Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Buffettology -- Ignore unavailable to you. Want to Upgrade?

To: Terence Mitchell who wrote (428)	10/17/1998 1:47:00 PM
From: Tomato	Respond to of 4691

Terence, Thanks a lot.

To: Terence Mitchell who wrote (428)	10/18/1998 12:21:00 AM
From: James Clarke	Read Replies (1) \| Respond to of 4691

That Motley Fool repost on ROE is pretty good, in that it makes you think, but the author is not quite there. He starts with the key equation to investing, known as the Dupont methodology: ROE = Profit Margin x Asset Turnover x Leverage or Earnings/Equity = Earnings/Sales x Sales/Assets x Assets/Equity So how do you get high ROE? Depends on the business. Most Buffett businesses do it through profit margin. But not all - the key to Walmart is asset turnover. And when the author of that Motley Fool piece said a company with low profit margins and asset turnover, but 13x leverage isn't going to survive long, he just wrote off every bank or financial services company in the world. A great bank earns 1 1/2% on assets, but magnifies it with leverage to a 20% ROE. This may sound complicated, but its really not mathematically. It is hard conceptually, and just underscores the point that the formulas are only a tool - you've got to understand the economics behind them. That is the art. You want to look beyond the numbers - they're just a symptom - to understand how to pick out a great business from among all the mediocre ones out there. In my view, 60% of it is the industry, 20% is strategy, and 20% is the company's ability to execute. A great company needs all three, but as Buffett says, when great management takes on an awful industry it is usually the reputation of the industry which survives. Jim