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With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers prove that Costco (COST) is a genuine EVA Monster and the king of physical retail, so it is worthy of your close attention. It is truly remarkable how this company has managed to carve out an undisputed wide moat in an extremely competitive landscape.

Throughout the years, I kept emphasizing in the FALCON Method Newsletter that the current market price of a stock might have nothing to do with the value of the underlying business. While this statement is the cornerstone of value investing, it may sound disturbing for those familiar with the names and theories of reputable economists contradicting me. (Burton Malkiel, Eugene Fama, and Paul Samuelson come to mind, the latter two of them being Nobel Laureates.) There’s no way to invest successfully without seeing clearly who is right—the academics or the real investors—so it is vitally important that you understand the points I outline below.

To lay the groundwork, let me quote Warren Buffett’s letter from 1988 first. “[The efficient market theory] doctrine became highly fashionable – indeed, almost holy scripture in academic circles during the 1970s. Essentially, it said that analyzing stocks was useless because all public information about them was appropriately reflected in their prices. In other words, the market always knew everything.” According to the EMT, price equals value, and that’s it.

Now let me show you two real-life examples that may make you think twice about what this theory says. On January 4, 2000, Yahoo! stock was selling for $500 per share. The business had a market cap of $505 billion at the time. The earnings were $47 million, and the PE ratio was 11,478! As value investor Phil Town writes, “Assuming the earnings were growing at some astronomical rate, say 36 percent a year, how long before we’d get our money back? Sixteen years. Never mind that no company ever grew that fast for that long starting that big. […] Oh, and if it did somehow grow that fast, the earnings would be over $300 billion. Exxon just had record earnings in 2008 of $45 billion. Earnings of all of the U.S. stocks traded regularly that year added up to about $300 billion, so Yahoo! all by itself would have to become pretty much the whole stock market to make sense out of that price. Yes, Professor, stocks do get mispriced from time to time. Just a bit.”

Scott McNeely was the CEO of Sun Microsystems, one of the darlings of the tech bubble. At its peak, his stock hit a valuation of ten times revenues. A couple of years afterward, he had this to say about that time: “At ten times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for ten straight years in dividends. […] That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next ten years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?”

As a side note, you don’t have to look further than the tech sector to find companies trading at 10 to 15 times revenues today. I don’t know if they will follow the same path Sun did, but it certainly looks like there are tons of investors who will, at some point in the future, be asking themselves once again, “what were you thinking?”

I hope these two examples managed to highlight that the stock price and the value of the underlying business can diverge from time to time. The hypothesis of a totally efficient stock market simply doesn’t stand. After all, if you spot one single black swan, you have to abolish your hypothesis that all swans are white. And these examples show glaring market inefficiencies! On the other hand, the efficient market theory (EMT) is not 100% wrong either. The truth is somewhere in between, as Warren Buffett writes:

“Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day.”

In fact, Professor Malkiel, a pioneer of EMT, came to similar conclusions when he was asked after the 2000 to 2003 stock market debacle how some very good businesses could see their stock prices drop by 90 percent if the market was truly efficient. Very interestingly, he came as close to junking his theory as an academician ever could when saying, “In the long term, I think that [markets] are generally efficient. Though I’ll admit, they do go crazy from time to time.” So, Professor, the stock market is efficient, but sometimes it’s not. Sounds funny, but this is exactly what Buffett and other value investors have been saying for the past 50 years. And that “sometimes it’s not” part is what creates windows of opportunity for thoughtful investors. (By the way, did you know that Nobel-winning proponent of EMT, Paul Samuelson himself, invested in Berkshire Hathaway stock?)

Honestly, which camp looks stronger at this point: academics or real investors? For my part, I’d let economists keep their Nobel prizes while I’m becoming a rich statistical anomaly according to their models. That’s fun, believe me! After all, if you accept that the market price of stocks and the values of underlying businesses can diverge from time to time, all you need is the patience of a hunter to do nothing when companies are overpriced and to strike aggressively and buy when companies are priced far below their value. Did you know that a giant crocodile can go without eating for 12 months, waiting for the right opportunity to pounce on its prey? When learning this at Dubai Mall’s Aquarium, I already thought this was the exact kind of virtue true investors need to possess. We only strike when something appetizing comes along; in the meantime, we wait.

For value investors, cash size is usually a result of not being able to find anything to buy, and that’s the right approach. Rather than going to cash as a strategy and trying to time the market, it comes naturally for value investors as we do not like to overpay.

One thing to keep in mind, though, is that your standard reaction to a steep decline in the price of your stocks involves typical efficient market theory thinking. “Why is the price going down? There must be a serious problem that I don’t understand. Time to cut my losses and run away.” Whenever such garbage crosses your mind, please remind yourself that the market price of a stock can and does deviate from the underlying value time and again. The hypothesis of a totally efficient stock market has been proven dead wrong, and even one of its Noble winning proponents was investing with Warren Buffett.

In summary, value investors have every reason to be grateful for how Mr. Market operates. Most of the time, this bipolar fellow is taking his meds, so on most days, he’s pretty lucid and rational about the prices he buys and sells at. That means most of the time, the price of a business is pretty close to its value. On some days, however, he gets overwhelmed by his mood swings and gives us opportunities to pounce on. If you only remember one sentence from this writing, make it this one: If markets weren’t short-term inefficient, we would make no money, and if markets were not efficient in the longer term, we would make no money. The long-term efficiency part of the equation is needed so that valuation multiples can revert to their mean, giving us a nice capital appreciation in addition to the dividends collected along the way. Now you know why the market is perfect just the way it is.

Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!

Or read more like this in the Beyond Dividends book.

With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers show that Ferrari N.V. (RACE), the king of supercar manufacturers, exhibits EVA Monster characteristics and is thus worthy of your attention. Make no mistake; this is not a lousy car maker but a true luxury company! The prancing horse stands for much more than just a vehicle: it’s a symbol of prestige and elite craftsmanship.

Confessions first: Have you ever decided on a stock purchase (or any other investment) based on a write-up, blog post, or third-party analysis?

I’m guilty as charged, so don’t feel bad about this.

It’s a widely held fallacy that following what renowned investors (like Buffett) or well-paid Wall Street analysts do and say is more than enough for investment success.

Sorry to spoil the “Yes, Virginia, there is a Santa Claus” moment, but let me be the bearer of bad news. That’s not how outstanding investors work, and they have their reasons!

Don’t get me wrong; while monitoring the 13F filings of “superinvestors” may be useful, mindless coat-tailing won’t get you anywhere. As the saying goes, “You can borrow someone’s ideas but not their conviction.”

Borrowing an idea is seldom enough to take you to the finish line. You will need conviction about the stocks you invest in; otherwise, you won’t be able to hold them through thick and thin.

Other investors’ ideas should only act as inputs to be fed into your independent investment process. Yes, you do need a process you trust! If it’s evidence-based, like the FALCON Method, even better.

“If you can’t describe what you are doing as a process, you don’t know what you’re doing.” (W. Edwards Deming)

Cracking open The Wall Street Journal and buying the first stock mentioned is not a sound process, yet many speculators are operating at such a level (for their brief spell in the markets). For those in it for the long run, like me, no 2-second solution will cut it.

For my part, I had a well-established dividend growth investment process that made me financially free by 33. Subsequently, I managed to upgrade my stock-picking method to a whole new level, and it was a heck of a journey! You can follow my evolution in the Beyond Dividends book. (Where else can you get decades of investment experience for the price of a book?)

I’m a little embarrassed to admit, but at 41, nearly all my life was about making money. The only benefit I can highlight as a result (besides the obvious financial part) is that sharing all my discoveries can help others like you to switch to the fast lane and spare years of experimenting and agony.

Let Beyond Dividends make you think, question your long-held beliefs, and help you discover what investing style and strategy may fit your personality. After all, it’s your conviction that gets you through the night, so that’s the single most important factor of investment success.

In closing, let me share something deeply personal with you. My first book has sold more than 12K copies (and it’s not even translated into English). Over the years, the feedback I received often brought tears to my eyes, while the royalties I made could comfortably qualify as crumbs. Publishing a book is far from a great business. (Any author will tell you this, except for the luckiest 1%.)

Whenever someone with decades of investment experience devotes their time and energy to such a project, I’m always among the first buyers of their books, knowing I’ll vastly underpay for the gift they give the world by sharing all their ideas and experience. This attitude contributed greatly to my achievements, and if it resonates with you, feel free to follow suit.

By taking action now and reading Beyond Dividends, you empower yourself to take control of your financial life. Stop being the chess piece; become the player… and a master at that! Beyond Dividends is your next right move; order it here and now!

Bad news first: your brain is not hardwired to make you a successful investor.

Throughout evolution, survival was our number-one aim. Long books on cognitive biases are filled with how ill-equipped we are when it comes to navigating financial decisions.

To today’s point: we all are heuristic thinkers, meaning we use mental shortcuts to simplify problems and avoid cognitive overload. Like, “That stock is cheap; it’s trading at a 7 P/E.”

Sounds familiar?

For the record, before we move on: No stock is cheap because it trades at a low multiple, and no stock is expensive because of its high P/E. They both may be worthy of the valuation Mr. Market assigns to them. More on this in my Beyond Dividends book.

How hard do you think it is to access the most popular indicators and multiples like the P/E ratio? Indeed, all are just a mouse click away, completely free. So why isn’t everyone super successful in the stock market?

Because heuristics may have kept our ancestors alive on the savannah, but they don’t work in investing! There must be more to investment success than a handful of widely used (and terribly flawed) metrics that are easy to access, even for a fifth-grader.

By the way, what’s easy will always become overly popular and will thus stop working. As William Bernstein wrote in his book Skating Where the Puck Was, “the first people to invest in an asset class with high expected returns and low correlations enjoy sirloin, while the Johnny-come-latelys get hamburger.” Whenever an asset seemed to offer portfolio theory’s version of the Immaculate Conception: high returns combined with low correlations with other standard portfolio components, it always got discovered, became easier to buy and own, and thus its initial advantage disappeared.

What’s easy and profitable will never last. That’s what financial history teaches us.

Now that you know what doesn’t work, let’s see what does! A gentle warning, which you may expect after the intro: the solution is not of the 2-second click-for-riches kind.

Reading and learning as much as possible about the companies trading on the stock exchange is the basis of everything we do at the FALCON Method. (See the fifth step of our process in this post.) We aim to understand whether a firm has a sustainable competitive advantage that may enable it to earn spectacular returns for its shareholders. Identifying the moat characteristics and understanding the moat’s primary and secondary drivers is absolutely essential to make sound long-term investment decisions. And yes, it takes time and effort—lots of it.

Once we have a picture of a business’s competitive position, prospects, and the most important drivers to watch, we are ready to put together its financial model based on distortion-free metrics (Economic Value Added, aka EVA). This modeling, scenario building, and premortem-like identification of the probability tree’s hidden branches take us to our well-founded estimate of the annualized total return potential the firm’s shares may offer investors at the current price.

Yes, our process involves several moving parts. Nevertheless, by getting to this point, we have discovered and understood pretty well what factors and value drivers are crucial for the company we analyze, and this knowledge sets us apart from the crowd.

If this sounds shockingly complicated, let me assure you that I didn’t start out at this level of knowledge and understanding. I had to learn everything on my own, sometimes the hard and expensive way.

Luckily, you can follow in my footsteps, sparing a lot of time as my Beyond Dividends book reveals my journey in detail, with all the key takeaways that can make you a better investor. I’m willing to wager you’ll never again decide on a stock based on its P/E, and that’s just the beginning.

Seriously, decades of learning and experience are condensed in this easy-to-read, entertaining, albeit thought-provoking book, so grabbing your electronic copy qualifies as a no-brainer investment in your education.

“Playing the stock market is easy.”

I kept bumping into such boastful statements until Barstool Sports founder, Dave Portnoy, took this foolishness to the highest possible level by saying he was a better investor than Warren Buffett and that day trading was “the easiest game.”

Look, no one is supposed to “play the market.” Stock investing is a profession, period.

The stats undeniably show that the overwhelming majority of traders and investors fail. Based on brokers’ available data, 87% of all retail traders lost money trading forex in 2022. Stock investors/traders fare somewhat better: 80% lose, 10% break even, and 10% make money consistently.

Being in the last 10% of consistent money-makers, I know what separates me from the rest of the pack. I already had more than 10,000 hours of investment-related reading and thinking under my belt by the time I turned 35. Not to mention the firsthand experience of costly and painful lessons (along with success stories). As per Malcolm Gladwell’s principle, popularized in his Outliers: The Story of Success book, I easily qualified as a stock investing expert, although I’d never label myself as such. (A healthy dose of humbleness comes in handy if you are to survive and thrive in the markets.)

I share this because I seemingly had all the reasons to feel satisfied and retire as soon as I achieved financial freedom with my proven investment approach. And that’s what I did! Resting on my laurels and celebrating my achievement felt right… for about two weeks.

I knew all too well that entropy would kick in. If something’s not growing, it is slowly dying. If you’re not learning and getting better, only the painful downward slope remains. Fortunately, one of my friends convinced me to start teaching “this financial independence investing thing.” Being bored in my (way too early) retirement, jumping into this worthwhile project felt energizing.

I completed all of Columbia Business School’s Value Investing courses (the place is considered the cradle of value investing) and read hundreds of books… so why not pass on my knowledge for others to use and benefit from? After writing a best-seller on dividend investing and publishing top-selling online courses, the real milestone was launching the FALCON Method newsletter.

Looking back, I most certainly didn’t foresee how operating a newsletter service with 1,000+ subscribers (from 33 countries at last count) could impact my learning curve over the years. The incoming questions and feedback made me delve deeper, pushing me to explain complicated concepts in a digestible, easy-to-understand manner. Both my investing style and writing skills markedly evolved throughout this journey.

My mantra is, “There’s always something to learn.” I was reading the not-so-enjoyable-but-useful Best-Practice EVA book while finishing up my preparations for Ironman Barcelona (a long-distance triathlon race). Right there, before the event, I got in touch with the author’s team and asked tons of questions. Long story short, I managed to gain access to an institutional-level data service that helped remedy accounting distortions, thus paving the way for my further evolution.

The reason for sharing this is to emphasize that learning never stops; it is never supposed to stop. Warren Buffett’s business partner, Charlie Munger, summed it up perfectly:

“Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day.”

I know absolutely no successful people who do not read a lot. My story and evolution as an investor are shared in the Beyond Dividends book, which is a compilation of the FALCON Method newsletter’s writings.

You can learn how I transformed from a pure dividend investor into a more versatile stock picker who understands when real value resides in growth but can differentiate between harmful and value-creating growth. (Hint: financial statements are not too helpful in and of themselves.)

Beyond Dividends may open new horizons for even those who think they already know everything. (I fell into this trap before reaching a whole new level, remember?) I bet that Beyond Dividends will make you contemplate and maybe even question some of your long-held beliefs. That’s exactly what makes a book useful, and that’s why I keep devouring them long after passing the financial freedom milestone. How about you?

If you’re like me, reading your first investment book must have made you super excited.

“I can do this! It sounds totally reasonable. And getting rich is a nice byproduct.” Thoughts like these arose as I was eager to grab the next book.

Fast forward, and I’m sure you’ll agree that after reading the first 5-10 investment books, the messages start to become repetitive or controversial.

Either way, it only takes a few months for the typical person to convince themselves that they know enough to strike it rich in the stock market.

Too bad those books lie to you. They overpromise and underdeliver.

Most serious investors have read many of the investing classics, yet the data indicates they still don’t materially outperform. (At least they don’t even come close to the level of outperformance of people like Warren Buffett and Peter Lynch.) Have you ever thought about this?

The reasons may be twofold: (1) investing is a profession, so while reading is a good start and essential, it alone won’t make you successful, and (2) there’s no incentive for Buffett or any other professional to educate the masses on how to compete with them.

Let me add a third, thought-provoking point: the stock market keeps evolving (changing), as it is a complex adaptive system built on many investors’ personal views and transactions (and their behavioral biases). There’s always money to be made in the market, but winning strategies do not stay constant! You need to keep learning and adapting.

The biggest investors are the best examples of this! After all, Warren Buffett’s current investment approach has absolutely nothing to do with his initial strategy. The hardwired value investor Howard Marks has just recently made the leap to recognize the value residing in profitable growth. And last but not least, a telling example from Morgan Housel:

“The Intelligent Investor is one of the greatest investing books of all time. But I don’t know a single investor who has done well implementing Graham’s published formulas. In each revised edition, Graham discarded the formulas he presented in the previous edition and replaced them with new ones, declaring, in a sense, that ‘those do not work anymore, or they do not work as well as they used to; these are the formulas that seem to work better now.’ Graham died in 1976. If the formulas he advocated were discarded and updated five times between 1934 and 1972, how relevant do you think they are in 2020? Or will be in 2050?”

On a positive note, while ancient formulas may not work today, and no strategy produces outstanding returns forever, there IS an attitude that has more than stood the test of time! That’s the love of reading, learning, and discovering.

For my part, I keep devouring 50-70 books per year, and half are still investment related (almost a decade after reaching financial freedom). It may be embarrassing to admit, but nearly all of what I read pertained to investments when I was starting out.

After hundreds of titles, I certainly know a thing or two about them being repetitive and controversial. That said, whenever an experienced investor releases a new book, I regard it as a gift, a wonderful gesture. After all, no such publication can be priced too high compared to the experience and lessons delivered.

I usually read 4–5 books per month, and although not all of them are investment-related, I often find striking parallels between the actual topic and the way I invest. The title “Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won” serves as an excellent example.

Following conventional wisdom leads to suboptimal choices most of the time, both in the field of sports and investing. David Romer, a prominent Berkeley economist, says that the play-calling of NFL teams shows “systematic and clear-cut” departures from the decisions that would maximize their chances of winning.

Based on data from more than 700 NFL games, Romer identified 1,068 fourth-down situations in which, statistically speaking, the right call would have been to go for it. The NFL teams punted 959 times. In other words, nearly 90 percent of the time, NFL coaches made the suboptimal choice. Of course, that suboptimal choice was the conventional one. After all, as a manager, it is harder to lose your job by making a typical decision than by doing something unusual, even if the latter had a higher expected value.

Scorecasting highlights several examples like the above. “We found that NHL teams pull their goalies too late (on average, with only 1:08 left in the game when down by one goal and with 1:30 left when down by two goals). By our calculations, pulling the goalie one minute or even two minutes earlier would increase the chances of tying the game from 11.6 percent to 17.6 percent. Over the course of a season, that would mean almost an extra win per year. Why do teams wait so long to pull the goalie? Coaches are so averse to the potential loss of an empty-net goal—and the ridicule and potential job loss that accompany it—that they wait until the last possible moment, which actually reduces their chances of winning.”

What does this have to do with investing? Well, the evidence cited above has just killed the notion of full rationality (had you ever signed up for the rational person hypothesis in the first place). If you lose the ordinary way—by doing what you are expected to do—everyone will gladly commiserate with you, and you can simply blame that loss on bad luck. Imagine, in contrast, what would happen if you dared to do something extraordinary that didn’t turn out so well. Lose in a “stupid way,” and you are left alone to draw conclusions and get back to the herd as soon as you are ready to follow the conventional wisdom again.

Of course, this is just hindsight bias. If you did the right thing but failed because of bad luck, you’re labeled stupid. If you did the wrong thing but succeeded because of good fortune, you’re hailed as a genius. In reality, it’s often the opposite, but the psychological burden of going against the crowd is enormous.

Are you familiar with the process-outcome matrix? Focus on the process you can control, and don’t let the short-term outcome divert you from the winning strategy! This message is so important to keep in mind that I have the matrix on my fridge door.

As long as you are buying the overhyped and overvalued darlings of the market, you are doing everything right from the herd’s point of view. Underlying probabilities say that your performance will not be that great, but hey, you’ll have a lot of people to commiserate with! What if you bought an out-of-favor stock instead? As investing is probabilistic and never deterministic—although the base rate may support you—there is absolutely no guarantee that your particular pick would perform well. If, for some reason, it turns out to be a subpar investment, you will get the rotten tomatoes for purchasing the stock of a company that was “so apparently a dud.”

Can you handle the pressure of going against the crowd and being wrong sometimes? This brings us to the next psychological issue of the not-so-rational person, the question of broad vs. narrow framing. Narrow framing means that every stock matters to you individually, and you want to win with all of them. Coupled with the standard loss aversion, this narrow framing leads to disastrous performance and a lot of misery. Closely following daily fluctuations is a losing proposition because the pain of frequent small losses exceeds the pleasure of equally frequent small gains.

In contrast, broad framing means that you want your stock portfolio as a whole to perform well, and you are not that focused on individual stock positions within that portfolio. This latter frame of mind can hugely increase the willingness to invest in stocks (the proven best asset class for wealth building). For my part, I would never take one single bet even with the odds in my favor, but I gladly take that same bet if I am allowed to do it many times so that probabilities can play out and my advantage can materialize. Call me risk-averse, but this is exactly what broad framing is about!

It is easier said than done, I know. Scorecasting highlights that professional golfers are also risk-averse and plagued by narrow framing. In golf, the idea is to maneuver the ball into the hole in as few strokes as possible on every hole, no matter what. Even Tiger Woods—so unflappable, so mentally impregnable—changes his behavior based on the situation and putts appreciably better for par than he does for a birdie, evaluating decisions in the short term rather than in the aggregate. He should optimize for the total number of strokes, yet he is deviating from that strategy. Analogize this to your retirement portfolio. You simply want the most favorable total at the end. It shouldn’t matter how you got there. The soundness of the underlying process is decisive. However, a single year’s or position’s performance is of minor importance in the grand scheme of things and should thus never be taken too seriously.

As we are aiming for above-average returns, the FALCON Method goes against the crowd most of the time. However, simply being contrarian—doing the opposite of what others are doing—would be just as foolish as following the herd; this is why we pick our spots carefully and employ an evidence-based investment method that is “selective contrarian” in style. Some subscribers emailed me their concerns that they had read negative articles and analyses about the companies in our FALCON Portfolio. As long as the factually proven underlying factors of our stock selection process are pointing toward a buy decision, you should be happy to bump into all those negative articles since they create and keep up the sentiment that diverts the stock’s price from its intrinsic value. By the time positive articles start to surface, your portfolio will be loaded with quality stuff purchased at bargain basement prices. E.g., I bought McDonald’s at $92.59 when positive opinions and analyst recommendations were nearly impossible to come by. The same with Microsoft at $41.05. I encourage you to take a look at the current prices of these two stocks and the positivity of the most recent articles and analyses on them. By the time the cheerleaders appear on stage, you should be done with your buying.

As an individual investor, you can have the enormous advantage of long-term focus. Unlike the NFL manager (not daring to go for it on fourth-down) or the wealth manager on Wall Street (sticking to the current darlings of the market), you will not be fired if you make unconventional evidence-based choices instead of the typical, often suboptimal ones.

Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!

With this series, we’d like to give you some perspective on the companies in our distinguished EVA Monster universe. This rare breed of quality-growth stocks is worthy of your attention, and getting to know these businesses may pay off handsomely down the road.

As a quick recap, EVA Monsters have three things in common:

• They earn high returns on the capital they employ.
• They have growth opportunities that allow them to reinvest most of their cash flows at high rates of return.
• They have a sustainable competitive advantage (that Warren Buffett calls “moat”), which prevents their competitors from taking away their extraordinary profitability.

These characteristics tend to result in a strong (double-digit) fundamental return potential, meaning that no valuation tailwind is necessary to get great investment results with EVA Monsters. (These case studies explain this pretty well.)

As Charlie Munger said:

“Over the long term, it’s hard for a stock to earn a much better return that the business which underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return – even if you originally buy it at a huge discount. Conversely, if a business earns 18 percent on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with one hell of a result.”

We also shared the math proof of why buying EVA Monster stocks at a fairish valuation makes perfect sense for long-term investors. (Look for the “math example” in this post to alleviate your doubts.)

To round off the short introduction, we (1) try to avoid overpaying for EVA Monsters, (2) closely monitor the fundamental performance and management’s capital allocation decisions throughout our holding period, and (3) hold our positions as long as the underlying investment thesis remains intact, ideally for decades, to let compounding do the heavy lifting.

Without further ado, numbers show that Novo Nordisk, the leading producer of diabetes-care products, exhibits EVA Monster characteristics and is thus worthy of your attention. The company’s shares are available directly on Nasdaq Copenhagen under the ISIN code DK0060534915. On American OTC markets, the ADR uses the ticker symbol NVO.

One of the companies in our FALCON Portfolio announced in 2019 that it would discontinue the practice of giving quarterly guidance. That was Illinois Tool Works, and here’s the brief comment that I added to the news:

“I welcome this decision as quarterly guidance breeds short-termism that is the enemy of long-term shareholder value creation.”

In fact, you could read headlines in 2018 that Warren Buffett and Jamie Dimon (the chairman of the Business Roundtable and the chairman and CEO of JPMorgan Chase) joined forces to convince CEOs to end quarterly profit forecasts. They even wrote about the issue in an opinion column in The Wall Street Journal.

What do you think is wrong with the practice of quarterly guidance? Put simply, it shifts management’s focus from thinking about the long term to thinking about the next quarter. Companies forecast sales and profit numbers to Wall Street analysts, who use the data to produce research and stock recommendations for investors.

Missing “the number” can often result in huge and sudden stock moves. Think about Apple’s missed revenue forecast for its fiscal first quarter period that ended on December 29, 2018. CEO Tim Cook kicked off 2019 with a letter to investors describing various difficulties the company experienced during the holiday quarter. The number that analysts immediately focused on was the revised revenue guidance, which was lowered to $84 billion from a range of $89 to $93 billion given during the last earnings call on November 1. The market’s reaction was swift and severe, with the stock price falling nearly 10 percent on January 3.

On the other hand, making a forecast and then hitting the target are seen as a way to manage expectations and eliminate volatility.

While those in favor of guidance say that it improves communications with Wall Street, reduces share price volatility, and boosts a stock’s value, McKinsey & Co. found in a 2006 study that quarterly guidance had no effect on valuation multiples and didn’t reduce share price volatility. Instead, McKinsey found that the practice of giving quarterly guidance took up valuable time from management and made them focus too much on the short term.

Think about this last point! Earnings calls typically take place a month into the subsequent quarter, so analysts expect the management to not only talk about the prior period but to give a sense of how things are going during the current quarter. This essentially means that a month into a quarter, analysts ask executives to look at the first third of the quarter and make projections for the next ~60 days. Because investors pay so much attention to guidance, managers spend significant time thinking about these estimates, and this is time that they are not using to run the actual business!

Executives often feel pressure to make quarterly forecasts because the market appears to demand this, but “it can often put a company in a position where management from the CEO down feels obligated to deliver earnings and therefore may do things that they wouldn’t otherwise have done,” Dimon said in an interview on CNBC. “Quarterly earnings: they’re a function of the weather, commodity prices, volumes, competitor pricing. And you don’t really control that as CEO,” he added. “Sometimes you’re just like the cork in the ocean, but do the right thing anyway, and you’re going to be fine in the long run.” (Here is where the primary mission of long-term shareholder value creation comes into direct conflict with meeting and beating the short-term guidance.)

“When companies get where they’re sort of living by ‘making the numbers,’ they do a lot of things that really are counter to the long-term interests of the business.” (Warren Buffett)

Besides diverting management’s focus from long-term shareholder value creation, the widespread practice of quarterly guidance has another negative effect. When managers provide guidance, this effectively causes Wall Street analysts to crowd around the mid-point of the guided range in their own models. As a result, the variation of estimates is narrower than would be the case if analysts had to do their work. This kind of spoon-feeding does have serious consequences. I came across a well-written piece of opinion on Marketwatch that was titled “Why you can’t trust Wall Street analysts.” Here’s the essence of that writing:

“Many companies provide earnings guidance, which analysts incorporate in their estimates. For companies, guidance is designed to ‘under-promise and over-deliver’ in order to set up earnings beats, which propel the stock higher. Analysts are much more likely to rate stocks buy than sell, and if the beats help push stock prices higher, their track records as stock pickers look better. The conclusion: If you invest in stocks, you had better take analysts’ ratings and earnings estimates with a grain of salt.”

As to the uselessness of analysts’ recommendations, in 2000, Merrill Lynch analysts said there were 940 stocks to buy and only 7 to sell. Salomon said you should buy 856 and only sell 4. First Boston analysts were more negative; they only found 791 stocks to buy and 9 to sell. And Morgan Stanley said there were 780 wonderful businesses to buy and none to sell. This, right before the market plunged as much as 90 percent in some of these recommended stocks. The week that Enron went bankrupt, nine of the fourteen investment banking companies covering the stock had a “buy” rating on it. None said to sell it.

Here’s another eye-opening statistic from S&P Global Market Intelligence: in a typical quarterly earnings season in the U.S., two-thirds of S&P 500 member companies tend to publish earnings per share that are higher than the consensus estimate among analysts. This is hard evidence of the “under-promise and over-deliver” practice in action as well as the spoon-fed nature of the analyst community who fail to come up with their own forecasts but use the company’s guidance instead. After all, if each analyst had good information to formulate reasonable estimates, the average beat rate would be expected to be somewhere around 50%.

Let me summarize your takeaway. Most managers feel pressure to provide quarterly guidance. Once analysts get these numbers, they are quick to incorporate them into their models, and they most certainly do not want to look stupid by publishing estimates that are meaningfully different from the corporate guidance. Now that the spoon-feeding is done, both the executives and analysts know that it makes tremendous sense to under-promise and beat the heavily influenced Wall Street consensus quarter after quarter since this seems to drive stock prices higher (in the short run).

If you were an analyst familiar with the rules of this game, you would be biased toward issuing buy recommendations since (the highly probable) quarterly earnings beats can propel stock prices higher, thus proving your stock-picking ability and your worth to your employer. As a long-term investor, however, you should realize that short-termism is written all over Wall Street and is part and parcel of the above-detailed quarterly earnings game. Knowing this, you may still read the analysts’ research reports on companies, entire market sectors, or industries to obtain valuable information, but you should never let their recommendations influence your independent decision-making. You either have your own process for stock selection (like that of the FALCON Method), or you can easily fall prey to the predators of Wall Street who are much more eager to push up trading volumes than to boost your investment returns. (In fact, the McKinsey study of 2006 found that the only significant effect of quarterly guidance was increased trading volumes.)

Don’t get me wrong, guidance and disclosure are two different things! While making quarterly forecasts makes no sense, publishing quarterly reports is useful. Truth be told, there is not much that could happen in any single three-month period that could alter the long-term investment thesis of a sensible investor, but it is still good to get some update on how the execution of the announced strategy is progressing. By the way, even a whole year is meaningless for us both in terms of our investment performance and the operating performance of the companies in our portfolio. As Buffett put it in 1966:

“Our investments are simply not aware that it takes 365-1/4 days for the earth to make it around the sun. Even worse, they are not aware that your celestial orientation (and that of the IRS) requires that I report to you upon the conclusion of each orbit (the Earth’s – not ours).”

Now you understand the rules of the game and hopefully accept that by playing the long-term game, we are rather the exception than the rule.

Want to learn more about our stock ranking methodology and evidence-based investment approach? Start with this blog post!