Hey Reader,
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Did you know that Peter Lynch worked as a caddie at a golf course, where he met Fidelity's president, D. George Sullivan, which eventually led to his career in finance?

In today's issue:

• How to read a cash flow statement fast < 9 minutes
• Aswath Damodran explains how investors can compete with AI
• The importance of capital allocation
• Why moats matter
• Much more.....

Nuggets

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My Favorite Finds

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Brian Feroldi on how to read a cash flow statement in 9 minutes.

​Economic moats explained what they are and why they matter.

Saudi Aramco, one of the largest companies in the world, but what do we know about them?

​Aswath Damodaran on the impacts of AI on investing and how you can compete.

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DEEP DIVE

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Capital Allocation 101

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Capital allocation is a CEO’s number one job.

How they allocate the cash flow or profits they earn goes a long ways towards the company’s success.

They have five basic choices:

1. Reinvest in business
2. Pay down debt
3. Pay a dividend
4. Buyback shares
5. Mergers and acquisitions

𝟭. 𝗥𝗲𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗶𝗻 𝘁𝗵𝗲 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀:

Investing back into the company is often the first avenue that CEOs want to explore to drive growth.

This can take various forms, such as expanding existing operations, entering new markets, upgrading technology, or enhancing product development.

Reinvestment aims to generate returns that exceed the company’s cost of capital, thereby creating substantial value.

𝟮. 𝗣𝗮𝘆𝗶𝗻𝗴 𝗗𝗼𝘄𝗻 𝗗𝗲𝗯𝘁:

Reducing debt is a strategic move that helps lower financial risk and increase financial stability.

By paying down debt, a company can reduce its interest obligations and improve its creditworthiness, which in turn may lower the cost of future borrowing and increase financial flexibility.

𝟯. 𝗜𝘀𝘀𝘂𝗶𝗻𝗴 𝗗𝗶𝘃𝗶𝗱𝗲𝗻𝗱𝘀:

Distributing dividends is a way to return excess capital to shareholders, rewarding them for their investment.

Regular, consistent dividends can attract and retain investors looking for reliable income streams, enhancing the stock’s appeal to a broader market segment.

𝟰. 𝗦𝗵𝗮𝗿𝗲 𝗕𝘂𝘆𝗯𝗮𝗰𝗸𝘀:

A share repurchase represents another method to return value to shareholders.

By buying back its shares, a company can reduce the outstanding share count, potentially increasing earnings per share (EPS) and, therefore, the share price.

Buybacks often signal to the market that the company’s leadership believes the stock is undervalued.

𝟱. 𝗠𝗲𝗿𝗴𝗲𝗿𝘀 𝗮𝗻𝗱 𝗔𝗰𝗾𝘂𝗶𝘀𝗶𝘁𝗶𝗼𝗻𝘀 (𝗠&𝗔):

Engaging in mergers and acquisitions can accelerate growth more rapidly than organic methods.

A company can quickly access new customers, markets, and technologies through strategic acquisitions.

However, M&As have high risks and require careful integration planning to realize the anticipated benefits and synergies.

Which is your favorite?

Knowledge Tidbits

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The Investing for Beginners Podcast @IFB_podcast 12 Accounting KPIs every investor needs to know. 1. Accounts Receivable Turnover = Sales / Average Accounts Receivable 12:2 PM • Aug 28, 2024 69 Retweets 333 Likes Read 2 replies

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Thanks,
Dave Ahern
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​einvestingforbeginners.com​
​Investing for Beginners Podcast​

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