Hey Reader,
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Did you know? Despite being one of the most successful investors in the world, Warren Buffett does not keep a computer on his desk. He prefers to read and analyze information the old-fashioned way.

In today's issue:

• Why Warren Buffett thinks net income can be less than useful
• What we can learn from superinvestors
• The differences between ROIC and WACC and why it's important
• How long can stocks underperform?

Sponsored by: FNRP​ ​ Grocery-Anchored Commercial Properties ​First National Realty Partners offers accredited investors unique opportunities to invest in grocery-anchored commercial real estate. These are properties that have a supermarket or grocery store as their primary tenant. Grocery stores serve as the main draw (or "anchor") for shoppers, attracting consistent foot traffic to the property. Grocery-anchored tenants are generally considered more stable and lower-risk investments within the retail real estate sector because grocery stores tend to perform well even when times are bad (after all, groceries are a basic necessity). ​ Check Out FNRP

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NUGGETS

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My Favorite Finds

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Despite market stagnation from 1965-1982, superinvestors like Schloss and Tweedy Browne thrived with value investing, ignoring macro fears. Success came from stock-picking, not market timing, proving long-term strategy over short-term panic.

Breaking down all of the components of a DCF, the building blocks of valuing any company.

Howard Mark's latest memo, The Folly of Certainty warns against certainty in predictions, emphasizing intellectual humility. It highlights unpredictability in politics, economics, and investing, urging open-mindedness and caution to avoid overconfidence and errors in forecasting.

​Three reasons to watch out for net income or earnings. Warren Buffett warned that net income can be "a worse than useless number." Brian Feroldi does a wonderful job of breaking down why.

How long can stocks underperform? A lot longer than we would like.

Lyn Alden offers up a "7 Top Stocks to Buy and Hold for the Next Decade and Beyond." What do you think?

DEEP DIVE

ROIC > WACC
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Indicates value creation for companies. Let's learn more...
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𝗥𝗢𝗜𝗖 equals return on invested capital. 𝗪𝗔𝗖𝗖 equals weighted average cost of capital.
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Why is this important?

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First, a quick definition of each:
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𝗥𝗢𝗜𝗖 measures a company's 𝗲𝗳𝗳𝗶𝗰𝗶𝗲𝗻𝗰𝘆 𝗿𝗲𝗹𝗮𝘁𝗲𝗱 𝘁𝗼 𝗶𝘁𝘀 𝗮𝘀𝘀𝗲𝘁𝘀.
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The higher the number, the more efficiently Microsoft uses its assets to generate revenue growth.
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We can calculate ROIC by:
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ROIC = NOPAT / Invested Capital
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𝗡𝗢𝗣𝗔𝗧 (Net Operating Profit after Taxes) represents 𝗼𝗽𝗲𝗿𝗮𝘁𝗶𝗻𝗴 𝗶𝗻𝗰𝗼𝗺𝗲 (𝗘𝗕𝗜𝗧) times the t𝗮𝘅 𝗼𝗳 𝘁𝗵𝗲 𝗰𝗼𝗺𝗽𝗮𝗻𝘆. It also represents a connection to valuing a company using a free cash flow to the firm model.
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𝗜𝗻𝘃𝗲𝘀𝘁𝗲𝗱 𝗖𝗮𝗽𝗶𝘁𝗮𝗹 equals the 𝗮𝘀𝘀𝗲𝘁𝘀 a company uses to 𝗴𝗲𝗻𝗲𝗿𝗮𝘁𝗲 𝗿𝗲𝘃𝗲𝗻𝘂𝗲, such as inventory, accounts receivable, PP&E (product, plants, and equipment), offset by liabilities such as accounts payable, deferred income, etc.
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We have a gazillion different ways to calculate Invested Capital, but we will use 𝗗𝗲𝗯𝘁 + 𝗦𝗵𝗮𝗿𝗲𝗵𝗼𝗹𝗱𝗲𝗿𝘀' 𝗘𝗾𝘂𝗶𝘁𝘆 - 𝗖𝗮𝘀𝗵 for this exercise.
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𝗪𝗔𝗖𝗖
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𝗪𝗔𝗖𝗖 equals the cost of capital a company would spend to generate a return. Every investment has a cost and WACC helps measure those costs.
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Without getting into the gobbly goop of the formula, 𝗪𝗔𝗖𝗖 𝗺𝗲𝗮𝘀𝘂𝗿𝗲𝘀 the relationship between the 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗲𝗾𝘂𝗶𝘁𝘆 and 𝗱𝗲𝗯𝘁 and their weights.
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Bottom line, WACC represents a way for investors to 𝗺𝗲𝗮𝘀𝘂𝗿𝗲 𝘁𝗵𝗲 𝗰𝗼𝘀𝘁 𝗼𝗳 𝗮𝗻 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 and how much they 𝗻𝗲𝗲𝗱 𝘁𝗼 𝗲𝗮𝗿𝗻 to beat the hurdle.
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Why is this important?
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When a company has a ROIC > WACC it indicates the company is generating growth from its assets or value for shareholders.
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The longer a company can generate ROIC > WACC the more value it creates for shareholders. Think of companies like Visa, Mastercard, Microsoft, Google, among others.
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When looking for long-term investments consider the relationship between ROIC and WACC and try to determine how long the company's competitive advantage will last.

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EDUCATION

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Today's Bite

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Of Knowledge

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The Investing for Beginners Podcast @IFB_podcast EBITDA Broken Down: 10:3 AM • Aug 24, 2024 166 Retweets 904 Likes Read 8 replies

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

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​Value Spotlight: Stock market investors can save time and find success by discovering the right tools and resources. If you don't know where to start, or are simply tired of wading through the endless sea of financial information, Value Spotlight was created for you.

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