The stock market is basically full of dirt. The majority of companies listed are like the earth beneath our feet - grinding along just about sustaining the goods and services the economy needs in order not to flatline. But in that dirt there are diamonds, undiscovered or thrown away, hard to spot with the naked eye but which once polished can gleam so brightly that investors will pay a huge premium for them. Of course as so few investors seem to know the difference between pebbles and dirty diamonds as they come out of the ground the cons at the top of the mine can talk up any old bit of rock as the next big thing. Its amazing how time and again we are suckers for it… wouldn't it pay to learn to spot the difference?

Warren Buffett clearly did. He knew how to identify great companies with 'superior economics' before anyone else. His thinking hinged on the qualitative understanding of a company's durable competitive advantage' that I wrote about last week but also on the 'monster mathematics' of a great company's financials.

What you need to track down wealth building stocks

The finance industry has done such a good job of ensuring that share prices are divorced in investors minds from their underlying businesses that the most printed stock ratios on the web are always the Dividend Yield and the PE Ratio. These are great ratios, but useless for comparing companies on anything other than valuation grounds.

If you want to invest in companies that can deliver extraordinary long term investment returns what you need to understand is how profitable a company is, what the company does with that profit and how a simple GCSE maths trick can turn you into a m(b?)illionaire.

While this stuff is very basic we should remember the famous quote from the quotable one that "investing is simple, but not easy". It's worth repeating simple things to oneself constantly like mantras as unrestrained cleverness leads endlessly to stupidity.

The one key ratio you need to know to find great stocks

If a company issues shares it starts with some equity in the bank (cash) that it invests to hopefully make a profit. The profit that the company generates as a percentage of the equity invested is known as the return on equity (ROE).

I'll go…

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