87 - Cost of Growth Valuation and Asset / Earnings Equivalence

References: This episode was inspired by a Twitter thread where I responded to a poll on how to value companies. That thread is available at the following link: https://twitter.com/TreyHenninger/status/1288475399861817352 Mental Models discussed in this podcast: Cost of Growth Valuation Gordon Growth Model Asset / Earnings Equivalence Retained Earnings Return on Invested Capital Earnings Yield Dividend Yield Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Follow me on Twitter and YouTube Twitter Handle: @TreyHenninger YouTube Channel: DIY Investing Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline The full show notes for this episode are available at https://www.diyinvesting.org/Episode87 Summary: Growth is not free for most companies. It costs something. The cost of growth valuation model takes into account return on invested capital when valuing stocks. Most companies have to retain earnings in order to grow. Assets are only as valuable as the earnings they create. You can't take credit for both book value (assets) and earnings power in the same valuation on a stock. It's a problem of double counting that leads to overvaluation.