WTOTM - 5 steps to a good DD

1. don't tell me why you are right, tell me why the market is wrong.

An analysis à la "Asians are just discovering coffee, that's why we're buying Nestle" is a crap analysis. Priced in, priced in, priced in. Don't tell me why you're right, tell me why the market is wrong.

Food for thought for systematic mispricing of the market: what do you know well, what industry do you work in, what do you have a strong opinion on ("Circle of Competence")? Who is the market - old, white, male, WASP, an algorithm, not a biologist, not a computer scientist, not you.

2. when will the undervaluation disappear?

A DD needs a catalyst event. "When Sino AG sells its Trade Republic shares" is a catalyst event. "When the first sales figures of the Ford F150 Lightning come out" is a catalyst event. "Alibaba has a pe ratio of 15" is not a catalyst event. Alibaba will never not be a Chinese company anymore and China will not be a risk-off factor for stocks anytime soon.

3. what is your goal?

More coal, duh? It's not that simple. Every trade has a certain risk-return ratio. The probability that Unilever will outperform the S&P500 in 2022 is very low, the probability that Nvidia will generate more alpha is already higher. However, the risk in the event of a recession is quite different for a stock as highly valued as Nvidia than in the stable diversified conglomerate of Unilever. Every market phase has a certain life cycle - how long is your investment horizon for this investment?

4. Qualitative and Quantitative

Qualitatively, Competitive Advantage is very important. Does the company have a moat? Be aware of what the opportunities and risks of a stock are. Quantitatively you should know at least Revenue, Profit, Assets, Liabilities. To understand current eps and PE ratio are eps growth of last years and projection into future. Even better than a forward PE ratio is a discounted cash flow model (keyword: margin of safety). Depending on the company, price/book, margin or capital intensity are also important. A look at Seeking Alpha is a good start.

5 Investors Relations

The development of a company depends on its management. What is being dealt with at the moment? What is being worked on at the moment? The Investors Relations website of each corporation contains presentations with important prose.

Leadership itself (which shareholders control along with employee representatives on the board) also creates a discount or premium. For example, Elon = 5x and Jack Dorsey = -10%. Obviously.

Now please write better DDs so I have to do less research myself. Ok, bye 👋🏻