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December 5, 2017

The movie and musical show Mary Poppins has two interesting investment issues I would like to give my take on. Compounding and investment quality.

There is a song in the movie about how financial assets grow through the magic of compounding. I believe that is something that investors should always be mindful and aware of. Note that in order for compounding to take place, there needs to be dividends or interest payments. Look for that and that they are paid out of profits, not from what was invested. In other words, there must be operating cash flow.

The play has dialogue about opportunities for George Banks’ employer which is an investment bank. He eventually chooses a simple factory project over an elaborate money making scheme. His reasoning was that it wasn’t clear what product was being sold in the scheme or how it would make its money other than from its investors, while the simple project would sell its products at a modest profit and grow its sales and profits in a methodical manner.

What happened a little later is that his bank’s management felt they lost a great opportunity because every other bank seemed to be benefitting greatly from the scheme while he invested in a mundane business so they suspend George. It then turns out that the scheme was a big loser for all of its investors and George’s employer was protected from that while the factory loan became very successful, so he is reinstated along with a promotion. The issue here is that it is important to understand the underlying products and business model that will generate profits; and without that understanding it is better to forgo it.

Now, what does this mean to you? Well, do you make your investments in companies where you understand their business model and how they can generate profits, or do you follow the herd grasping at possible increased market values?

I have a simple rule: If you do not understand how money can be made, then don’t invest in it. However, if you do understand how money can be made, then that should only be the first step in finding out more, don’t use that as the only criteria.

Understanding what you invest in is a supercalifragilisticexpialidocious moment.

One Comment leave one →
  1. 6hawthorne permalink
    December 5, 2017 4:53 pm

    Hi Ed Nice article Bob

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