Feeling overwhelmed by stock tips, crypto crazes, and charts that look like spaghetti? What if I told you a simple, timeless formula from an old newspaper clipping could be your key to calmer, smarter investing?
One money manager, Jim Barksdale, consistently beat the market not with complex algorithms, but with a simple question: “Is this company run like a smart business owner would run it?”
He didn’t hunt for hot trends. He looked for companies that quietly “create equity“, meaning they generate tons of cash and wisely plow it back into the business to create even more value. Think of it like a brilliant baker who uses her profits to buy a better oven, which then helps her bake more and better bread.
This strategy helped his firm earn an average of 21.5% per year when the market was only doing 13.3%. Here’s his four-step formula you can use today.
The Simple 4-Point Checklist for Finding “Equity Creators”
Before you invest in any company, ask yourself these four questions.
1. Is It a Profit Machine? 🤑 (High Return on Equity)
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The Question: For every dollar shareholders have invested in the company, how much profit does it generate each year? This is called Return on Equity (ROE).
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The Simple Goal: Look for companies with an ROE above 13%. A high ROE means management is incredibly effective at turning money into more money. It’s a sign of a high-quality business.
2. Does It Plant Seeds for Tomorrow? 🌱 (High Reinvestment Rate)
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The Question: Does the company take a hefty chunk of its profits and reinvest it in growth (like research, new equipment, or expansion)?
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The Simple Goal: Look for a reinvestment rate above 50%. A company that doesn’t reinvest is a company that’s standing still. You want to own businesses that are building the future, not just living in the past.
3. Is It Avoiding the Debt Trap? ⛓️ (Low Debt)
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The Question: Is the company drowning in debt? High debt is like an anchor that can sink a company during a storm (like a recession).
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The Simple Goal: Look for companies with low debt. Barksdale preferred companies with a debt-to-equity ratio well below the market average (his was 21% vs. the market’s 45%). Less debt means more stability and less risk for you.
4. Are You Getting a Good Deal? 🏷️ (Don’t Overpay)
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The Question: Is the stock priced reasonably? Even the best company in the world can be a bad investment if you pay too much for it.
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The Simple Goal: Look for companies with a Price-to-Earnings (P/E) ratio below the market average. This is the classic rule of buying bargains. You’re looking for filet mignon at ground beef prices.
The Takeaway: Think Like an Owner, Not a Gambler
Forget the noise. Investing doesn’t have to be a casino. By focusing on these four timeless principles: high profits, smart reinvestment, low debt, and a fair price, you stop gambling on hype and start investing in quality businesses. You begin to think like an owner, and that’s when your wealth truly begins to grow.
What’s one company you think might pass this 4-point test? Share your thoughts in the comments!
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