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The DIY Investing Podcast

138 EpisodesProduced by Trey HenningerWebsite

Do you want to learn how to manage your own investments? Are you ready to stop paying investment management fees and start building wealth? The DIY Investing Podcast is dedicated to providing you with the knowledge, skills, and resources you need to be a better investor. Learn how to make investment… read more

32:33

87 - Cost of Growth Valuation and Asset / Earnings Equivalence

References:

This episode was inspired by a Twitter thread where I responded to a poll on how to value companies. That thread is available at the following link:

https://twitter.com/TreyHenninger/status/1288475399861817352

Mental Models discussed in this podcast:
  • Cost of Growth Valuation
  • Gordon Growth Model
  • Asset / Earnings Equivalence
  • Retained Earnings
  • Return on Invested Capital
  • Earnings Yield
  • Dividend Yield
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Twitter Handle: @TreyHenninger

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode87

Summary:

Growth is not free for most companies. It costs something. The cost of growth valuation model takes into account return on invested capital when valuing stocks. Most companies have to retain earnings in order to grow.

Assets are only as valuable as the earnings they create. You can't take credit for both book value (assets) and earnings power in the same valuation on a stock. It's a problem of double counting that leads to overvaluation.

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