How to Learn Investing: The Cookie Business Lesson
If you’re here, it’s because you want to learn how to invest your money (or maybe someone just sent you this post by chance). Either way, I ask two things: read carefully and grab a pen and paper to follow the numbers.
To make it practical, I’m not going to explain it to you. I’m going to explain it to Sofía — the daughter of my friend Fran.
1. Why Most People Don’t Learn About Money
Many people go through life without ever learning how to invest, manage their money, or even manage themselves. It’s not always their fault — they didn’t grow up in an environment where financial skills were taught.
So today, I want to teach Sofía how money really works.
2. The Cookie Business
Sofía has a friend named Laura. On weekends, Laura bakes cookies. During the week, she sells them at school.
Price per pack: €7.5 (5 cookies → €1.5 each)
Cost per cookie: ~€0.50
Direct cost per pack: €2.5
Gross margin per pack: €5 (7.5 – 2.5)
Sofía thinks €5 is pure profit. But here’s the first lesson: it’s not. That’s gross margin — revenue minus direct costs. Real businesses also have overhead: salaries, electricity, rent, etc. Only after subtracting those do you get something closer to profit, or EBITDA.
For simplicity, let’s ignore overhead for now.
3. Annual Revenue and Profit
“How many packs does Laura sell a day?” I asked Sofía.
“Some days 10, some days only 1 or 2… maybe 5 on average.”
Let’s calculate:
5 packs/day × 20 school days/month × 10 months/year = 1,000 packs per year
1,000 packs × €7.5 = €7,500 annual revenue
€7,500 – €2,500 costs = €5,000 gross margin per year
Over 4 school years, Laura would make €20,000.
Sofía was amazed: “That’s a lot of money, even if she spends weekends baking!”
4. Valuing a Business
Now comes the big question: What if Laura offered Sofía half of her business?
At first glance:
Business expected profit over 4 years = €20,000
Half = €10,000
So would you pay €10,000 today for the right to €10,000 in 4 years?
Not so fast. Risks exist: Laura might stop baking, quality might fall, or kids might stop buying. The real price should be somewhere between €1 and €10,000, depending on how you judge the risks and growth potential.
This is the essence of investing: figuring out what something is truly worth.
5. Entering the Stock Market
Years pass. Laura is now 23 and runs 10 cookie shops. She wants €1M in financing and values her business at €5M. By going public, total value becomes €6M.
She issues 10,000 new shares at €100 each (to raise €1M).
With her 50,000 existing shares, the total is 60,000 shares.
This year:
Profit = €1.2M
Earnings per share (EPS) = 1,200,000 ÷ 60,000 = €20 per share
So if you buy a share at €100, you earn €20 = 20% return in year one.
But what if the share costs €200?
€20 ÷ €200 = 10% return.
At €400?
€20 ÷ €400 = 5% return.
6. Understanding the P/E Ratio
This brings us to the Price-to-Earnings Ratio (P/E):
€100 ÷ €20 = 5 (cheap)
€200 ÷ €20 = 10 (reasonable)
€400 ÷ €20 = 20 (expensive)
High P/E (>20): Investors are paying for big future growth, or it’s overvalued.
Low P/E (0–10): Growth is slowing, or it’s undervalued.
Medium (10–20): Balanced expectation.
“So with this we know if a stock is cheap or expensive?” asked Sofía.
“Yes, but that’s only necessary, not sufficient,” I replied. Cheap doesn’t always mean good.
7. Return on Invested Capital (ROIC)
“Do you know how much it costs Laura to open a new store?” I asked.
“About €400,000.”
“And how much does she make in the first year?”
“About €200,000.”
That’s 50% return. In 2 years, the investment pays for itself.
But what if she only made €10,000? That’s just 2.5% return.
The difference is huge. This is ROIC — a measure of how effectively a company uses capital to generate profits.
8. The Golden Rule of Investing
Now imagine this:
You buy shares of companies with low P/E (cheap)
AND those companies have high ROIC (great businesses)
What happens? You own cheap pieces of excellent businesses.
“Would you want to be Laura’s partner under those conditions?” I asked Sofía.
“Of course!” she said.
Exactly. That’s the foundation of smart investing:
👉 Invest in good companies. At good prices.
Simple. But powerful.
Final Thoughts
That’s it, dear reader. Today we covered two pillars of investing:
Valuation (P/E ratio): Is the business cheap or expensive relative to earnings?
Quality (ROIC): How effectively does the business generate returns on invested capital?
Combine both — buy good companies when they’re cheap — and you’ve got the essence of investing.
If you found this lesson useful, share it. It might be the best gift you give someone today.