There is a dangerous obsession in the stock market today.
Turn on any financial news channel, and you will hear endless chatter about "growth." Which tech stock doubled its sales? Which startup is disrupting an industry? It is easy to get seduced by the speed of expansion.
But here is the hard truth that separates the gamblers from the wealthy: Growth is not free.
If a company spends $2 to generate $1 of new revenue, it is growing. It is also going out of business.
As we build our "Relax to Rich" portfolio, we need to look past the flashy revenue numbers and focus on the engine under the hood. We are looking for ROIC.
The Metric That Matters: ROIC
ROIC stands for Return on Invested Capital.
Forget the complex accounting for a moment. Think of ROIC as the interest rate a company earns on its own money.
If a business takes $1,000 of capital (from shareholders or debt) and generates $200 in profit from it, that is a 20% ROIC. It measures efficiency. It answers the question: Is this management team actually good at allocating money?
Here is why this is the most underappreciated variable in investing:
1. Growth Fades, but Efficiency Endures
High growth rates are like gravity; eventually, they come down. As companies get larger or competitors enter the market, growth naturally slows to match the economy (usually around 2%).
However, a high ROIC is much more durable. Companies that maintain high returns on capital usually have a "moat" or a competitive advantage that is hard to copy. This is why a mature giant like Apple or Costco can be a better investment than a flashy new IPO that is burning cash.
2. The Compounding Effect
This is where the magic happens. A company with high ROIC generates excess cash. It does not need to borrow money or sell more shares to grow. Instead, it takes its profits and reinvests them back into the business at that same high rate of return.
Consider two hypothetical companies over a 10 year period:
Company A (The Sprinter): Grows revenue fast, but has a low ROIC of 10%.
Company B (The Compounder): Grows steadily, but boasts a high ROIC of 30%.
Over a decade, Company B will leave Company A in the dust. Why? Because Company B is compounding its own cash more efficiently. It creates a snowball effect of value that low-ROIC businesses simply cannot catch, no matter how fast they increase their sales top line.
The "Relax to Rich" Approach
Wall Street often ignores this. They bid up the price of low-quality growth stocks, leaving the high-quality compounders trading at reasonable valuations.
Our strategy is simple but requires patience. We look for the sweet spot: businesses that have healthy growth combined with a high, sustainable ROIC. When you find a company that can reinvest its own profits at high rates for years, you do not need to trade in and out. You just sit back and let the math work for you.
Do you prioritize growth or efficiency in your own portfolio? Hit reply and let me know.
To your wealth,
William
Editor, Relax to Rich Club