77 - What is the source of your investment return?

Mental Models discussed in this podcast:

• Mean Reversion
• Inertia
• Reinvestment Rate
• Return on Incremental Invested Capital (ROIIC)

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode77

Source of Investment Return

Investments, as opposed to speculations or gambling, is a method of seeking returns while protecting principal. Therefore, it is critical to understand the source of your investment returns. You are not entitled to investment returns. You don't have a God-given right to earn an excess return on your investments. 

So what is the source of your returns?

Hint: It will vary by the type of investor you are. 

Examples: 

• Mean Reversion
  • Net-Net Investors
  • Value Investors
• Inertia
  • Momentum Investors
• Future Business Performance
  • Quality Investors
    • Low Reinvestment Rate
    • High Return on Incremental invested capital
  • Growth Investors
    • High Reinvestment Rate (often 100%)
    • Low-Medium return on incremental invested capital
    • No dividends
  • Dividend Growth Investors
    • Low-Medium Reinvestment Rate
    • Stable return on incremental invested capital