“Somebody taught me a long time ago a very valuable lesson which is if you do the right things on the top line, the bottom line will follow. And what they meant by that was: if you get the right strategy, if you have the right people, and if you have the right culture at your company, you’ll do the right products. You’ll do the right marketing. You’ll do the right things logistically and in manufacturing and distribution. And if you do all those things right, the bottom line will follow.”
— Steve Jobs
.
“Investors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesn’t count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.”
— Warren Buffett
.
“The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
— Warren Buffett
.
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
— Charlie Munger
.
The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
.
“Over the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The two tend to really converge pretty closely.”
— Li Lu
.
“In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”
Great list! A lot of solid reflections here—thank you for sharing these insights. One thing I’d like to add, though, is the importance of understanding market cycles and the broader economic environment. While it's critical to focus on individual companies and their moats, being aware of macroeconomic factors—like inflation, interest rates, and market sentiment—can significantly influence the long-term performance of investments.
As much as we strive for long-term value creation, it’s important to remember that external economic conditions can create either tailwinds or headwinds for businesses. The best companies can sometimes be caught off guard in certain cycles. Understanding how these factors play into your analysis of a company’s growth trajectory is just as important as evaluating the company itself.
I'd argue that having a strong grasp on market cycles can help us position our portfolios better, even in volatile times, without being swayed by short-term noise.
Keep up the great work, and looking forward to your future insights!
Very good contribution, Phaetrix! It's definitely important to understand business and market cycles. I would also add understanding the capital and credit cycles.
“Somebody taught me a long time ago a very valuable lesson which is if you do the right things on the top line, the bottom line will follow. And what they meant by that was: if you get the right strategy, if you have the right people, and if you have the right culture at your company, you’ll do the right products. You’ll do the right marketing. You’ll do the right things logistically and in manufacturing and distribution. And if you do all those things right, the bottom line will follow.”
— Steve Jobs
.
“Investors should remember their scorecard isn't computed using the Olympic-diving method:
Degree-of-difficulty doesn’t count.
If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.”
— Warren Buffett
.
“The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.”
— Warren Buffett
.
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return – even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”
— Charlie Munger
.
The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative.
// Peter Lynch, One Up on Wall Street
.
“Over the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The two tend to really converge pretty closely.”
— Li Lu
.
“In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.”
— Joel Greenblatt
42. Valuation matters, but so do qualitative factors.
— Valuation in the Quality Context = Value For Quality Investing by Weight Ratio.
.
Weight Ratio (PEROIC Duality Doctrine)
= P/E ÷ ROIC
.
In the short run, the market is a voting machine but in the long run, it is a weighing machine.
— Benjamin Graham
24. Growth only creates long-term value if the company has a moat.
— Moat = High ROIC & ROA.
Circle of competence in stock investing is actually the Intrinsic Value Computation.
Misconception.
Opportunity costs ≠ wacc
Opportunity costs is actually Invested Capital.
&
The return on the Opportunity costs is the return on invested capital ROIC.
A very interesting post.
Thanks, Ulrich. Any other points you'd like to add that you think are important?
Great list! A lot of solid reflections here—thank you for sharing these insights. One thing I’d like to add, though, is the importance of understanding market cycles and the broader economic environment. While it's critical to focus on individual companies and their moats, being aware of macroeconomic factors—like inflation, interest rates, and market sentiment—can significantly influence the long-term performance of investments.
As much as we strive for long-term value creation, it’s important to remember that external economic conditions can create either tailwinds or headwinds for businesses. The best companies can sometimes be caught off guard in certain cycles. Understanding how these factors play into your analysis of a company’s growth trajectory is just as important as evaluating the company itself.
I'd argue that having a strong grasp on market cycles can help us position our portfolios better, even in volatile times, without being swayed by short-term noise.
Keep up the great work, and looking forward to your future insights!
Very good contribution, Phaetrix! It's definitely important to understand business and market cycles. I would also add understanding the capital and credit cycles.
Very good points. Thanks for sharing!
Sure! What would you add to the list?
Excellent curation of contemplations!🙏
Thank you man!
Thank you.