I started serious Investing Journey in Jan 2000 to create wealth through long-term investing and short-term trading; but as from April 2013 my Journey in Investing has changed to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

Since 2017 after retiring from full-time job as employee; I am moving towards Investing Nirvana - Freehold Investment Income for Life investing strategy where 100% of investment income from portfolio investment is cashed out to support household expenses i.e. not a single cent of re-investing!

It is 57% (2017 to Aug 2022) to the Land of Investing Nirvana - Freehold Income for Life!

Click to email CW8888 or Email ID : jacobng1@gmail.com

Welcome to Ministry of Wealth!

This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

"For the things we have to learn before we can do them, we learn by doing them." - Aristotle

It is here where I share with you how I did it! FREE Education in stock market wisdom.

Think Investing as Tug of War - Read more? Click and scroll down

Important Notice and Attention: If you are looking for such ideas; here is the wrong blog to visit.

Value Investing
Dividend/Income Investing
Technical Analysis and Charting
Stock Tips

Sunday, 15 July 2012

How to become rich in stocks??? (10)

Read? How to become rich in stocks??? (9)

Many retail investors love to learn from Warren Buffet's investing lessons especially those under the classification of Value Investors.

"Your success in long-term investing may not be what you actually see and get now. Your delay Gratification may lead to super return that you couldn't even believe it." - Createwealth8888

Warren Buffett and the Magic of Retained Earnings

Let Me Have A Dollar

If I had a magical process for investing capital at a high rate of return, let’s say at 20 percent, and you invest $5 with me, at the end of the year I will have made you $1.

You will now be faced with three options:

1. You can take the $1, in which case you can spend it or invest it elsewhere, perhaps in a llama farm.

2. You can leave the $1 with me and allow me to reinvest it for you.

3. Or together, we can use the $1 to buy out existing shareholders.

The first question that should come to mind, if you leave the money with me to reinvest, is “are our children learning,” and next, “Will I have the ability to continue generating the 20 percent rate of return?” Then, if you take the $1, what rate of return can you expect to achieve … in the llama farm? The answer to the first question is found in two components:

1. The track record of ROE in my business.

2. The historic retained earnings off of my business’s balance sheet.

If historically, my business has retained earnings and the ROE has remained strong, averaging 20 percent, then by all appearances the business has the ability to put the $1 to good use, reinvesting it at the high rates of return on equity. If, on the other hand, my business has historically retained earnings (plowed them back into the business for expansion, new business projects, and so on), yet the return on equity has steadily dropped over the years, then it appears that I have poorly allocated retained earnings into low returning investments, and I do not have the capability to effectively expand the business or, at the very least, the core, original business has begun to suck wind. Either way, you will see this as a drop in ROE and perhaps a paltry, anemic ROE track record.

1 comment:

  1. relatively, a small or medium business has much higher chance to obtain high ROE. When it grows larger, it is becoming more and more difficult to achieve high ROE. One of the reason, mature companies start to pay high percentage of profit as dividends against retained for future growth. More often, even if the owner knows the company will not grow that fast, it continue to invest retained earnings for a much smaller return. sad story for minority shareholders.


Related Posts with Thumbnails