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.