Return on Invested Capital or ROIC is an instrument that can be used for measuring the historical performance of a business unit or of an entire company. The ROIC model is often used to assess the value creation capabilities of a firm or firms in an intuitive way. However great care should be taken. An unbalanced focus on the method ROIC may just as well be an indicator of poor management due what is a good return on invested capital harvesting behavior, ignoring growth possibilities, and long-term value destruction.
The harder you grip the bat, the more you can swing it through the ball, and the farther the ball will go. I swing big, with everything I’ve got. I hit big or I miss big. Building a portfolio that can deliver superior performance requires that you evaluate each investment using expected value analysis. We call it the Babe Ruth effect: even though Ruth struck out a lot, he was one of baseball’s greatest hitters. The Babe Ruth effect occurs in many categories of investing, but is especially pronounced in VC.
The more a VC understands this skew pattern, the better the VC. Bad VCs tend to think the dashed line is flat, i. In reality you get a power law distribution. The Babe Ruth effect is hard to internalize because people are generally predisposed to avoid losses. Behavioral economists have famously demonstrated that people feel a lot worse about losses of a given size than they feel good about gains of the same size. Losing money feels bad, even if it is part of an investment strategy that succeeds in aggregate.