Framework #4 Analysing investments
In this post, we are going to talk about analysing potential investments. First I have some questions which I ask myself and lastly, I look at the valuation. Valuation is the last step in my analysis because I don’t want to focus on the price too much.
What I do first when I come to an interesting stock is focus on the downside. This is the worst-case scenario and you should always consider this. What is the downside? Is there a downside? How can I lose money? I want situations where I can’t lose money.
Then I ask myself the following questions
1. Do I understand this business and the industry? Is it in my circle of competence?
2. Does the business have a moat? (will come back to that one later)
3. Does the management in place have integrity and talent?
4. Does the price make sense and provide a margin of safety?
5. Do I feel comfortable putting 50% of my family net worth in this investment?
When I’ve done my analysis, I do a simple DCF calculation where I use a discount rate of 15%. The other parameters are different for each business. I use three scenarios (worst, normal and best) to get to a valuation.
In the follow-up article, we are going to dive deeper into analysing risk with investing.
Link to framework #3: https://app.getquin.com/activity/xFSzOAeEBo