What struck me is how investing wisdom often evolves from searching for the right answers to asking better questions. Early in my career, I spent much of my time trying to estimate outcomes more accurately. Over time, I realised that the biggest mistakes usually came not from bad forecasts but from failing to question my assumptions. In that sense, a good investment checklist is less a tool for finding winners and more a defence against our own overconfidence. The longer I invest, the more I appreciate that successful investing is often an exercise in avoiding unforced errors rather than discovering brilliant ideas.
Excellent list of thought-provoking questions. On the "Is this an exceptionally good company?" question, some of the factors I consider are:
- Is revenue recurring and predictable, or more one-off in nature?
- How strong is customer retention, and how easy is it for customers to switch?
- Is the product or service essential or discretionary?
- Is the company operating in an attractive market with some form of moat, such as brand or network effects, or are there emerging competitors or substitutes?
- Does the company have real pricing power, or are prices largely market-driven?
- How diversified is the customer base, or is there concentration risk?
- Is there exposure to higher-risk geographies?
- Is the company exposed to volatile or uncontrollable input costs
- What near-term and longer-term external trends could create tailwinds or pressures for growth / margin
Hope that's a useful list of factors to consider when evaluating the resilience, and sustainability of a company's earnings.
This is a great list. However, in my experience, one of the difficulties is that when an 'exceptional' business is suddenly 'cheap,' there is a serious question about whether the business will continue in this exceptional state. There are, as you know, too may examples to list - but historically we can look at the newspaper business pre-internet, or more recently the 75% decline in META (21-22) on the AR / cash flow waste concerns. The MAG7 capex spend brings up these issues now. Tying in to this, when such an event occurs, has time become the enemy of this business suddenly, or no? These are not easy questions to answer. But rarely do we find exceptional businesses at anything other than 'rich' prices (see, e.g. COST) But if they continue to be exceptional, in 5 or 10 years, suddenly they were not so rich. Its a very tough problem. Charlie Munger just prior to his death thought only 2% of SNP businesses would be better within 5 years....(see interview w Todd Combs). Not easy.
I wonder how the combination of a high-quality company and a significantly undervalued security can create a compelling investment opportunity, while also noting the importance of tailoring these criteria to individual investor profiles.
What struck me is how investing wisdom often evolves from searching for the right answers to asking better questions. Early in my career, I spent much of my time trying to estimate outcomes more accurately. Over time, I realised that the biggest mistakes usually came not from bad forecasts but from failing to question my assumptions. In that sense, a good investment checklist is less a tool for finding winners and more a defence against our own overconfidence. The longer I invest, the more I appreciate that successful investing is often an exercise in avoiding unforced errors rather than discovering brilliant ideas.
Excellent list of thought-provoking questions. On the "Is this an exceptionally good company?" question, some of the factors I consider are:
- Is revenue recurring and predictable, or more one-off in nature?
- How strong is customer retention, and how easy is it for customers to switch?
- Is the product or service essential or discretionary?
- Is the company operating in an attractive market with some form of moat, such as brand or network effects, or are there emerging competitors or substitutes?
- Does the company have real pricing power, or are prices largely market-driven?
- How diversified is the customer base, or is there concentration risk?
- Is there exposure to higher-risk geographies?
- Is the company exposed to volatile or uncontrollable input costs
- What near-term and longer-term external trends could create tailwinds or pressures for growth / margin
Hope that's a useful list of factors to consider when evaluating the resilience, and sustainability of a company's earnings.
This is a great list. However, in my experience, one of the difficulties is that when an 'exceptional' business is suddenly 'cheap,' there is a serious question about whether the business will continue in this exceptional state. There are, as you know, too may examples to list - but historically we can look at the newspaper business pre-internet, or more recently the 75% decline in META (21-22) on the AR / cash flow waste concerns. The MAG7 capex spend brings up these issues now. Tying in to this, when such an event occurs, has time become the enemy of this business suddenly, or no? These are not easy questions to answer. But rarely do we find exceptional businesses at anything other than 'rich' prices (see, e.g. COST) But if they continue to be exceptional, in 5 or 10 years, suddenly they were not so rich. Its a very tough problem. Charlie Munger just prior to his death thought only 2% of SNP businesses would be better within 5 years....(see interview w Todd Combs). Not easy.
P.S. A good current example of this problem might be found in ADBE. Not dead yet, or done and cooked?
I wonder how the combination of a high-quality company and a significantly undervalued security can create a compelling investment opportunity, while also noting the importance of tailoring these criteria to individual investor profiles.