Return on assets (ROA) is net income as a percentage of a firm’s assets, and it measures how efficient a firm is at translating its assets into profits. Use 6 percent to 7 percent as a rough benchmark—if

over a long time span, the impact of investment returns trump the impact of speculative returns.8

Patents fall into the regulatory category as well because a patent holder is legally protected from direct competition for a set period of time. And as large pharmaceutical companies have demonstrated, patents can lead to years of extremely high profit margins.

determine why a firm has done such a great job of holding on to its profits and keeping the competition at arm’s length.

view this account with extreme skepticism because most companies tend to overpay for their targets, which means the value of goodwill that shows up on the balance sheet is very often far more than the asset is actually worth.

Being picky about valuation isn’t fun. It means letting many pitches go by and watching many stocks run—stocks that never met your strict valuation criteria. But when it’s done properly, disciplined valuation also greatly increases your batting average—the number of stocks you pick that do well versus the number that do poorly—and it also limits

The basic investment process is simple: Analyze the company and value the stock. If you avoid the mistake of confusing a great company with a great investment—and the two can be very different—you’ll already be ahead of many of your investing peers.

three levers that can boost ROE—net margins, asset turnover, and financial leverage.

This sounds obvious, but perhaps the most common mistake that investors make is failing to thoroughly investigate the stocks they purchase. Unless you know the business inside and out, you shouldn’t buy the stock.