​Charlie Munger didn’t succeed just because he was smart. He succeeded because he understood the math of reality better than most. He knew that algebra is a filter for making decisions.

The first thing I had to unlearn was how I valued potential. If a deal had a 40% chance of making $1 million, my brain went straight to the $1 million. I started with the upside.

​But that was wrong.

​If I have a 40% chance of winning $100, I do not have $100. I have a ticket worth $40.

​$100 x 0.40 = $40.

​That is the reality. Once I accepted this, I stopped chasing “potential”.

​The Standard of Misery

​Most people try to maximize happiness. I have learned it is mathematically more efficient to minimize misery.

​In algebra, you can have a string of great numbers: 10 x 10 x 10. You are doing great. But if you multiply that string by Zero, the answer is Zero.

​In life, “Zero” isn’t just nothing. It is ruin, disaster.

​I assign values to these outcomes:

• ​Success: +100

• ​Misery: -1,000

​If I look at a decision and there is even a 2% chance of Misery, the math breaks.

​2% of -1,000 is -20.

​That penalty is so heavy it destroys the value of the decision. I don’t care what the upside is. You cannot average out a ruined life.

​We often judge our success by our current results.

​It looks different depending on the game you are playing.

If you are a value investor, you don’t need to be right every time. You might only have a 60% win rate on individual stocks. You will have losing years.

​But your Overall Success Probability is 75%.

Why? Because you have removed the “Zero.” You don’t use leverage. You don’t buy scams. Even if a stock drops 40%, you don’t panic sell. Because your downside is capped at “temporary pain” rather than “total ruin,” the math guarantees that if you just keep playing, the 60% win rate will eventually compound you into a millionaire.

The gap between your current value and your real value is the value of your discipline. You are richer than your bank account says. You just have to wait for time to print the receipt.

If you are an entrepreneur, the math flips. You are like Jeff Bezos. You accept that your success probability on any single idea is naturally low, maybe 10%. But your upside is 100x. (Asymmetric Upside)

​Most people look at a founder with three failed launches and see a loser. If you have ten ideas, and each has a 10% chance of a 100x return, your Expected Value is massive. You don’t need to be right often; you just need to be right once.

Imagine you have to decide whether to launch a new product line.

• ​Cost to Launch: $50,000 (Capped Loss).

• ​Probability of Failure: 80%.

• ​Probability of Success: 20%.

• ​Upside if Successful: $1,000,000.

​Most managers say “No” because there is an 80% chance of failure. They are scared of looking bad.

But run the algebra:

(0.20 x $1,000,000) - (0.80 x $50,000)

$200,000 - $40,000 = +$160,000.

​The decision has a positive value of $160,000 the moment you say “Yes.” Even if it fails, it was the right mathematical move.

​Jeff Bezos says if you have a 10% chance of a 100x return, you take the bet every time. He is right.

​The goal isn’t to be a genius.

​If you survive the downturns, avoid the -1,000 zeros, and let the probabilities play out, the math takes care of itself.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. I may buy or sell these stocks at any time. You must do your own research before investing

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The biggest reason people lose money is simple: they buy a ticker symbol, not a business. If you cannot explain how a company makes money, you have no business owning it.

• Understand the “Why”: Does the company sell a product people need (like toothpaste) or just want right now (like a trendy gadget)?

• The 5-Year Test: If you aren’t willing to hold the stock for at least 3-5 years, don’t own it for 10 minutes. In the short term, stock prices are random and unpredictable. In the long term, they follow the business’s actual profits.

Price vs. Value: They Are Not the Same

A stock price tells you what people think a company is worth today. It does not tell you what the business is actually worth.

• Valuation Matters: You can buy a great company at a bad price and still lose money. Always ask: “If I bought the whole company at this price, would the cash it produces give me a good return?”

• Ignore “Adjusted” Earnings: Wall Street loves to pretend expenses like stock compensation aren’t real. Ignore them. Look at GAAP earnings, the real cash left over after everyone gets paid.

The Balance Sheet: Your First Line of Defense

Before you look at how much money a company makes, look at what they owe.

• Debt: Companies with heavy debt burdens are fragile. If interest rates flip or the economy slows down, debt can wipe out equity holders overnight.

• The Safety Net: A strong balance sheet gives a company the power to survive hard times and buy back their own stock when it’s cheap.

Think Like a Business Owner

Be a business owner. Warren Buffett doesn’t buy a stock hoping it goes up next week; he buys a business because he wants to own its future cash flow.

• Ignore the Headlines: The news is noise designed to make you emotional.

• Look 18-24 Months Out: As Stan Druckenmiller says, don’t buy for today. Buy for where the business will be in two years. If you can’t see that future clearly, stay away.

Betting on What Won’t Change

Predicting the next big invention is nearly impossible. It is much easier (and more profitable) to bet on what won’t change.

• The Jeff Bezos Principle: People will always want lower prices, faster shipping, and better selection.

• The Moat: Invest in companies with a competitive advantage that is hard to break, whether it’s a brand people trust (Coca-Cola) or a network effect that locks people in.

Risk, Growth, and the “Downside”

Never invest based solely on a “growth story.” Stories change quickly.

• Multiples Matter: If you pay 50x earnings for a company, everything has to go perfectly for you to make money.

• Know the Downside: Before you ask “how much can I make?”, ask “how much can I lose?” There is always risk you can’t see.

• Normalized Margins: Don’t trust a single boom year. Look at what the company earns in a “normal” year to understand its true power.

The Power of Doing Nothing

Activity is the enemy of returns.

• Tax Efficiency: Every time you sell, you trigger a tax event and interrupt the compounding process.

• Decision Fatigue: The more decisions you make, the more likely you are to make a bad one. Keep your process clear and simple.

• Let Winners Run: If a great company is growing its earnings and reinvesting wisely, do not sell just to “take a profit.” You interrupt the magic of compounding.

Master Your Psychology

Investing is not a game of IQ; it’s a game of temperament.

• Think in Probabilities: Nothing is 100% certain. Ask yourself: “What is the probability of this going right vs. going wrong?”

• Detach Emotionally: The market exists to serve you, not to instruct you. When stocks crash, don’t panic, get interested. That is when the best businesses go on sale.

Final Thought: Success comes down to this: Buy great businesses with clean balance sheets and wide moats. Pay a fair price. Then, do the hardest thing of all, wait.

Disclaimer: This article is for informational purposes only. It is not financial advice. I am not a financial advisor. You must do your own research before investing

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Happy Holidays to you and your families. It is the most beautiful time of the year to be with loved ones.

As we end 2025, I want to share my learnings, experiences, and a reflection on how the year went for the portfolio.

I have been in the investing world long enough to know that the downside matters the most. If you do not respect it, hard lessons will be learned.

As a result, the first principle of my investment approach is shaped by Warren Buffett’s two rules: never lose money, and never forget rule number one.

I believe this concept is not well understood by many. These rules are the foundation of everything I do because, in investing, the downside matters more than the upside. If you lose 50% of your capital, you need a 100% gain just to recover your initial investment. That is why I focus on what can go wrong before I look at what can go right. For this reason, I view my job primarily as risk management, rather than just investing.

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Performance

As of today, the portfolio has appreciated 39.5% in 2025. By comparison, the S&P 500 has returned 17%. This marks the third consecutive year of outperformance against the index.

Annual Returns vs. S&P 500:

• 2023: Portfolio +33% (Index: +21%)

• 2024: Portfolio +36% (Index: +23%)

• 2025: Portfolio +39.5% (Index: +17%)

Cumulative Return (3-Year Total):

• My Portfolio: 150%

• S&P 500: 75%

Portfolio Changes

I sold my positions in Alibaba and Tencent.

Tencent is, in my opinion, the best business in China. It is one of the few companies in the world that can grow revenue while also increasing profit margins at that scale. Its ecosystem is unique and powerful. However, I read everything through English translations. I believe that to truly understand a business, you must understand the local life and culture around it. Since I lack that direct insight, I require a massive margin of safety to own Chinese stocks.

Alibaba faces a different problem. E-commerce is a tough business. Competitors like Pinduoduo and JD are fighting for market share and reducing every bit of margin. To keep their market share, Alibaba has to lower prices. As a result, their profit margins have been dropping for the last few years. They are also spending more money just to earn the same amount of revenue.

I bought Alibaba because it was very cheap; the company traded at a very low earnings multiple and had generated strong free cash flow for many years. However, the stock price has gone up about 100% since then, while free cash flow has dropped significantly, even turning negative due to high CapEx. Although they might win in cloud computing and AI, or stabilize their e-commerce margins in the long term, the setup has changed. With the price substantially higher and the business economics getting tougher, there was not enough margin of safety left to justify holding it. I decided to sell and move this capital into 4 high-conviction US-based businesses

UnitedHealth & Molina

UnitedHealth is now my largest holding. It provides massive scale and predictable earnings. Molina is different. It focuses mainly on Medicaid and operates with a very low-cost structure, which makes it highly efficient at managing government contracts.

I saw the recent drop in their share prices as a chance to buy.

Lululemon is my second-largest holding. The stock dropped earlier this year because sales growth slowed in North America. I think it is a good business. They sell premium products and earn high returns on their capital. They also have huge room to grow internationally, especially in China and Europe. We bought a premium brand for the price of an average retailer.

Gartner

In December, I initiated a position in Gartner, which is now a top-3 holding.

Gartner provides essential research and advisory services to executives. I view their service as “risk mitigation” for corporate decision-makers. Before a CTO commits significant capital to software, they require independent validation.

The stock sold off on fears that Artificial Intelligence would displace human analysts. I disagree. AI generates more data, more vendors, and more noise. In a complex environment, trusted, independent judgment becomes more scarce and valuable, not less.

Lessons from 2025

These are not brand-new lessons; they are principles I already knew, but the market has a way of reminding you of them.

1. Catching the absolute bottom is impossible. The most important reminder this year came from my decision to buy into the healthcare sector. I bought these companies after they had already fallen significantly. I believed they were cheap. However, shortly after I bought them, they went down aggressively again.

It was a reminder that you can never perfectly time the bottom. In the short term, there is no floor to a stock price, even if the valuation makes sense.

2. Temperament matters more than intellect. In investing, mistakes are part of the game. You can learn from them and improve your process, but avoiding them completely is impossible. That is why temperament and risk management are the two most important tools we have.

Prices can stay disconnected from value for a long time, even if your thesis is right. Since I never short stocks and I never use options, my only job is to own pieces of great businesses and wait. Attempting to time the market is a fool’s game; having the patience to sit through the volatility is the real skill.

Macroeconomic Outlook

I do not make decisions based on headlines, but I stay aware of the economic environment. When new tariffs were announced, the impact was immediate, especially for companies that rely heavily on specific supply chains. Their stock prices dropped because these changes have a long-lasting impact on their profits.

Rules can change, and the world will not stay the same, so companies that hold debt can be vulnerable. That is why I prefer companies that have strong balance sheets and generate free cash flow. Currently, the S&P 500 pays you back about 2.74% a year in free cash flow. That barely keeps up with inflation. I stick to the basics: Price is what you pay. Value is what you get.

Investment Philosophy

As we look to the future, it is important to repeat the core principles

My goal is to beat the S&P 500 by ten percentage points over the long run.

I believe owning productive businesses is the best way to build wealth over time.

1. Owning great businesses.

2. Buying them for less than they are worth (Margin of Safety).

3. Having the right attitude.

To show the power of business ownership: $100 invested in the S&P 500 in 1957 would have grown to about $77,626 by the end of 2025. That is the power of time. My job is to avoid interrupting that growth.

I prefer a focused portfolio. As Charlie Munger said, “If a thing is not worth doing at all, it’s not worth doing well.”

I do not believe in buying our 20th best idea just to have “variety.” That just lowers our returns. Like the Walton family with Walmart, I believe in holding fewer positions where I am very confident. When the odds are in our favor, we bet big.

I realized that people are what turn a good company into a great one, whether it is the culture at Berkshire Hathaway or the drive at Amazon and Apple. To succeed, I need to find management teams that can handle change over decades, and then let them do their job.

My process is simple. I do not start with the economy. Instead, I start with the company itself. I look at the balance sheet to estimate how much money they will make in three, five, or ten years. I also check who their competitors are and if their product will last. Because the future is hard to predict, I only buy when the price is much lower than the value.

I stay away from most AI stocks right now. In the early 1900s, cars changed the world, yet hundreds of car companies went bankrupt. Similarly, in 2000, the internet changed the world, but for every Amazon, there was a Pets.com that went to zero.

I prefer to buy the winner after they have won. For example, during the internet crash, Amazon stock fell 90% and was risky. Today, it is safe and dominant. Warren Buffett followed a similar path with Apple. He did not buy it early. He bought it in 2016, after everyone already owned an iPhone. I am not looking for the next Amazon. I am looking for the businesses that have already proven they are built to last.

Thank you

Arda Solmaz

Disclaimer: I am not a financial advisor. This letter is for informational purposes only and represents my own opinions and portfolio moves. It is not investment advice. Please conduct your own due diligence.

I’m sharing this not to celebrate a short-term move, but because it’s a good example of one of the hardest parts of investing: buying when most people disagree with you.

I’ve followed Lululemon for years. The product is strong, the brand loyalty is real, and the balance sheet is clean, no debt.

But earlier this year, sentiment turned sharply negative. North America slowed, and the market quickly decided the brand was losing its edge. The stock fell nearly 60% from its highs.

The North America slowdown didn’t change how I saw the business, and international growth still looked like it was in the early stages, and the clearest way to see that was to put Lululemon next to Nike. Even in the most recent reports, the gap is still clear:

• China growth: Nike -17% vs Lululemon +46%

• Gross margin: Nike 40.6% vs Lululemon 55.6%

• P/E: Nike 30x+ vs Lululemon ~15x

Lululemon was delivering stronger growth and better profitability, yet the valuation was still far lower.

And this is where Buffett’s reminder matters: “Be fearful when others are greedy, and be greedy when others are fearful.” It’s simple advice, but it’s difficult to act on when sentiment is ugly and the stock is falling.

That’s why I’m unlocking the original research note today.

I want you to see the work exactly as it was written at the time, the valuation model, the data, and the reasoning. I think it’s more useful to see the process than just the outcome.

You can read the full, unlocked analysis here

If you enjoy this style of research and want access to new notes when they’re published (plus the full library), you’re welcome to join as a paid subscriber below:

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Best,
Arda

Disclaimer: The content of this email and the associated research notes are for educational and informational purposes only and do not constitute financial advice. I am not a financial advisor, and the ideas presented here represent my personal opinions and analysis. All investments carry risk, including the potential loss of principal. Past performance is not indicative of future results. I currently hold a long position in Lululemon (LULU). Please perform your own due diligence or consult with a certified financial professional before making any investment decisions.

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But while he nails the philosophy, and I highly recommend reading it, there’s another part of the story worth adding. One that often gets missed.

To truly understand the arithmetic of Berkshire Hathaway’s returns, how a dying textile mill transformed into an $800,000-per-share fortress, you cannot view Buffett’s career as a single continuum. You have to split it into three distinct operating systems.

Most people study the first two. Almost everyone misses the third.

Era 1: Pre-Munger

The first era was the “Partnership Era,” defined entirely by the Benjamin Graham philosophy.

During this phase, Buffett wasn’t a business owner; he was a mechanic looking for broken cars he could strip for parts. He hunted for “Cigar Butts”, mediocre companies trading below their liquidation value. The math was simple: buy a dollar for 50 cents, wait for the gap to close (mean reversion), sell, and repeat.

While this approach produced the highest percentage returns of his career, it had a fatal flaw: It wasn’t scalable.

The Cigar Butt strategy requires constant friction. You are always entering and exiting and most importantly, you are always subject to “reinvestment risk.” Once you sell the net-net for a profit, you have to find another mispriced asset immediately.

As Buffett later realized, “Time is the enemy of the mediocre business.” You can date a textile mill for a quick profit, but you can’t marry it.

Era 2: The Compounder

The second era is the one most value investors obsess over. This was the “Post-Munger” pivot, where Charlie convinced Warren to stop buying fair businesses at wonderful prices and start buying “wonderful businesses at fair prices.”

This shifted the engine from Liquidation Value to Earnings Power.

Buffett began acquiring high-ROIC engines with immense pricing power, brands like See’s Candies, Coca-Cola, and eventually Apple.

The structural genius here wasn’t just “buying quality.” It was that he stopped looking for a price exit and started looking for earnings retention.

When you own a compounder like See’s Candies, you don’t need to sell to realize your gain. The business realizes the gain for you, internally, by producing cash flow. See’s had incredible pricing power and brand-loyal customers. They kept increasing the price, and customers kept coming. It was more than just assets, it was pure earning power, and it taught them a lot about business.

But the catch was that See’s wasn’t able to reinvest that cash into itself, it couldn’t just keep opening stores forever. Instead, it sent that cash to Buffett to invest elsewhere. On the other hand, Coca-Cola was a brand that could travel across the globe and keep scaling. Both models eliminated the friction of taxes and the pressure of constantly finding new ideas. This era is the real lesson behind the ‘Berkshire Phenomenon

But even this era had a limit. Great businesses generate too much cash. Eventually, you run out of “wonderful businesses” to buy.

Era 3: The Legacy Builder (Post-2008)

This is the third, critical era that emerged largely after the 2008 Financial Crisis. This is the era that Wall Street often misunderstands as “Buffett losing his fast ball.”

He didn’t lose his fast ball; he changed the game.

Buffett realized that to make Berkshire last another 100 years, he couldn’t just own light-capital compounders. He needed to own the very arteries of the global economy. He needed Capital Sponges, businesses that could absorb billions of dollars of reinvestment at decent rates forever.

He moved aggressively into capital-heavy, critical infrastructure:

• BNSF Railway: He bought the physical tracks that move the American economy.

• Berkshire Hathaway Energy: He built a utility giant that demands massive CAPEX but guarantees a regulated return.

These aren’t just stocks; they are the physical backbone of the United States.

He extended this logic globally with his recent wager on the five Japanese Trading Houses (Sogo Shosha). He wasn’t just buying cash flow; he was buying recognized stability and essential services, energy, food, materials, that no competitor can disrupt.

The Capital Architect

This is the key lesson of the third era. Each era taught Buffett something important, and he adjusted every time. But after the 2008 financial crisis, he took one big lesson to heart: the financial system was more fragile than most people assumed.

If he wanted Berkshire to last a century, he couldn’t rely only on stock picking or asset-light businesses. He needed to own the hard, essential infrastructure itself.

He wasn’t just trying to get rich anymore; he was designing a fortress that could survive any storm.

Berkshire going from $15 to $750k+ per share didn’t happen because Buffett was a good stock picker. It happened because he treated Berkshire itself as the ultimate Capital Allocator.

He took the cash flows from a dying textile mill and systematically redeployed them into high-ROIC assets.

Most CEOs cling to dying businesses for too long. Buffett didn’t, he pulled the cash out of the loser and put it into the winners.

If you only view him as a “Stock Picker,” you miss the genius. He was a Capital Architect who built a machine designed to cure reinvestment risk. That is the blueprint for the most durable company in history.

I wanted to share a quick update on a meaningful validation of the research process here at The Value Thesis.

Yesterday, Michael Burry (The Big Short) liked a note I posted regarding the Molina Healthcare thesis.

I’m sharing this because it reinforces the framework I use. With over 50,000 stocks globally, the real challenge isn’t finding stocks to analyze, it’s knowing which ones to ignore. I apply four criteria to every analysis: I look for a simple and durable business, an efficient management team, a structural competitive advantage, and a valuation that offers a margin of safety.

This mindset is closer to investors like Charlie Munger, Li Lu, Seth Klarman, and Nick Sleep. They didn’t build great records by chasing whatever was hot. They did it by looking for businesses where the value was structural, but the market was either fearful or simply missing the real issue.

Burry has a similar instinct, he tends to look where sentiment is already broken. And right now, Managed Care is hated because medical costs have spiked, so most people stop at the headline and move on.

But if you look at the structure, government-sponsored healthcare is effectively a commodity. You can’t easily raise prices, and the product is largely the same across competitors. In a commodity business, the edge is being the low-cost producer — and Molina runs one of the most efficient operations in the sector.

Because the sector is so disliked, the valuation can offer a margin of safety relative to long-term earnings power.

I believe the market is efficient most of the time. The challenge is doing the work to understand the bear case and the actual problem, rather than just chasing the upside.

Just to be clear on my mindset: I lean buy-and-hold. I spend time analyzing businesses I’d be comfortable owning for years, the kind that can generate real profits and reinvest at good returns so the business can compound.

If you want to see the full thesis and how I applied my framework, you can read the deep dive here: Full Molina Healthcare Deep Dive

This deep dive is exclusive to premium subscribers. If you are currently a free reader, you can upgrade below to unlock the full thesis and my complete archive:

Upgrade to Full Access

Thanks for reading,

Arda

Disclaimer: I am not a financial adviser. I am not a registered investment advisor (RIA). This content is for educational and entertainment purposes only and should not be construed as investment advice. I am currently long $MOH.

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To succeed today, quantitative analysis based on low P/E ratios is not enough. It requires business understanding, a focus on Return on Capital, and patience for the long term. At least, this is my everyday task now.

Compounding is an important concept in investing, and it is actually quite simple to imagine.

If I am the owner of 10% of a company that earns $100 million per year, I still own the same 10% the next year, but the company earns more. The year after, it earns even more. My percentage ownership stays the same, but the earnings themselves keep getting bigger.

This is a Compounding Machine, though finding one is the hard part. The big question for an investor is: If you find such a company today, how much should you pay for those future earnings?

To answer that, we have to look at Return on Capital.

The Two Types of Businesses

There are really only two types of companies: those with high returns on capital and those without.

• High-Return Business: Puts a dollar to work and creates 15 to 20 cents (or more) of new value.

• Low-Return Business: Puts a dollar to work and struggles to create 10 cents.

Over time, the high-return business creates tremendous wealth, while the low-return business just treads water.

What Is Capital?

Capital is just the fuel the business needs to operate. It comes basically in three forms:

1. Equity: Selling a piece of ownership.

2. Debt: Borrowing money

3. Retained Earnings

Companies use this capital for Working Capital (day-to-day bills) and Capex (machinery and buildings).

Ideally, I want to own a company that doesn’t need to constantly raise outside capital.

Measuring Efficiency: Return on Capital Employed (ROCE)

I calculate return on capital simply. I want to know how much profit the business generates relative to the cash and assets tied up in it.

The formula I use is:

ROCE = EBIT ÷ (Equity + Debt - Cash)

Note: I subtract cash because idle cash isn’t “working.” I use EBIT here to see the pure operating power of the machine, but I never ignore interest expense when calculating the final valuation.

How Do Companies Grow?

To increase earnings, a company can invest in new factories, research, or buy other companies. They fund this through Retained Earnings (the net income they don’t pay out as dividends).

But, not all growth is good growth. If a company spends $1 to earn 5 cents, they are destroying value. We want companies that spend $1 to earn 20 cents.

Let me show you the math behind why a “High Return” company is worth paying up for.

Scenario 1: The “Expensive” High Quality vs. The “Cheap” Low Quality

Imagine two companies. Both have $100M of Capital Employed and they reinvest all their profits back into the business.

Company H (High Quality)

• 20% Return on Capital.

• It looks “expensive” trading at 15x Earnings.

• Price you pay: $300 Million.

Company L (Low Quality)

• 10% Return on Capital.

• It looks “cheap” trading at 10x Earnings.

• Price you pay: $100 Million.

Most value investors buy Company L because of the low P/E. But look at what happens over 5 years.

The Starting Line (Year 0)

• Company H: Earns $20M

• Company L: Earns $10M

The Finish Line (Year 5)

• Company H: Now earns $49.8M

• Company L: Now earns $16.1M

The Reality Check: Even though you paid a high price for Company H ($300M), because the earnings grew so fast, you are now effectively paying just 6x its current earnings.

Meanwhile, for Company L, you are paying 6.2x its earnings.

Even though Company H was 50% more expensive to start with, it became the cheaper stock in just 5 years because of how fast it compounded. If you focus only on a low starting P/E, you miss the magic.

The longer you hold, the more value H will create.

Scenario 2: The True Fair Fight

Now, let’s make the starting point identical. Imagine you have $100 Million to invest. You find two companies that both earn $10 Million a year (so both trade at a P/E of 10x).

Company H2

• Price you pay: $100M

• Year 0 Earnings: $10M

• ROCE: 20% (This company grows earnings at 20% per year).

Company L2

• Price you pay: $100M

• Year 0 Earnings: $10M

• ROCE: 10% (This company grows earnings at 10% per year).

Fast Forward 5 Years:

• Company H2: The earnings have compounded to $24.9M.

  • Based on your $100M investment, you are now earning a 25% yield (or a P/E of 4x).

• Company L2: The earnings have compounded to $16.1M.

  • Based on your $100M investment, you are earning a 16% yield (or a P/E of 6.2x).

The Result: Even though you paid the exact same price for the exact same earnings on Day 1, the “High Return” machine pulled ahead massively. The longer you hold, the wider this gap gets.

Final Thoughts

Just because a stock looks cheap doesn’t mean it’s a good investment.

There are many investors who bought Apple between 2012 and 2016 when it was trading like a value stock. But they sold as soon as it reached their “estimated value.”

• 2011-2017: Apple compounded at roughly 14%.

• 2017-2024: Apple compounded at 30%+.

Those who sold early missed the best years of the compounding machine. As Charlie Munger always said, “The first rule of compounding is to never interrupt it unnecessarily.”

Find the high-return businesses, pay a fair price, and let them do the work.

Most people hate reading filings. I get it. But without them, you simply can’t understand a business. Once a company passes my quick mental screener, I go into the filings, and this is how I read financials.

Business Section

This section tells you the basics you actually need:
What does this business do? What problem is it solving? Who are the customers, and why do they choose this company over someone else?

You also get the story, how the company started, what it focused on early, how the product evolved.

Most important of all, this is where you get a real look at the full product and service mix. I try to read this part like I’m the owner:
the customers, the product lines, the services, the history, the future opportunity — everything.

You also get a first look at the competitive landscape. Once you understand who they’re fighting with and how, you can start scanning those competitors too. That’s when the whole industry begins to make sense.

Management’s Discussion (MD&A)

This part is important because it lets you see the company through management’s eyes.

Here, they talk about the business, the industry, the risks, the opportunities, and what they’re trying to achieve. You can often tell a lot about management by how they describe the goals: are they trying to capture market share? Increase volumes? Improve margins? Cut costs? Focus on efficiency? All of that shows up here.

A useful trick is to compare the current MD&A to past ones. You start to see whether management stays consistent with its goals and whether they actually deliver on the things they said before.

They also walk through financial highlights — revenue, margins, cash flows, capital spending, and how they think about returning cash to shareholders through dividends or buybacks. It’s basically their explanation of “what happened” and “why it happened.”

This section matters a lot because it shows the reasons behind the financial performance. If margins went up, they should tell you why. If revenue slowed or accelerated, there should be an explanation. If one segment is growing faster than the rest, they will usually talk about what’s driving it.

Good management is transparent here. They don’t hide the tough parts, and they don’t pretend everything is perfect. You want people who give you the full picture, especially when it comes to risks and challenges ahead.

Risk Factors

You need a real understanding of the risks. Every industry has its weak points. Every company has a few things that can break the story. And if you don’t understand what can go wrong and why it would go wrong, you’re not really analysing anything.

Take a simple example: if an insurer gets 70–90% of its revenue from the ACA exchanges, one policy change can hit almost the entire business. Some companies rely so heavily on a single customer that if that customer leaves, years of progress can disappear overnight — at that point, you’re effectively analysing a completely different company than the one you thought you owned.

Others depend on one manufacturing country or a single critical supplier, so a geopolitical issue can shut everything down. In pharma, it’s common to see a business where one drug drives most of the revenue. And in fintech, you often find models that only work because of one bank partner, if that relationship ends, the company suddenly has no product.

Financials

After the business section and the MD&A, I move on to the financials. I start with the income statement, but I treat it as only the first step. It shows revenue and profit, but it doesn’t explain everything that’s happening underneath. So while reading it, I keep an eye on things like R&D spending, marketing, depreciation, and interest payments. These small details tell you how the company is trying to grow and how much pressure debt is putting on the bottom line.

But a big caveat here: the income statement is just one year. To really understand what’s going on, you have to look at a few years together. Revenue can fluctuate, margins can move around, and profits can look good one year and weak the next. Sometimes these swings are normal; sometimes they hint at deeper issues. That’s why I move next to the balance sheet.

The balance sheet shows the company’s actual financial position. You can see how debt has changed over time — is it rising, falling, or staying stable? You can see if cash is building up or disappearing. And you can see retained earnings: are they growing each year or barely moving? This part matters a lot because it shows whether the business is getting stronger or if it’s slowly stretching itself. Buffett focuses heavily on this because most risk shows up here first.

Then I read the cash flow statement, which tells you what actually happened in cash. Here you can see if earnings turn into real money or if the business is constantly tied up in working capital. And this is where more caveats show up. For example, if inventory keeps building up, that might mean demand is slowing or the company overestimated sales. If customers are taking longer to pay, that can tighten cash. If the business runs with negative working capital — like some retailers or payment companies — you can see how much that structure helps or hurts the business.

The cash flow statement also shows whether capex is being spent to maintain the business or to grow it, how much interest is being paid, and how much stock-based compensation is quietly entering the picture.

When you put all three statements together, the picture becomes clearer. The income statement shows performance. The balance sheet shows financial health. The cash flow statement shows whether the business generates dependable cash. Seeing how revenue, profits, debt, cash, and working capital move over time tells you far more than looking at a single year.

Read the Notes

They look boring, but this is where a lot of important detail sits – the kind you’ll never see on a summary slide or a stock screener.

In the notes, I want to understand how things actually work. For debt, that means: what are the terms, is it a bank loan or bonds, is there a revolving credit line, when does it mature, and how sensitive is it to interest rates? Fixed-rate debt and floating-rate debt behave very differently when rates move. You can also see whether they have covenants that might become a problem if earnings drop.

The notes also explain accounting choices: how they recognise revenue, how they treat leases, how they handle impairments. You often find details on customer and supplier concentration there too — for example, whether one customer accounts for 20–30% of revenue, or whether the company relies heavily on a single supplier or country.

There can also be sections on legal issues, guarantees, off-balance sheet items, and segment information. None of this looks exciting, but it all helps you see what’s really behind the headline numbers. Read the notes and the business becomes much clearer.

Proxy, Ownership, and Incentives

At the end, I always check the proxy. It shows who actually owns the company and how management is paid. Insider ownership tells you whether they think like owners, and the compensation plan tells you what they’re really prioritising.

I look at what the incentives actually are. Are they being rewarded purely on short-term profit or EPS growth? If so, they might be tempted to do things that look good now but hurt later, for example, using debt to buy back stock at high prices just to increase per-share profit. Or cutting R&D and long-term investment to reduce expenses.

If incentives are tied to long-term value, things like per-share performance over several years, returns on capital, and shareholder returns over time, that usually points to a different mindset. I also pay attention to how much stock management owns, how long their equity awards vest for, and whether they think like owners or just employees.

Once you understand how management gets rewarded, you have a much better idea of how they are likely to behave with your capital.

In Short

Reading filings isn’t easy. They’re long, they’re technical, and half the information in there isn’t even useful. But when you go through them in a structured way, they start to tell you the full story of the business, how it makes money, where its strengths are, where the real growth opportunities might be, and what the main risks look like. You also see how management thinks about the financials, how they talk about the future, and what their incentives and ownership actually are. And the notes give you details you’d never find anywhere else.

There’s no simple shortcut for any of this. But with this approach, the whole thing becomes a lot easier, and you end up with a much clearer understanding of the business you’re studying.

This is just how I read filings and understand businesses. It’s not advice, just my personal approach and the way I think about companies. Always do your own work.

Investing is all about the long term, step by step, building resilient wealth. Keeping a short-term horizon in the market is risky, not only for your capital but also for your ability to behave rationally when things don’t go as expected.

However, staying in the game for the long term is harder than it seems. It requires conviction, the ability to separate noise from signal, and a strong sense of delayed gratification — especially for those just starting out. Surviving through the years and reaching the point where compounding starts to work is never easy.

If you make it work in your favor and extend your time horizon beyond that of others, you can build tremendous, resilient wealth. For instance, if someone invested $10,000 in an index fund in 1942, it would be worth $51 million today. Similarly, a $10,000 investment in Berkshire Hathaway at its inception in 1965 would be worth approximately $425,551,637 today.

The Challenge of Long-Term Thinking

So, why is it so difficult to think long-term? Human brains evolved to prioritize immediate survival our ancestors faced immediate dangers and needs, such as finding food and avoiding predators, which required short-term thinking.

The future is inherently uncertain, and humans tend to avoid risks, preferring guaranteed immediate outcomes over potentially greater but uncertain future benefits.

Consumer culture encourages instant gratification.

Economic pressures, such as the need for short-term financial stability, can also limit the ability to plan for the long term.

The human brain has limited capacity.

Long-term planning requires abstract thinking, which is more demanding and less natural than dealing with immediate concerns.

I suggest reading or listening to Charlie Munger’s “24 Standard Causes of Human Misjudgment.” It’s a masterpiece for understanding these concepts.

Changing Mindset

Success in investing requires a shift in lifestyle and thinking. If you are pressured financially in the short term, you cannot make long-term decisions. Teaching the brain to think long-term requires significant learning and training.

This is why Peter Lynch and Warren Buffett emphasize the importance of temperament. You can analyze companies, get the right valuations, and find the right pricing, but without the right temperament, you can’t be successful.

Staying in the Game

How do you stay in the game long-term?

The simple answer is: avoid losing all your capital. Don’t assume you’re smart enough to escape that risk, many brilliant minds in business and investing history have fallen into the same trap.

For me, the most important decision is to avoid deadly mistakes. Even when I make errors, I focus on keeping the downside limited.

Charlie Munger says that if you can’t stomach a 50% downturn, you shouldn’t be in this business. In his lifetime, Berkshire Hathaway has twice gone down by about 50%.

Staying rational is key

• Stop chasing the market for short-term gains. In the short term, the stock market is a voting machine, but in the long term, it is a weighing machine, as Benjamin Graham says.

• Avoid deadly mistakes that could cost you all your money. As Charlie Munger says, “All I want to know is where I’m going to die so I never go there.”

• Behave rationally. Stock market volatility is not a risk but an opportunity for the long-term thinker, volatility offers great opportunities.