Investment process: 11 questions I ask

1. Does the business have long-term tailwinds or headwinds?

2. Does the business have ‘good economics,’ namely, the ability to re-invest in itself at satisfactory rates of return (at least 15%)?

3. How much will the business be able to grow? I am looking for businesses with a “long runway” before the business is likely to saturate the market or face significantly increased competition.

4. Does the business have a moat (competitive advantage)? Is that moat sustainable? Is it widening or becoming narrower?

5. Does the business have honest and competent management, and how are they incentivised? Look at shareholdings, track record and remuneration.

6. What is the history of the business? Consider debt, capital raising, dividends and who owns the shares.

7. What is the value of the free cashflow likely to be generated over the next decade, and what is the likely value of the business at the end of the decade? Perform a variety of discounted cash-flow models, minimum discount rate 10%.

8. What are the main risks facing the business? What is the business worth in the worst reasonably possible scenario? Make a pitch against the business.

9.  What is the most likely intrinsic value range of the business?

10. What do other intelligent and trustworthy people think about the business?

11. Why might the market incorrectly value this business?

Edit: 12. Who does this company create genuine value for other than its shareholders and management? What value does it create, and is it broadly commensurate to profits?

This additional question is designed to identify business drivers and long term sustainability. For example, a roll-up engaging in multiple arbitrage offers little value to anyone, but a blood plasma company saves lives. My belief is the latter is a more sustainable proposition.

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