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It’s #QualityTuesday!
In this series, I’ll teach you 5 things about the stock market in less than 5 minutes.
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1️⃣ How to find great stocks
Do you know the secret to great stocks?
They are very profitable and reinvest most of their profit in organic growth.
Growth Rate = High ROIC × High Reinvestment
A Compounding Machine grows its value at rapid rates by reinvesting its profits at high returns.
Two metrics are important:
ROIC: tells you how efficiently a company turns capital into profits
Reinvestment rate: tells you how much of those profits can be reinvested back into growth
Just image a company with a ROIC of 25% reinvests 40% in itself:
Growth Rate = ROIC × High Reinvestment
Growth rate = 25% x 40% = 10%
Now compare that to a company earning 10% ROIC while reinvesting 65% of its earnings:
Growth Rate = ROIC × High Reinvestment
Growth rate = 10% x 65% = 6.5%
Despite reinvesting much more capital, it compounds at only 6.5%.
This is the key difference between average businesses and truly exceptional ones.
You want companies with a high ROIC (> 15%) that reinvest a lot in organic growth.
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2️⃣ Book Tip: Principles (Ray Dalio)
Principles by Ray Dalio is an amazing book.
It will teach you three things:
How to think independently
Learn from mistakes
Creating systems for better decisions
I created a full book summary. You can read it here:
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3️⃣ One simple investment quote
You know how to get rich? But really rich?
It’s not about a Magic Formula or big secrets.
It’s all about being patient.
Charlie Munger said it best: