Coca Cola, one of the bluest of the blue chips. This is a foundational pillar of any portfolio. Through good times and bad times, Coke pumps out profits and generates wealth for its owners. It’s an easy business to understand: sugar water. It is a fantastic business. There is nothing quite like it. The returns generated by the selling of sugar water is incredible – consistent return on equity in the 20% range, which means loosely that for every dollar of sugar water Coke sells, they are able to generate 20ish cents of pure profit. But I’m not here to give you an in-depth analysis of Coca Cola today. Instead, I wanted to expand on how using the earnings yield can help you think about opportunity costs. Remember that post on how to think about an asset? Quickly peruse that again as it will be a useful primer for what I am about to go over.
One of the reasons posts have been few and far between since the fall is that I have been transitioning the cash flow from debt repayment to savings and investments. If I wasn’t that interested in the art and science of investing, I would have picked 2 Vanguard ETFs, done regular dollar cost averaging over the next umpteen years, and called it a day (this is something I think most people should do as they will have no further interest in analyzing investments). However, I have an obsessive level of interest and curiosity in businesses and want to figure out the most optimal way to invest in businesses. Thus, a lot of time was (and still is) spent gaining knowledge. Let’s talk about one metric I use to screen potential investments: the earnings yield.
I trailed off about going off on a little winter vacation to the Oregon Coast after a recent post on what most of you must have found riveting on simple discount cash flow analysis. This was a nice little reprieve from the double drudgery of winter and work. It was also a nice little warm up for our 3000km+ road trip to Omaha in April. We stopped by the quaint towns of Seaside, Cannon Beach, and Arch Cape. Here are some photos from the trip.
I should just call this “how to increase traffic to your blog with little effort” because that is what it has seriously become. I was really hustling with the whole nine yards of blogging back in the fall, especially in October. I definitely saw traffic boom and it felt good. But I found out I really didn’t enjoy a lot of the aspects of blog hustling: the never-ending blackhole of social media, Pinterest, spamming new and old posts on Twitter to vie for attention, spamming other people’s content in the hopes of your content being promoted on Twitter, using Hootsuite, etc, etc, etc. That stuff was no fun at all. It felt like a chore. It made blogging really laborious. I have better things to do with my time. And that’s why the pace has changed around here since the fall.
For me, value investing is the only logical approach to investing. I recently wrote about how the price you pay for an asset will determine its rate of return, using a condo as a simple example. It really is as simple as that: you need to determine the rate of return you are seeking and then calculate the appropriate price to pay for the cash the asset will generate into the future. Value Investors will talk a lot about discount cash flow analysis. I’ll show you a simple way to look at discount cash flow and how it connects to the price of an asset and the rate of return you are seeking. If you’re still feeling slightly confused, don’t worry, let me show you what I mean by using the ad revenues of this website to determine what price you would need to pay to purchase this asset’s cash stream.