Jose Najarro

And that's why I call it Wall Street's blind spots.

And it's all centered around one major theme that has kind of sub themes.

But the major theme and the major blind spot that I try to call out and that I think most people ignore is that you can't simply analyze a business in terms of what cash flows you think they're going to produce.

You have to analyze the business of, okay, what they're going to produce, but then what they're going to do with those cash flows.

What are their capital allocation capabilities and philosophy?

Because if you have a business that is great and it's producing good cash flows, but then they use that to repurchase stock at a high valuation, then your reinvestment returns of those cash flows are going to be low.

And so then you're not necessarily going to be compounding.

Similarly, if the company goes and does a huge acquisition with those cash flows, potentially even leverage enough for those acquisitions and paying a huge premium for that acquisition, then your return on reinvested capital is going to be potentially very low.

And then the way I kind of like to think about it is good companies that can reinvest their returns at high returns on invested capital.

Those are the companies that you should be willing to pay a premium versus traditional kind of valuation metrics like price to news ratios and things of that nature.

Because if you have a company that is reinvesting at north of 20% returns their cash flows, that's what you want, because that's really hard to obtain anywhere else.

So if you think about the example I like to use, which is really simple to understand is think about Apple 20 years ago, right?

So they were launching at that stage roughly the iPod, right?

And so they got a lot of earnings from that iPod.

It was a success.

But then they didn't say, okay, I'm going to go and grab those earnings and pay them back as dividends.

What I'm going to do is I'm going to reinvest them into R&D and different things to create the iPhone.

Perfect.

That was a huge success.

The return of reinvested capitals of those reinvested capitals was really high, more than 20%, significantly more.