Over time, I’ve found that successful investing is less about constantly making the right predictions or finding the next “big winner” and more about thinking rationally regarding a business’s competitive position, financial strength, valuation, and management’s capital allocation decisions.
Many investors overcomplicate the process.
At its core, investing is relatively simple:
Stocks are ownership pieces of businesses.
That simple idea shapes almost everything about how I think about investing.
Think Like a Private Business Owner
When evaluating a stock, I try to think like a private market buyer would.
If you were buying an entire business outright, you probably wouldn’t care much about:
short-term stock price fluctuations
quarterly earnings “beats” or “misses”
or what the stock market might do next week.
You would likely focus on:
the competitive position of the business
the cash flow it generates
management quality
and what rate of return you could reasonably expect on your investment.
That’s how I try to think about public equities.
The stock market often encourages short-term thinking, but in reality, buying a stock is simply purchasing a fractional ownership interest in a business.
How I Think About Valuation
My preferred valuation metrics are:
EV/EBIT
and EV/Owner’s Earnings.
Why?
One reason I prefer using enterprise value (EV) is that it provides a more complete picture of what an investor is actually paying for a business. Unlike a traditional price-to-earnings ratio (P/E), enterprise value accounts for both the cash and debt on a company’s balance sheet.
Two companies may appear similarly valued on a P/E basis, but one company may carry substantial net debt while another may have significant excess cash. That difference can materially impact both the risk profile and intrinsic value of the business.
Enterprise value adjusts for these balance sheet differences and therefore often provides a more accurate representation of the true economic value of a company. In many ways, enterprise value reflects what a private buyer would effectively have to pay to acquire the entire business, including assuming its debt and receiving its cash balances.
I prefer these metrics because they focus more on the actual earning power of the business rather than accounting earnings alone. Reported EPS numbers do not always provide investors with an accurate picture of a company’s true earning power because accounting earnings can be distorted by non-cash charges, capital structure differences, tax rates, and other accounting conventions. Two businesses with similar underlying economics can report very different EPS figures simply because they have different financing structures or tax rates.
EBIT is a useful starting point because it allows investors to evaluate the operating profitability of a business independent of capital structure and taxes.
Owner’s earnings, a concept popularized by Warren Buffett, attempts to estimate the true cash-generating power of a business after accounting for the capital expenditures necessary to maintain operations.
In many ways, owner’s earnings are similar to free cash flow, although I think owner’s earnings often provides a more useful framework because it attempts to separate maintenance capital expenditures from growth investments.
I generally focus more on cash flow than reported earnings because cash flow is often harder for management teams to manipulate over long periods of time.
Keep Valuation Simple
There are many sophisticated valuation models in investing, but I think many investors overcomplicate the process.
Small changes in growth and discount rates can dramatically alter the output of a valuation model.
As John Maynard Keynes famously said:
“It is better to be vaguely right than precisely wrong.”
I prefer simple valuation frameworks that rely on conservative assumptions.
For example, if an investor buys a business at:
a 10% earnings yield (10x earnings)
and the business can grow earnings by 2–3% annually,
then the long-term expected rate of return will likely be somewhere around 12–13% annually over time, assuming the valuation multiple remains relatively stable.
This isn’t a perfect formula, but over long periods, investment returns tend to roughly track:
earnings yield
plus growth
plus capital returns through dividends and stock buybacks.
Why I Don’t Like Paying for Speculative Growth
As a value investor, I generally do not place a large premium on future growth prospects.
The reason is simple:
Predicting the future is extremely difficult.
Many companies trading at premium valuations today are priced as though years of strong growth are guaranteed. In reality, the future is uncertain and highly competitive industries can change quickly.
I would rather pay for:
current earning power
durable cash flows
and reasonable valuations
than speculate on aggressive future growth projections.
If future growth materializes, that’s great. But I prefer to treat growth as upside optionality rather than something that must happen in order for the investment to work.
Why Most Investors Think About Selling the Wrong Way
Many investors anchor their sell decisions around stock price movements.
I try not to think about selling that way.
I don’t automatically sell simply because a stock has gone up, nor do I necessarily hold simply because a stock has gone down.
Instead, I focus on whether the intrinsic value of the underlying business has become stronger or weaker.
For example:
I may add to a position that has appreciated if the business fundamentals and intrinsic value have improved materially.
Conversely, I have no problem reducing or exiting a position (regardless of if I have a gain or loss on a position) if the original thesis breaks or intrinsic value is deteriorating.
Ultimately, the business performance matters far more than the recent stock chart.
Making Fewer Decisions Can Lead to Better Results
Modern investing encourages constant activity.
Investors are bombarded daily with:
financial news
hot stock tips
macro predictions
and the next “can’t miss” trend.
In many cases, overtrading and making too many investment decisions leads to worse outcomes.
I believe investing is often more about patience and selectivity than constant action.
Over time, I’ve found that there are:
many mediocre businesses
many mediocre investment ideas
and many mediocre ideas disguised as good ones.
The goal is not to own a large number of investments.
The goal is to identify situations where:
the odds are heavily in your favor
downside is limited
and long-term expected returns are attractive.
That’s one reason why I prefer running a relatively concentrated portfolio.
Why I Prefer Smaller Stocks
One advantage an individual investor possesses is flexibility.
Large institutional investors often cannot meaningfully invest in smaller companies because the positions are too small to impact portfolio performance.
An investor with a smaller portfolio can invest in:
microcaps
special situations
spinoffs
and illiquid securities
without moving the stock price significantly.
That creates opportunities that often do not exist for larger pools of capital.
Many smaller companies are also:
less researched
less efficiently priced
and overlooked by institutions.
While smaller stocks can be more volatile, I believe they can also offer some of the best opportunities for long-term investors willing to do independent research.
Ignore Short-Term Price Fluctuations
This is easier said than done, but short-term stock price movements are often meaningless.
In many cases, volatility reflects:
emotion
liquidity
headlines
or temporary sentiment
rather than changes in long-term intrinsic value.
I try to focus more on:
business performance
capital allocation
competitive positioning
and normalized earning power
than short-term market fluctuations.
Over time, I believe intrinsic value and business performance matter far more than short-term volatility.
Index Funds Are a Great Option for Most Investors
While I enjoy researching and analyzing individual businesses, I also recognize that investing in individual securities is not appropriate for everyone.
Analyzing businesses properly requires:
time
emotional discipline
patience
and a willingness to be wrong.
For most people, consistently investing in a low-cost index fund is likely the best approach.
Simple investing strategies often outperform more complicated approaches because they:
reduce mistakes
minimize fees
and remove emotion from the process.
There is nothing wrong with acknowledging that indexing is a highly rational solution for many investors.
Final Thoughts
I don’t believe successful investing requires predicting the future with precision.
I think investing is primarily about:
rationality
discipline
patience
and capital allocation.
At its core, investing is simply the process of buying future cash flows at attractive prices while avoiding permanent capital impairment.
The market will always fluctuate. Headlines will always create fear and excitement. But over long periods of time, I believe investment outcomes are driven far more by:
business quality
valuation
management
and investor temperament
than short-term market noise.
The goal is not to make hundreds of brilliant decisions.
The goal is to make a small number of rational decisions consistently over long periods of time.
Agree with your takes, very Buffett like. Thanks for sharing.
If I can add something, I will say that when you define the amount for the excess cash, it's also important to see what the usage or plans for that excess cash is.