Charlie Munger on How to Pick Stocks That Will Outperform
He looks at ONE key metric (hint, it's not the valuation).
From his speech:
"A Lesson on Elementary, Wordly Wisdom as it Relates to Investment Management":
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He looks at ONE key metric (hint, it's not the valuation).
From his speech:
"A Lesson on Elementary, Wordly Wisdom as it Relates to Investment Management":
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1/
Over the long term, a stock will generate investing returns inline with what the business which underlies it earns.
So, how do you measure this?
Over the long term, a stock will generate investing returns inline with what the business which underlies it earns.
So, how do you measure this?
2/
It's Return on Capital (ROC):
For example:
If the business earns 6% on capital over 40 years and you hold it for 40 years, you're not going to make much different than a 6% return.
Even if you originally buy it at a huge discount.
Conversly:
It's Return on Capital (ROC):
For example:
If the business earns 6% on capital over 40 years and you hold it for 40 years, you're not going to make much different than a 6% return.
Even if you originally buy it at a huge discount.
Conversly:
3/
If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive price for the stock, you'll end up with a fine result.
This is a fact.
If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive price for the stock, you'll end up with a fine result.
This is a fact.
4/
If you're a long term investor,
the return on capital (ROC) which a company can generate, and its ability to reinvest at a superior rate of return, is more likely to determine how well its shares do.
And NOT the VALUATION at which you buy or sell it.
How to calculate ROC:
If you're a long term investor,
the return on capital (ROC) which a company can generate, and its ability to reinvest at a superior rate of return, is more likely to determine how well its shares do.
And NOT the VALUATION at which you buy or sell it.
How to calculate ROC:
5/
ROC = Net income / (debt + equity)
A company's return on capital measures it's efficiency and is also an indicator of the size and strength of its ability to maintain a competitive advantage (moat).
ROC = Net income / (debt + equity)
A company's return on capital measures it's efficiency and is also an indicator of the size and strength of its ability to maintain a competitive advantage (moat).
6/
As Warren Buffett once said:
"It's better to buy a great company at a fair price than a fair company at a great price."
As Warren Buffett once said:
"It's better to buy a great company at a fair price than a fair company at a great price."
7/
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8/
I dissect the:
- Investing techniques
- Stock holdings
- Stories
of the world's greatest investors.
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I dissect the:
- Investing techniques
- Stock holdings
- Stories
of the world's greatest investors.
Follow for more:
@ValueInvestorAc
Enjoyed this? Please help us reach a greater audience, retweet the 1st tweet of this thread. Thanks!
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