Not all moats are the same. Some moats are wider but not as durable, while others might be durable but have little growth opportunities. The 3 things that determine the attractiveness of a moat and how much the business is worth are its return on capital, durability, and reinvestment opportunities.

Return on Capital

Return on capital (ROC) is how much a company can produce for every dollar invested. No moat companies can only earn an average ROC over their lifetime. That is to say, their ROC is the same as their cost of capital. You can think of the cost of capital as…


I previously wrote about the 7 types of moats of quality companies. Another way to look at moats is from a capital allocation perspective. A few years ago, Connor Leonard from IMC made a wonderful presentation on 3 types of capital allocation moats:

  1. Legacy moat
  2. Reinvestment moat
  3. Capital-light compounder

Legacy moat is companies that earn an above-average return but without much opportunity to reinvest those earnings back into the business. Therefore, the management decides to pay those earnings in dividends.

Sydney Airport is a company that distributes all of its earnings as dividends because of limited reinvestment opportunities. Sydney Airport…


Investing for Growth is a compilation of Fundsmith’s annual letters and articles Terry Smith wrote for the Financial Times. Just a bit of background, Fundsmith is a UK-based fund that was founded by Terry Smith with a strategy focused on investing only in high quality businesses. Fundsmith has a track record of 18.1% p.a since inception in 2010.

Here are a few takeaways.

It’s okay to pay up for quality


Imagine you want a car. What car should you pick? First, you have to know why you want a car right. You probably also have a few criteria like:

  1. What’s my budget?
  2. What type of car? i.e sedan, SUV, etc.
  3. What’s my preference for make and model?
  4. Should I get brand new or second-hand?
  5. Automatic or manual transmission?

Why are these questions useful? They narrow down your search. Instead of going through hundreds of cars, you only have to focus on a few dozen that satisfy your criteria. You can quickly differentiate a good pick that satisfies all of your…


The mistake we often make when valuing a stock is overestimating the business growth potential, how much free cash flow it can generate, and so on. We extrapolate a spurt of excellent performance caused by temporary changes such as a brief supply and demand tailwind into the distant future. Or sometimes, we just fail to anticipate the actions of other competitors, new entrants, and changes in the industry.

Imagine you’re about to make a bet on a soccer game. What do you do? You either pick your favourite team, or pick the one you’re familiar with if you don’t have…


Long-Term Capital Management’s demise comes from a mix of how their perfect models quantify risks in an uncertain world, a sense of infallibility, 30 to 1 leverage, illiquid trades, and basic greed. It is like betting on the outcome of a coin flip and if you lose, keep doubling down on the bet until you make it. Except for the fact that markets are often irrational. Or put it differently, even if something has a 0.1% chance of ruin, do it long enough, the chance of ruin is 100%. By using past trends and volatility to model future risks, LTCM…


I think it is easier to figure out what not to buy than what to buy. If we can weed out the stocks to avoid, we’ll be a step closer to figure out what to buy. What are some stocks you should avoid? Generally, hot stocks that everyone is talking about. Some are ‘momentum’ stocks where the share price has gone into the stratosphere over a short-period without any solid reason. Some are promising startups growing revenue at a very high rate but barely profitable. Buying these stocks doesn’t necessarily mean you’ll lose money; Amazon.com was such a stock back…


How do we attain wisdom? It starts with knowledge. What kind of knowledge should we acquire? Peter Kaufman’s three buckets of knowledge can guide us.

Every statistician knows that a large, relevant sample size is their best friend. What are the three largest, most relevant sample sizes for identifying universal principles? Bucket number one is inorganic systems, which are 13.7 billion years in size. It’s all the laws of math and physics, the entire physical universe. Bucket number two is organic systems, 3.5 billion years of biology on Earth. And bucket number three is human history, you can pick…


What is value investing? It is to buy a business for less than what it’s worth. We can break this into three parts.

Buy a business

Buying a stock is the same as owning a fraction of the underlying business. If you buy a share of Apple (AAPL), you own the business that produces things from iPhone, iPad, Macintosh, macOS to Apple Watch, app store, Apple TV+ and etc.

What it’s worth

A company is worth the present value of its future cash flow. …


Overshoot

Howard Marks of Oaktree Capital described the market as a pendulum that rarely stays in the middle “The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average,” it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc.”

What causes the market to behave this way? Delayed feedback. Most complex systems have a time delay between the inputs and the outputs. A seed in the soil takes years to…

J. Yeo

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