Mental Models discussed in this podcast:
- Mean Reversion
- Inertia
- Reinvestment Rate
- Return on Incremental Invested Capital (ROIIC)
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Show Outline
Source of Investment Return
Investments, as opposed to speculations or gambling, is a method of seeking returns while protecting principal. Therefore, it is critical to understand the source of your investment returns. You are not entitled to investment returns. You don’t have a God-given right to earn an excess return on your investments.
So what is the source of your returns?
Hint: It will vary by the type of investor you are.
Examples:
- Mean Reversion
- Net-Net Investors
- Value Investors
- Inertia
- Momentum Investors
- Future Business Performance
- Quality Investors
- Low Reinvestment Rate
- High Return on Incremental invested capital
- Growth Investors
- High Reinvestment Rate (often 100%)
- Low-Medium return on incremental invested capital
- No dividends
- Dividend Growth Investors
- Low-Medium Reinvestment Rate
- Stable return on incremental invested capital
- Quality Investors
