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Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better.

Today's Issue Read Time: <2 minutes

• Lesson: The importance of valuation
• Timeless Content: Morgan Housel and Howard Marks talk debt
• Thread: Understanding margin of safety
• Resource: A free summary of Warren Buffett's investing lessons
• And more!

Friends,

We love investing in wide-moat businesses. That means they have network effects or switching costs or some other force keeping customers locked in while holding the competition at bay.

Normally, that means avoiding restaurant stocks altogether. But -- learning lessons from the likes of Domino's & Chipotle over the past two decades -- we know that if a company nurtures its brand and has excellent operations, there can be lots of money to be made.

This is why Stoffel added shares of Cava Group to his portfolio in May. For those unfamiliar, think of it as the "Chipotle of Mediterranean food." Since then, it's been nothing but good news: same-store sales were up a whopping 14%, it's rapidly expanding its locations, and the stock is up over 50%.

And yet, Stoffel refuses to add any shares.

Why? Valuation.

Right now, the company's market cap clocks in at $14 billion. If it achieves a market-matching 10% return per year, it will have a $25 billion market cap by 2030.

But what else would need to happen between now and then?

Assuming Cava trades for 30 times free cash flow (fairly aggressive) and achieves a market-leading 12% free cash flow margin (fairly aggressive), then by 2030, Cava would need to:

• Generate $830 million in free cash flow.
• Achieve sales of $6.9 billion.

If we run these numbers through a reverse DCF, we find that Cava would have to increase revenue by 38% per year for the next 6+ years to get there.

Is that possible? Certainly.
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Is that probable? No.

Thus, Stoffel is perfectly happy keeping it as a 2% position in his portfolio. He knows it's a business he wants to continue following, but he also knows the market will likely offer more attractive buying opportunities in the future.

The right mixture of exposure and patience is every investor's best friend -- and it's the recipe for long-term investing success.

Wishing you investing success,

Brian Feroldi, Brian Stoffel, & Brian Withers Long Term Mindset

P.S. Want to learn how to do a reverse DCF calculation of your own? We teach the step-by-step process (Lesson 5.1) in Valuation Explained Simply.

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One piece of timeless content

We love hearing Morgan Housel talk-- but add Howard Marks to the mix, and you've got a podcast for the ages! Check out their joint podcast as these two geniuses discuss debt, the relationship between leverage and longevity, and the nature of risk.

One thread

10-K Diver @10kdiver 1/ Get a cup of coffee. This is a thread that @ruima and I wrote jointly. In this thread, we'll help you estimate how much "margin of safety" a company has when it's loaded with debt. Understanding this will help you avoid Evergrande-type fiascos in your own portfolio. 3:23 PM • Sep 25, 2021 396 Retweets 1798 Likes Read 47 replies

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One resource

Every investor should study Warren Buffett. However, he's put out a lot of content over the past 50+ years. Consuming it all would take years. That's why this free PDF is such a great resource. In just 64 pages, Compounding Quality summarizes Buffett's most important investing lessons.

If you've consumed some great investing content recently, reply to this email with the link, and we might include it in a future newsletter.

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