Reference library

Explainers for the concepts value investors actually use.

This page holds the evergreen teaching pieces: valuation, balance sheets, capital allocation, cyclicality, and the mechanics that matter once an investor moves beyond slogans.

The search box and quick-jump index are at the top so visitors can find a concept immediately rather than scrolling through the entire archive.

Browse archive Open book summaries

How to use this page

Write once, then link back from the blog.

Turn recurring questions into evergreen reference pieces.
Keep the language simple enough for non-specialists to follow.
Use examples from real businesses instead of abstract definitions alone.

Valuation Foundational

Margin of Safety

Margin of safety is the distance between what a business is worth and the price paid. The wider the uncertainty around value, the more that gap matters.

A good business can still be a bad investment at the wrong price.
Higher leverage and weaker predictability require a larger discount.
The point is protection from analytical error, not just bargain hunting.

Cyclicals Earnings power

Normalized Earnings

Reported earnings can be misleading when a business is at a temporary peak or trough. Normalized earnings estimate what the company can earn across a full cycle instead.

Peak margins exaggerate value, trough margins understate it.
Use mid-cycle assumptions and ask what is structurally durable.
A strong balance sheet is what allows earnings to normalize at all.

Capital structure Valuation

Enterprise Value vs Market Cap

Market cap values the equity. Enterprise value adjusts for debt and cash so that two businesses with different financing can be compared on a cleaner operating basis.

Identical market caps can mask very different total valuations.
Debt and preferred claims change what a buyer is really paying for.
Use enterprise value when comparing operating businesses, not just equities.

Management Quality

Capital Allocation

Capital allocation is management's decision about what to do with the cash the business generates. It often determines whether a good business becomes a truly great compounding machine.

Buybacks only help when shares are actually undervalued.
Acquisitions should be judged by returns, not by narrative growth.
Owner-oriented management shows up most clearly when cash piles up.

Cash flow Operations

Working Capital and Cash Conversion

Profit can look healthy while cash flow deteriorates if inventory or receivables are absorbing more cash. Working capital is often where accounting earnings meet operating reality.

Inventory build can signal either optimism or hidden weakness.
Receivables tell you whether customers are paying on time.
Weak cash conversion often deserves more attention than weak margins.

Compounding Reinvestment

ROIC and Incremental Returns

Return on invested capital measures how efficiently capital becomes operating profit. Incremental returns reveal whether new capital is still being deployed productively.

Historical returns matter less if new projects earn much less.
The best compounders combine strong returns with a long runway.
High returns with no reinvestment opportunity is a different animal.