Key insights
- The author outlines a checklist for evaluating businesses before investment, emphasizing understanding the business model, consistent earnings growth, a real economic moat, effective capital allocation, downside risk assessment, and reasonable valuation. While not directly impacting the broad US market, widespread adoption of such principles could lead to more rational investment decisions and potentially reduce speculative bubbles.
Been refining this over the years. Not perfect but helps me avoid obvious mistakes.
-
Do I understand what the business actually does? If I can't explain it simply, I skip.
-
Has it compounded earnings or free cash flow consistently for 5+ years? One good year means nothing.
-
Is the moat real or imagined? Brand, switching costs, network effects, cost advantage - pick one that's actually defensible.
-
Is management allocated capital well historically? Check ROIC over 10 years, not just last year.
-
What's the downside if I'm wrong? Can the business survive a bad few years without going under?
-
Am I paying a reasonable price? I don't need the cheapest price, just not obviously expensive.
I've found that if a company fails even 2 of these, it's rarely worth digging further. What does your checklist look like?