29. What is Return On Equity - Warren Buffett's Favorite Number

Preston Pysh is the #1 selling Amazon author of two books on Warren Buffett. The books can be found at the following location:

In this lesson, we learned the importance of buying a company that has a strong return on equity. Since the market price of the stocks you buy is dependent on the dividends and the growth of the book value, we can quickly learn that a company that grows it's book value at a faster pace is more valuable.

When we assessed two different companies in the video, we created a situation where both companies had the exact same earnings. The difference between the companies was the size of their equity (or book value). When a company with a large amount of book value is compared to a company with less book value, the percent change in their growth will be much more difficult if earnings are similar.

When a company consistently has a strong Return on Equity, we know as investors that the management of the company is properly reinvesting the earnings of the business into assets that will continue to grow the capital earned. This is very important since most of the earnings produced by a company are retained and not paid as a dividend. When a disciplined investor purchases companies with a sustained high ROE, their investments compound at a much higher rate than other assets. The great thing with purchasing companies with high ROEs is that it helps alleviate capital gains tax if the security is held for a long period of time.

[loremipsum]

9 years later and it is still extremely helpful. Thank you Mr. Pysh 🙏

[Elaba_]

Keep these video's online forever. This is really important.

[godfatherofcinema]

Your tutorials are among many I've watched and I must say that yours stand out in how simply they are presented and their thoroughness. All I can say is GREAT JOB and keep up the fantastic work!

[dramese]

I'm nearly at the end of lesson 3, great! I have to rewatch all again, to internalise this treasure. Thank you for break things down to common people like me 🙏🏿🙏🏿🙏🏿

[cristynaive]

Your method in teaching is simple and clear which suits me as an amateaure in this field of finance. Thank you so much

[festuskiplagat]

Thank you Preston pysh... Can't thank you enough for making my life better

[aqwtfgv]

HI preston, I'm french and i want to say thank you for your tutorials!!! really, reallly good work. More instructive than other channels!

[barnsleyj]

Thank you for helping me with my investing knowledge, you have a real talent for explaining in plain English what is potentially a complicated subject.

[haygbertigian]

It's 2021 and your video is still awesome after 9 years of posting. <3

[jona]

Thank you. Super helpful and important. I will be coming back to this often. I wish I learned this when I was younger. I have a much better grasp of the subject now.

[mikehollowayuk]

Thank-you for all these videos Preston. Ps, no article link here? Thanks again! 😊

[Marley-iils]

Incredibly informative. Thank you. I wish I came across this 40 years ago.

[gauravsingh]

Thank You so much ...
Love from India 🇮🇳🇮🇳🇮🇳

[MicahtheG]

my brother, this is gold! thank you for sharing your knowledge! Very appreciated God Bless

[michelhansen]

Question: Why was it relevant to point out the similarities between bonds and shares at the beginning? Thank you for making these videos! <3

[WallStreetinWallStreetLLC]

Hi Preston, great videos and great work..in this video (29) you say looking for company with ROE up to 17% or 78%?

Thank you

[ahmedhussain]

You are very good in explaining concepts. thanks.

[gops]

This is the best one among cloud of articles

[leverageearnings]

Dude, I love You. This is a game changer.

[Tronading]

Hi Alex, I was just reading the article now and I think the answer to that question is just in the paragraph above, where Buffett analyses the return of stocks for around 20years before the article and it seems the stocks were returning around 12 year on year:
" ...but over the years, and in the aggregate, the return in book value tends to keep coming back to a level around 12%."