Most investors ignore this, but they really shouldn't!

Most investors ignore this, but they really shouldn't!

In the world of investing you will come across all sorts of investing metrics / financial ratios. You’ve probably heard of Earnings per share, compound annual growth rate, P/E-ratio, P/B-ratio, Price-to-earnings growth ratio, or maybe even the Altman Z-Score. Obviously, all of these metrics serve a specific purpose and when you consider investing in a specific stock, it makes sense to consider some of the data available to you.

However, there are hundreds if not thousands of investment metrics that you could consider in your stock analysis. However, information overload (i.e. having access to too much information) can actually hurt investors.

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So what if you were only allowed to look at one single investing ratio / financial metric before buying a stock? Which investing metric would you choose? I think this can be a very valuable thought experiment. And in this video, I will tell you which metric is by far the most important metric in investing if you are a long-term investor and I will show you how to use it to make more informed investment decisions.

If you’ve watched some of the videos on my channel, you will know that I am a big believer in the business owner mindset as opposed to having a securities trader mindset. If you buy a stock, I want you to mentally always buy the entire business and not just a ticker symbol that will pop up in your broker. Being a business owner implies having a long-term investing horizon.

And to compound your money at high rates, you want to own the BEST businesses that are available to you and that are in your circle of competence. But how can you identify the best companies in the world? Well, if you were only allowed to look at one metric to determine business quality, I would absolutely go for return on equity, or in short ROE.

Basically, a business is like a car, or an engine. If you put in x amount of capital, how much in returns will a company deliver? Just like a fuel efficiency rating helps you compare cars, return metrics like ROE (return on equity), ROIC (return on invested capital), ROA (return on assets), or ROCE (return on capital employed) allow you to compare businesses. Broadly speaking, the higher these business profitability metrics (ROE (return on equity), ROIC (return on invested capital), or ROCE (return on capital employed)), the better.

But what’s a good ROE? As Terry Smith (Terry Smith is the founder of Fundsmith and author of the investing book Investing For Growth) explains in this video, ROE, ROIC, ROA, or ROCE first and foremost should be higher than a firm’s cost of capital. Terry Smith's philosophy: Buy good companies!

0:00 intro
1:15 The right mindset?
2:02 World-class businesses?
2:37 A BUSINESS is like a car
3:50 Hot dog truck example
5:17 Terry Smith: what is a good business?
7:45 Going one step further
9:24 Growth is not valuable!
12:18 Powerful lesson #1
13:40 Powerful lesson #2

The content provided on this channel should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. The stocks and funds discussed on this channel are examples only and may not be appropriate for your individual circumstances.

Before making any financial or investment decisions, I recommend you consult a financial planner or advisor to take into account your personal investment objectives, financial situation, and individual needs.

In no event shall René Sellmann be liable to any viewer for any damages of any kind arising out of the use of any content published on this channel, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages.

I hope you enjoyed the content!
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