The Investing for Beginners Podcast - Your Path to Financial Freedom

Return on Equity is a quick and easy way to discover how well a company turns its assets into equity. The Dupont analysis goes even further into discovering how the company grows its return on equity. Be it through leveraging debt or growing revenue.

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:35                     All right, folks, we’ll walk up to testing for beginning podcast. This is episode eighty-four tonight. Andrew and I are going to do a two-parter here. So what we’re gonna do is we’re going to talk about the Dupont analysis and the reason why we’re going to talk about this is we got a great question from Facebook that Andrew and I wanted to answer on air, but we wanted to talk you guys through what the Dupont analysis was so that when we answered the question and it kind of makes sense to you guys. So for those of you who are not familiar with Dupont analysis, all raise your hand. Okay? That’s everybody. All right, so this is something that is not talked about a lot and it’s a very interesting analysis and what it is in a nutshell is the breakdown of the return on equity. And Andrew, I’m going to have you talk a little bit about return on equity and then we can kind of talk a little bit about how this analysis kind of that.

Andrew:                              01:31                     Yeah, sure. If you’re the asked me that question yesterday, I would’ve had my hand up to. So definitely not aware of it. I’m definitely aware of the return on equity. So that obviously helps a lot. We’ve turned. Oh, we’ve talked about return on equity before we had an episode in the archives or we talked about some of the efficiency ratios, return on assets, return on equity, so that episode might be a good supplement to this one and maybe if you listen to those back to back get a better understanding. I know it’s not that easy to learn these kinds of advanced topics through a podcast, but I think the more exposure you get to it, whether that’s through a podcast or through reading or just writing out some exercises, is trying to do them with some companies and stocks are out there. Then the more and more you can learn and kind of digest it.

Andrew:                              02:20                     Like you said, Dave, Dupont analysis is a breakdown of the return on the equity and it essentially breaks it down into three parts. So why it’s called Dupont is because, um, there’s a, there’s a meeting, it’s not, it’s still public, it’s called Dupont, now it merged with Dow Chemicals and now it’s called Dow Dupont. But there were three gentlemen there and they came up, basically, they wanted to figure out how, how they kind of take the return on equity and take it to the...

 

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence, crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     Welcome to Investing for Beginners podcast. This is episode eighty-three tonight. Andrew and I are going to take a few moments to answer some listener questions. We got some great questions recently and Andrew and I wanted to take a few moments to go over those with those with you guys. So without any further ado, I’m going to go ahead and read some questions in an Andrew’s gonna answer for us. So in Andrew’s going to be the area, answer man.

Dave:                                    01:00                     So first question. Hi Andrew. My name is Luke. I am 24-year-old college student and I’m a new subscriber and an ebook purchaser. First off, I would like to thank you for all that you’ve taken the time to put it out there. I’ve learned so much from your podcast alone that I’m feeling so much more confidently already about what am doing with my money. The first stock that I purchased was Comcast maybe a month and a half ago. I’ve been contemplating selling to buy into positions, still listed as buys and your ego letter that made the purchase of this month to Comcast has been pretty steady since that held it, but I figured I’d ask for input. I don’t want to miss out on any opportunities. Thanks in advance for any advice. Luke. Andrew, what are your thoughts?

Andrew:                              01:46                     So obviously like we like to say we can’t give personalized information or advice. I’m legally, but I can talk about kind of what I would do if I was in the shoes based on like the context a lot of investing in has to do with context. You have to understand that as you go along with your journey, the stock selections that you make, the investment decisions you make, the portfolio decisions that you make. Oftentimes those can be more important than actually the stocks you pick themselves up, but those are going to vary based on what your situation is, what your goals are, where your portfolio is. So some of the WHO’s just building a portfolio, you combine that with not combined, you can contrast that with somebody who already has a diversified portfolio and then you can contrast that with somebody who maybe is five years or less close to retirement.

Andrew:                              02:44                     And that would be those with all three be situations where they will all have a different portfolio, uh, decision making ideas and that reflects itself in the stocks that you buy or sell. So for me, when I first started out, when I was first building my portfolio, and Luke,

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:33                     All right. Welcome to this podcast. This is episode 82 tonight. Andrew and I are going to do a case study into a GE. Been in the news recently for some not so great stuff and we’re going to talk a little bit about why investing principles are critical and GE is going to be a great illustration of that. Andrew came across a great article on Wall Street Journal recently and we will put a link to that in the show notes for you guys, but it talks a little bit about a gentleman that worked for GE for a long time and Andrew will give us a little more details on that. So Andrew, why don’t you tell us a little bit about the article.

Andrew:                              01:14                     Sure, yeah. It was actually about several gentlemen, an article was written back earlier this year. There’s this one. He’s like 61 years old. He had basically was able to retire after working at GE for a thing. It was over for the years. He had a pension, 85,000 and you had company stock up more than $280,000, to give some backstory on GE, a huge, huge blue-chip company. I believe the evaluation used to be over $200,000,000,000 back in a, like the.com kind of boom-bust. They kinda had the type of evaluations that you saw just like with every other stock. And same with the financial crisis. However, recently things have been really bad there they went from 2016, they had share price hovering around 25, $30 a share through 2017. It was dropping and I believe by the end of 2017 was around a, it’s around seven a $7 and eighty cents per share.

Andrew:                              02:28                     So the company has just really been struggling and the amount of loss in market value from this stock has just been horrendous. In this Wall Street Journal or the coal, they compare from a dollar standpoint, right? An of market value. Obviously when you compare the accompany like Enron or Lehman that went completely bankrupt, the percentage is not as much because obviously, GE is still alive today, but the actual market value loss was greater than a lot of some of the big name bankruptcy’s or just huge stock crashes that we’ve heard of in the past. Companies like Valiant and Ron DM, Lehman and Bear Sterns. GE has lost more market valued under all of those since 2015, so obviously it had to be a big stock with a lot of the market value at that happen. Really, really a sad, sad story and I think we can shed some light into it and really try to examine it and let’s try to learn lessons from it and hopefully that helps us understand that some things that we like to preach over and over again on the podcast are not just things that we say because they sound nice.

Andrew:                             

[00:00] You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence crippling confusion, and help you overcome the emotions by looking at the numbers. Your path to financial freedom starts now.

[00:36] All right, folks, welcome to investing for beginners podcast. This is episode 81 tonight. We’re going to do something different for us tonight. We’re going to play you an audio clip and then we’re going to talk a little bit about it. So Andrew and I have talked a lot about how we choose companies, where we find her ideas and things of that nature. And tonight I thought we would go back and show you the original source where we’ve gotten our ideas from and so I’m going to have you listened to an audio clip from Charlie Munger and he’s going to talk about is four filters for choosing an investment.

[01:09] We have to deal with things that we’re capable of understanding and then once we’re over that filter we have to have a business with some intrinsic characteristics that give it a durable competitive advantage and then of course we would vastly prefer a management in place with a lot of integrity and talent and finally, no matter how wonderful it is, it’s not worth an infinite price. So we have to have a price that makes sense and gives a margin of safety considering the natural vicissitudes of life. It’s a very simple set of ideas and the reason that our ideas have not spread faster is there to sample the professional classes, can’t justify their existence if that’s all I have to say. I mean it’s also obvious and so simple. What would they have to do with the rest of the semester?

[02:14] Alright. So that was fascinating. Very interesting guy to listen to. Super smart and a little cranky. So it’s kind of fun at the end. They enter an hour chuckling about that earlier. It’s kind of comical, but. So Charlie being Charlie, so I thought we would break it down and talk a little bit about the different filters there and we can talk a little bit about those ideas and give you guys a little bit better idea of how to find companies to invest in. So filter number one, filter number one, it’s going to be develop an understanding of the business. Andrew, why don’t you chat a little bit about that and I’ll throw my two cents in on that.

[02:55] Yeah, sure. So when I think about business, I think it should always be very, very simple. Business in general, uh, has a purpose. I think it gets lost a lot, especially in the stock market. People think I want to own this business, I want to buy it, I want to buy a piece of it and I want to sell it. Lay there for a higher price. And I think that’s so backwards. I think you buy a business because you want the profits from it. You want this business to make profits and you want to keep some of those profits and that...

 

Announcer:                           00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers. Your path to financial freedom starts now.

Dave:                  00:34                                    All right folks, Welcome to the Investing for  Beginners podcast. This is episode 80 tonight. We’re going to do something kind of different. A lot of fun. I think this is good. That’d be really interesting. So Andrew took a deep dive into where the 10 percent of returns of the s and p over the last 80 years comes from. And tonight we’re going to talk about the individual components that make up that 10 percent and kind of where it comes from.

Dave:                                  01:00                     I thought this was really kind of fascinating and Andrew, a lot of great work getting this together. So I’m going to go ahead and turn it over to him and we’re going to chat a little bit about it.

Andrew:                              01:10                     Yeah, thanks Dave. I guess that’s a good disclaimer, right? That A. I did a lot of work and be speculation on my part. Right. Fair enough. Idea and running with it. Yeah. Fair enough. So there’s no academic sources for this other than Google, so don’t come at me with their pitch forks, but I was always, you know, I’m curious.

Andrew:                              01:34                     It’s something you hear all the time, right? People talk about what’s the average return I can expect from the stock market and it’s been around 10 percent a year for over 80 years, like they’ve mentioned. And you know, you hear a 10 percent, you hear seven percent and seven percent is just the return with inflation taken out because inflation is also been pretty constant, pretty consistent around three percent a year. So it makes for a good kind of estimation, right? If you’re thinking about where are my finances going to go in the future, how am I going to plan and what’s like a reasonable, what are reasonable expectations? You know, I think to think that you could be an average person and become more rich than Jeff Bezos just because you’re going to be a stock market genius. I think that’s obviously absurd, but at the same time it’s not absurd to think that over a long enough time period with consistent deposits and even decent or just average returns from the stock market that you can make a quite a bit of a fortune where it can change your life over the very long term.

Andrew:                              02:47                     And so if we can kind of ...