what you should remember:

• The cash flow statement shows how much cash goes in and out a company over a certain period.

• It consists of 3 parts: Cash Flow from Operating Activities, Investing Activities and Financing Activities

• Cash Flow from Operating Activities: cash that enters and leaves the company from its normal business activities (selling its products and services)

• Cash Flow from Investing Activities: cash the company needs to (dis)invest to maintain its normal business activities

• Cash Flow from Financing Activities: cash movements between a company and its owners (shareholders) and its debtors (bondholders)

Whenever you’re ready

That’s it for today.

Compounding Quality is all about securing your financial future.

Whenever you’re ready, here’s how I can help you:

• 📈 Access to my Portfolio with 100% transparency

• 📚 Access to my ETF Portfolio

• 🔎 Full investment cases about interesting companies

• 📊 Access to the Community

• ✍️ And much more!

Join here

Everything in life compounds

Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

A 10-K tells you everything you need to know about a stock.

In this article, you’ll learn how to read a 10-K like a professional.

The importance of a 10-K

According to Jim Rogers, 98% (!) of people on Wall Street don’t read the annual report. As a Fund Manager, I can confirm that most professional investors don’t read the 10-K before they invest in a company.

This means that you can create a BIG advantage for yourself if you read 10-Ks.

Successful investing is hard work. The best way to outperform the market is by becoming a learning machine.

What is a 10-K?

Every year, companies must publish their 10-K. It’s the most important document a company publishes. The better you know how to read an annual report, the better you’ll be able to understand the companies you invest in.

But what is a 10-K?

A 10-K is an official document that contains a lot of information about the company. The SEC requires US listed companies to publish this report to inform (potential) investors about their financial conditions.

You’ll learn about the company’s history, it’s organizational structure, financial statements, executive compensation and so on.

Structure of a 10-K

The beautiful thing about a 10-K is that they all have the same structure.

This means that the more 10-Ks you read, the faster and the better you’ll get at it.

The structure of a 10-K looks as follows:

1. Business: an overview of the company’s main operations including its products and services. This section shows you how the company makes money

2. Risk factors: shows the major risks of the company. The risks are typically listed in order of importance

3. Financial statements: specific financial information about the business

4. Management discussions and analysis (MD&A): Management’s view on the business results of the past fiscal year

We’ll now dig into each section using Visa as an example. You can find Visa’s 10-K on the Investor Relations section of their website.

1. Business

This section describes the company’s main products and services.

It’s a good place to start as it tells you how a company makes money.

It’s very important to always invest within your circle of competence. If you don’t understand the business model, you can skip the company right away.

The business segment can usually be found at the beginning of the 10-K.

2. Risk factors

This section shows the risks a company faces, usually listed in order of importance.

Going through this section is very important. As Benjamin Graham once said:

When a company has a lot of goodwill on its balance sheet, generates a significant percentage of its revenue from a few clients, has low margins, or is active in a highly competitive market, it increases the risk for you as an investor.

3. Financial statements

As an investor you want to buy financially healthy companies with high margins and plenty of reinvestment opportunities.

That’s why the Financial Statements are one of the most important sections of a 10-K.

There are 3 Financial Statements in a 10-K:

• Balance Sheet: gives you an overview of a company’s main assets and liabilities. You want to invest in companies which don’t have too much debt

• Income Statement: shows the company’s revenues and expenses over a certain period. You want to invest in profitable companies which can grow their revenue organically at an attractive rate

• Cash Flow Statement: gives an overview about how much cash goes in and out a company over a certain period. You want to invest in companies that are cash flow positive

We’ll dive deeper in every financial statement in our next articles.

4. Management discussions and analysis (MD&A)

This section shows the view of management on the business results of the past fiscal year.

It’s always important to look at the qualitative factors behind the numbers. That’s why it’s important that management can tell its story in its own words.

Is the increasing revenue structural? Or is it because of a one-off event?

You want to invest in companies with an integer management with skin in the game. Management should always give you a reliable view about the performance of the company.

Avoid companies that do not give an honest representation of their results.

Conclusion

• If you read the 10-K of a company you’ll learn a lot and create a BIG advantage over other investors

• A 10-K is an official document that is published every year

• The 10-K can usually be found under the Investor Relations section of a company’s website

• Every 10-K consists of 4 parts: business, risk factors, financial statements and management discussions & analysis (MD&A)

Whenever you’re ready

That’s it for today.

Compounding Quality is all about securing your financial future.

Whenever you’re ready, here’s how I can help you:

• 📈 Access to my Portfolio with 100% transparency

• 📚 Access to my ETF Portfolio

• 🔎 Full investment cases about interesting companies

• 📊 Access to the Community

• ✍️ And much more!

Join here

Everything in life compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Analyzing Good Businesses is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Between 2001 and 2013 he managed to report an astonishing annual return of 20.8%. A yearly outperformance of 14,3% per year (!) compared to the MSCI World.

In this article, we will share 15 essential investment lessons from Nick Sleep, one of the best investors in the world.

1. Start with the business model

Make sure you understand how a company makes money.

Invest in companies which have a good business model that have had success in the past. The best business models don’t change much over time.

2. Think on the long term

Would you buy a house if you only wanted to live in it for a few weeks? No. The same goes for stocks.

Only buy a stock when you’d be perfectly happy to hold it if the market would shut down for 10 years.

3. Invest in companies with skin in the game

Invest in companies which are run by their founders.

When you do this, you automatically increase your chances to outperform the market.

4. Focus on what matters

Good investors ignore the noise.

Next quarter’s earnings are worthless. Instead, focus on the moat of the company and its ability to maintain their competitive advantage.

5. Have patience

Compounding works like magic when you let it work long enough for you.

Don’t try to get rich quick or use debt to invest in the stock market. Good investing starts with good risk management.

6. Follow a good investment process

Buy good business, don’t overpay, do nothing. So easy in theory, so hard in practice.

Your investment process determines the success of you as an investor. Lean from great mentors and become the best investor you possibly can.

7. Learn from your mistakes

When making investment decisions, either you learn or you earn.

Consider investment mistakes as learning opportunities.

8. Focus on the number of outstanding shares

Don’t invest in companies which dilute existing shareholders.

Take a look at the evolution of the outstanding shares over the past 10 years. You want this number to be constant or deceasing.

9. Never use shorts or leverage

Nick Sleep never uses leverage, shorts, or financial derivatives and neither should you.

Good investing is consistently doing above average without taking too much risk.

10. Look for scale economies shared

Invest in companies that provide great benefits for their clients.

Economies of scale are crucial to achieve this. It allows the company to drive down costs and pass those savings to their customers.

11. Become a learning machine

The best investors are those who become learning machines.

Read as much as you can and become wiser every single day.

12. A crisis offers opportunities

When Nomad Investment Partners lost almost 50% during the financial crisis, Nick Sleep did one crucial thing… he bought more of his favorite stocks.

Bear markets offer great opportunities for investors. You just don’t realize it at the time.

13. Let your winners run

The biggest mistake you can make is to sell a stock that goes on to rise tenfold.

When you have found a great company, you should stick with it.

Nick Sleep was one of the first investors to find out about Amazon. Today, he is invested in only 3 stocks: Amazon, Costco, and Berkshire Hathaway.

Here is his write-up on Costco in 2005. Since then, the stock is up more than 1000%.

14. Create the right environment

To make good decisions, you should be able to think rationally.

Always compare an attractive investment opportunity with your current portfolio.

Doing nothing and keeping trust in your current positions is also a decision.

15. It’s all about quality

In the end, it’s all about quality. You want to buy great businesses lead by quality managers achieving quality returns.

All shareholder letters of Nick Sleep

Do you want to learn more from Nick Sleep? His annual shareholders letters are truly excellent full of golden investment wisdom. Download them here for free:

All letters of Nick Sleep

Whenever you’re ready

That’s it for today.

Compounding Quality is all about securing your financial future.

Whenever you’re ready, here’s how I can help you:

• 📈 Access to my Portfolio with 100% transparency

• 📚 Access to my ETF Portfolio

• 🔎 Full investment cases about interesting companies

• 📊 Access to the Community

• ✍️ And much more!

Join here

Everything in life compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Today, you will receive a full investment case of 41 (!) pages about Games Workshop

This is a wonderful company that definitely deserves your attention.

Happy reading!

Games Workshop - General Information

👔 Company name: Games Workshop
✍️ ISIN: GB0003718474
🔎 Ticker: GAW.L
📚 Type: Owner-Operator Stock
📈 Stock Price: £189.5
💵 Market cap: £6.6 billion
📊 Average daily volume: £19.0 million

Three main takeaways

Here are the 3 important takeaways:

1. Niche Market Leader

Games Workshop is the largest and most successful hobby miniatures company in the world.

2. Highly Profitable

The company boasts strong profitability.

3. Excellent Track record

This stock has proven itself as a multi-bagger in the past.

Conclusion investment case

We wrote a 41-page deep dive about Games Workshop. Let’s summarize it for you.

Games Workshop is one of the best compounding machines you have never heard of.

Games Workshop operates a simple, vertically integrated business.

They design, manufacture, and sell fantasy miniatures (Warhammer, Warhammer 40,000).

The business benefits from network effects, high switching costs, and a fiercely loyal global community.

The company maintains a healthy balance sheet and boasts strong growth numbers.

While these opportunities look great, there are also concerns in the market.

The shift toward video games and 3D printing could hurt physical miniatures. The customer base is also aging.

Games Workshop is managed by experienced leaders.

They have successfully turned around the business by simplifying rules, opening smaller stores, and licensing IP to video games and now Amazon for films/TV.

This mitigates many of the risks.

But the real question is…

Are we buying it?

The answer is…

Yes.

Onepager

Here are the basics of Games Workshop (click on the picture to expand):

Quality Score

Every company gets a Quality Score based on 15 metrics.

Finally, the company gets a ‘Total Quality Score’ which is calculated by taking the sum of the score of all 15 metrics and dividing it by 15.

As you can see in the table below Games Workshop gets a Total Quality Score of 8.3/10.

Full Investment Case

You can download the full investment case here:

Investment case Games Workshop

Everything in life compounds
Pieter (Compounding Quality)

Book

• Order your copy of The Art of Quality Investing here

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Since 1997, Amazon’s stock increased with more than 1550x (!).

We have read all his annual letters. 15 great (investment) lessons can be found here.

Lesson 1: It’s all about the long term

When you think on the long term, you have a BIG advantage compared to those who don’t.

Bezos was willing to make investment decisions in light of long-term market leadership rather than short-term profitability or Wall Street reactions.

Lesson 2: A competitive advantage is essential

Online selling is a scale business characterized by high fixed costs and relatively low variable costs.

This gives Amazon a huge competitive advantage as it is very hard for smaller e-commerce companies to compete with them. It’s one of the key reasons why Amazon is so successful.

Lesson 3: Be OBSESSED by your customers

Customer obsession is the core of Amazon’s success.

Amazon has always had the objective to build the earth’s most customer-centric company.

Bezos believes that constantly lowering prices and maximizing value for customers will result in a larger dollar amount of free cash flow for Amazon over time.

Lesson 4: Focus on organic revenue growth

Topline growth is the most preferred source of growth.

Only invest in companies which manage to grow their revenue organically at an attractive rate. Over the past 15 years, Amazon grew its revenue with 26% (!) per year.

Lesson 5: Good investing and good business are synonymous

When you invest in good businesses, great investment results will follow eventually.

Lesson 6: free cash flow is king

Earnings don’t determine the value of a company, the present value of future cash flows does.

In his annual letters, Bezos stated multiple times that free cash flow is Amazon’s key financial metric.

Lesson 7: Advertising is the price you pay for having an unremarkable product or service

When you have a great company, the product will sell itself.

You want to invest in companies that produce products or services customers LOVE.

Lesson 8: Culture is everything

In the short term, valuation is the most important mover for the stock price.

In the long term, free cash flow growth and the culture of the company is.

Lesson 9: Be cash-favored and capital efficient

Bezos stated that Amazon is fortunate to benefit from a business model that is cash-favored and capital efficient. They don’t need physical stores nor do they need a lot of inventory.

A low capital intensity is key for quality companies as this allows them to grow exponentially when they reinvest in themselves.

Lesson 10: Improve every single day

Every annual letter, Bezos mentions it’s still Day 1 for Amazon.

Operational excellence means delivering continuous improvement in customer experience, driving productivity, and margin efficiency. This should be the goal for every company.

Lesson 11: Focus on Return on Invested Capital (ROIC)

Bezos has always had the long-standing objective of building the best, most profitable, highest return on capital long-term franchise.

The ROIC is THE most important metric for quality investors. The higher, the better.

Lesson 12: Don’t focus on the stock price

Bezos stated that they don’t celebrate a 10% increase in the stock price as much as they celebrate excellent customer experience.

In the end, the fundamentals of the company is all what matters.

Lesson 13: Secular trends are your friend

Treat external trends as your friend.

If you fight them, you’re probably fighting the future. Embrace them and you’ll do great.

Lesson 14: Don’t be afraid to fail

Failures are crucial to become successful.

Plant seeds daily. Good companies should reinvent themselves every single day.

Lesson 15: Invest in durable companies

A great business has four characteristics: customers love it, it can grow to very large size, has strong returns on capital and it’s durable in time with the potential to endure for decades.

When you find a company that ticks all boxes, don’t just swipe right, get married.

All shareholder letters of Jeff Bezos

If you want to learn more, here you can find all shareholders letters of Amazon mapped in 1 PDF:

Annual letters Jeff Bezos

Whenever you’re ready

That’s it for today.

Compounding Quality is all about securing your financial future.

Whenever you’re ready, here’s how I can help you:

• 📈 Access to my Portfolio with 100% transparency

• 📚 Access to my ETF Portfolio

• 🔎 Full investment cases about interesting companies

• 📊 Access to the Community

• ✍️ And much more!

Join here

Everything in life compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.

Analyzing Good Businesses is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Between 1985 and 2005, his Magic Formula compounded on average with 33% (!) per year.

I’ve read everything I possibly could about Greenblatt and summarized it for you in this article.

The Magic Formula

In 2006, Joel Greenblatt published his excellent book The Little Book That Beats The Market. The goal of this book was to explain his investment philosophy in such a simple manner that even his children could understand it.

Greenblatt’s main strategy was very straightforward: buy good companies which are cheap.

With this book, The Magic Formula was born. His strategy achieved an annual return of 33% between 1988 and 2004.

But how does The Magic Formula work?

The basic idea is very simple. You can do it in 8 easy steps:

1. Determine your investment universe

2. Calculate the earnings yield of all companies in your investable universe

3. Calculate the returns on capital of all companies in your investable universe

4. Rank all companies from highest earnings yield to lowest earnings yield

5. Rank all companies from highest return on capital to lowest return on capital

6. Buy the companies with the highest earnings yield in combination with the highest return on capital

7. Re-balance your portfolio every year

8. Continue this over the long term (at least 5 years)

You don’t want to do all calculations yourself?

Greenblatt does it for you on his website.

Here are the 30 most interesting US stocks according to Greenblatt’s strategy as of today:

Greenblatt’s Magic Formula is very similar to what we talked about in our article ‘Strategies that outperformed the market’.

But is it so simple? Can you outperform the market by using these simple formulas? The answer is yes.

But what’s the catch?

Never underestimate behavioral biases and investment psychology when you invest in these kind of strategies.

Let’s say that you started using The Magic Formula and you’re investing in small, unknown companies like Polished.com and Snail Inc. After 2 years, your return is equal to -28% while the S&P500 returned +15%. Would you pursue? Because that’s what needed to make this strategy a success.

For my own piece of mind, I’d rather underperform the market for a while owning companies like Mastercard, Adobe or S&P Global than Polished.com and Snail Inc. It will allow me to pursue the strategy during though times.

10 Essential principles

Now you know everything about Joel Greenblatt’s Magic Formula, let’s dig a bit deeper in his core investment philosophy.

Here are 10 of Joel Greenblatt’s essential investment principles.

1. Don’t try to time the market

Timing the market is a fools game.

Market timing has nothing to do with being a successful investor.

The best investors focus on the fundamentals of a company.

2. Buy good business at bargain prices

Buying a share of a good business is better than buying a share of a bad business.

You want to invest in companies which are able to reinvest their free cash flow at high rates of return.

Want to learn more about ROIC? Take a look here: What you need to know about Return On Invested Capital.

3. Know what you own

Investing is simple, but not easy.

Focus on easy companies in easy industries.

Always invest within your circle of competence.

4. You will underperform

By definition, you will underperform the market from time to time.

Always focus on the big picture.

When you are using a strategy that has proven to work in the long term, you’ll end up fine.

5. Every investor is unique

You can borrow someone’s idea, but you can’t borrow their conviction.

Every investor is unique and has its own objectives.

As an investor, you are always running your own marathon.

6. Focus on small caps

Small cap stocks are often less efficiently priced.

Why? Because big, professional investors aren’t interested in these companies.

Warren Buffett stated that he would be able to dramatically increase Berkshire Hathaway’s returns today if he would be able to invest in smaller companies.

If you want to gain a big advantage, you should focus on companies that aren’t followed by (many) analysts.

7. Determine your risk appetite

Howard Mark once said that there are old investors and there are bold investors, but they are no old bold investors.

The best definition of risk is the permanent loss of capital.

Never make investments which will cause you to stay awake at night.

8. The market will eventually be right

If your investment case was correct, Mr. Market will eventually pay you.

In the short term (1-2 years), the market is inefficient.

But in the long-term, the market always gets it right.

9. Never underestimate incentives

Always look at management incentives.

How have they allocated capital in the past? Is their salary too high? Is there heavy insider buying or selling? What’s their track record?

10. All intelligent investing is value investing

Every investor tries to do the same: buy a stock for less than what it’s worth.

Making a distinction between growth and value is useless as future growth is a crucial part of the value of a company.

Here’s what Warren Buffett has to say about the value versus growth debate:

More from Joel Greenblatt

Do you want to learn more from Joel Greenblatt? His 2 books are a must read:

• The Little Book That Still Beats The Market

• You Can Be A Stock Market Genius

Joel Greenblatt is also a professor at the University of Columbia. The beautiful thing about this? Here you can download all class notes (> 300 pages) a student of Greenblatt took during his courses:

Class Notes Joel Greenblatt

Everything in life compounds
Pieter (Compounding Quality)

👉 If you enjoy reading this post, feel free to share it with friends! Or feel free to click the ❤️ button on this post so more people can discover it on Substack 🙏

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Fiscal.ai: Financial data

Disclaimer

As a reader of Compounding Quality, you agree with our disclaimer. You can read the full disclaimer here.