Buffett’s Three Categories of Returns on Capital

Posted on 11 CommentsPosted in Uncategorized

“A truly great business must have an enduring “moat” that protects excellent returns on invested capital.” –Warren Buffett, 2007 Shareholder Letter A reader recently sent me the following clips from the 2007 Shareholder Letter that pertains to a topic that we’ve discussed quite a bit here: the concept of return on capital, why it’s important, and how to think about it. For those interested, you could review all the previous posts on the concept of ROIC here. Basically, I just […]

Reinvestment Moat Follow Up: Capital Light Compounders

Posted on 17 CommentsPosted in Education, Investment Philosophy

This post is the second guest post by my friend Connor Leonard, in what I hope to be a somewhat regular “column” here at BHI (by regular, I mean as often as Connor decides to put the proverbial pen to paper and share his insights with us). Based on the quality of his work, he’s welcome back anytime. Connor and I live in Raleigh, NC, and get together regularly to share investment ideas. I encourage you to reach out to […]

Calculating the Return on Incremental Capital Investments

Posted on 35 CommentsPosted in Education, Investment Philosophy

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Shareholder Letter I received a lot of feedback, comments and a few questions after Connor Leonard’s guest post last week. Connor’s write-up was very well articulated, and deservedly received much praise. There were a few questions which we tried to address in comments and email […]

Importance of ROIC: “Reinvestment” vs “Legacy” Moats

Posted on 41 CommentsPosted in Investment Philosophy

I’ve talked a lot about the importance of the concept of return on invested capital (ROIC), and how it is a key driver of value in a business. Feel free to go back and read some of those posts here. In this particular post, the discussion is continued. This post is something new for BHI: it’s a guest post written by my good friend Connor Leonard (see his brief bio at the end of the post). Connor and I live […]

The Misunderstanding of Peter Lynch’s Investment Style

Posted on 10 CommentsPosted in Books, General Thoughts

“I’ve never said, ‘If you go to a mall, see a Starbucks and say it’s good coffee, you should call Fidelity brokerage and buy the stock.’” – Peter Lynch I saw an article in Monday’s Wall Street Journal on Peter Lynch. Basically, it was a very brief piece where Lynch basically says that people are misinterpreting his advice to “buy what you know”. I like Peter Lynch and I like his writing. Although the first book I ever read on value […]

Importance of ROIC Part 5: A Glance at the Last 42 Years of Wells Fargo

Posted on 15 CommentsPosted in Case Studies, Investment Ideas & Company Research, Investment Philosophy, Investment Quotes

“Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago… a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.”   –Warren Buffett, 1992 Shareholder […]

Importance of ROIC Part 4: The Math of Compounding

Posted on 44 CommentsPosted in Investment Philosophy

I thought I’d circle back to discuss the topic of compounders and return on capital. I wrote a few posts about earlier this year, and there have been numerous comments and questions. In this post, I want to discuss the actual math behind the compounders, to try and show why return on capital is so important to long term business owners (which is what we are as stockholders). To recap what I mentioned earlier, I usually put investments in two broad […]

Importance of ROIC Part 3: Compounding and Reinvestment

Posted on 20 CommentsPosted in Education, Investment Philosophy, Investment Quotes

“We prefer businesses that drown in cash. An example of a different business is construction equipment. You work hard all year and there is your profit sitting in the yard. We avoid businesses like that. We prefer those that can write us a check at the end of the year.” -Charlie Munger, 2008 Berkshire Hathaway Annual Meeting I’m patiently looking for bargains everywhere. That’s the name of this game: “figuring out what something is worth and paying a lot less […]

Importance of ROIC Part 2: Compounders and Cheap Stocks

Posted on 33 CommentsPosted in Case Studies, Investment Philosophy

This is part 2 of my follow up thoughts on compounders, cheap stocks, and the importance of returns on capital. Part 1 is here. Also, some previous posts before that are relevant to this post as well: Thoughts on Return on Capital and Greenblatt’s Magic Formula Part 1 Thoughts on Return on Capital and Greenblatt’s Magic Formula Part 2 Buffett Shareholder Letter High ROE Wells Fargo vs. Small Community Banks A Few Thoughts on Buffett and Great Banks To recap last […]

Importance of ROIC Part 1: Compounders and Cheap Stocks

Posted on 20 CommentsPosted in Investment Philosophy

A while back, I posted a couple articles on return on invested capital (ROIC) along with some comments on Joel Greenblatt’s Magic Formula. These posts attracted a lot of comments and email questions, and so I wanted to post some more thoughts on the topic of compounding generally, and maybe ROIC more specifically. Here are some links to posts that are somewhat related to this topic: Thoughts on Return on Capital and Greenblatt’s Magic Formula Part 1 Thoughts on Return […]