Stocks are ownership interests in companies.

Being a stockholder is being a partial owner of a company.

Over the long term, a company's business performance and its stock price will converge.

The market rewards companies that earn high returns on capital over a long period.

Companies that earn low returns may get an occasional bounce in the short term, but their long-term performance will be just as miserable as their returns on capital.

The wealth a company creates - as measured by returns on capital - will find its way to shareholders over the long term in the form of dividends or stock appreciation.



My favourite financial ratios: ROA, ROE and ROIC.

Why you shouldn't invest in companies whose business you don't understand?

You shouldn't invest in companies whose business you don't understand because you won't be able to judge their future potential and vulnerabilities.

While intimacy with a company's business is not essential to making a decision to buy the stock, later "hold" or "sell" decisions may be clearer if you understand its competitive position in the marketplace, the value of its products or services, and the character of its industry's problems.  These are common-sense issues for which a simple understanding of the business will suffice.