The average company in the S&P 500 earns about 13.3% return on invested capital. If you find a business that's earning more than that, you've got potentially you've got a special kind of business and it should trade at a premium to the average valuation. But over time, businesses have this tendency to mean revert, so the return on invested Capital drops. So if I've paid twice the multiple and over 10 years, the multiple mean reverts down to the market multiple, what are the chances that I've actually made money? And it turns out that often it's pretty low.
IN THIS EPISODE, YOU’LL LEARN:
02:52 - Breaking down Warren Buffett’s strategy of “buying down wonderful companies at a fair price.”
02:52 - What the Acquirer's Multiple Investing strategy is.
08:35 - Why enterprise value is more useful than market cap to value stocks.
08:35 -The benefits of the Acquirer's multiple strategy vs Warren Buffett value investing strategy.
16:42 - How mean reversion works, what companies and financial metrics typically exhibit mean reversion.
29:28 - Why a competitive advantage is key for a company to sustain a high ROIC.
40:55 - What are things that investors mistake as being moats or sustainable advantages?
50:58 - How to implement this strategy and use the Acquirer's multiple stock screener.
And much, much more!
*Disclaimer: Slight timestamp discrepancies may occur due to podcast platform differences.
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