Investment Framework

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” — Warren Buffett

My main approach to investing is to analysing the durability of the business in the face of potential competition and disruption, the fundamental financial performance of the business and its growth runway.

Here is a simple shortened version of my checklist on my thought process to analyzing and shortlisting a company for investment:

1st stage: Quick screen round

– Business is one within circle of competence.

– What industry is the business in? How do they earn their money?

– Revenue and net profit increasing

– Return on invested capital (ROIC) is consistent and above 10%.

– Monitoring gross and operating profit margins

– How much debt does the company have?

– Is there a recurring revenue stream and what percentage of total revenue?

– Generating good free cash flow?

2nd stage: Analysis of competitive advantage

– What competitive advantages/moats does the company have?

– How strong is the moat? Risk of disruption?

– Who are their competitors? Who are their customers (and if any customer concentration risk)?

3rd stage: Identifying growth drivers

– Are there any near-term growth drivers?

– What are the growth plans that the management has outlined? (Local or overseas expansion? Merger or acquisitions?)

– Are they taking on more debt to grow?

– What were the previous years’ growth plans? Are they on track? How has the business evolved?

4th stage: Analysis of financial statements

– Income statement / Balance sheet / Cash flow statement

– Look out for one-offs that can affect the bottom line.

– Compare competitors.

5th stage: Valuation

– Use an appropriate valuation method

– Estimate a conservative projected growth rate.

– Allow for a margin of safety; however, a superior wide moat of a company can also act as a margin of safety.

6th stage: Portfolio allocation

– How big a position should be allocated for the portfolio?

– Are there other opportunities? Evaluate opportunity cost.

“Too many people view investing as “something on the side” that they do occasionally. They don’t take it serious enough to get serious results. Anyone seriously looking to make a substantial income would do well to develop the mentality that this is a business. It is professional. It requires work, study, research, and patience – just like the development of any other business.” – Mohnish Pabrai