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TIP633 : What I Learned from Chris Mayer w/ Clay Finck
We Study Billionaires - The Investor’s Podcast Network
Understanding the Importance of Return on Invested Capital in Long-Term Investing
The key to long-term investing success lies in recognizing when the original investment thesis is no longer valid. For a stock to reach hunter-bagger status over 20 years, a 26% compounding rate is required. With a timeframe of over 25 years, 20% compounding is necessary, while over 30 years, a 16.6% compounding rate is needed. Companies with substantial earnings growth and high returns on capital tend to be successful in the long run. Return on invested capital greater than 15% is a common feature in successful companies, indicating efficiency in utilizing invested capital. Companies like Constellation Software achieve remarkable returns by reinvesting earnings back into the business, acting as compounding machines. The reinvestment of earnings into future growth opportunities is crucial for maximizing long-term shareholder returns, as paying out everything as dividends can limit the potential for earnings growth and shareholder returns.
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