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Fundoo Professor: The Eventual Consequences of Risk Seeking


dcollon
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Good points.  I wish he would have discussed operating leverage, in many cases it can be much worse than financial leverage.  But operational leverage isn't on the balance sheet so a lot of investors miss it.

 

Some of the best investments are companies that have high operational leverage and are at the bottom of the trough before revenue ticks above the roll-over threshold.  Suddenly earnings explode out of nowhere.  Likewise the worst investments are ones with high operational leverage with falling revenue.  Investors believe the decline path will be steady and smooth when the reality is it's steady then falls off a cliff.

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