My investing checklist

From time to time, I’ve been asked whether I have an investing checklist. The answer is yes, but it’s just an informal list of things I want to think through before I invest. It doesn’t cover everything I think about, but it’s a good start. Anyway, it’s been hidden in one my Slack channels, and I thought I would share it:

• Define what this business is:

  • Reinvestment moat?

    • Ie: Big Tech, SaaS, etc

  • Legacy moat?

    • Ie: Pepsi, Coke, McDonald’s

  • Greenfield opportunity + long runways (can also be reinvestment moat)?

    • Ie: Evolution, Adyen, Twilio

  • Capital light compounders?

    • Ie: Autodesk, Adobe, Visa, Mastercard

• Is this business resilient, optional, or both?

  • Nonlinear vs linear revenue growth

• Does this business have an "out of the money call option"?

  • The way NZS Capital defines optionality: "Optionality as asymmetry which is not priced in at current prices." Key factor: NOT PRICED IN.

  • Optionality can be subjective: ie. Is Mastercard optional because it has tailwinds in e-commerce, touchless transactions, micro-transactions, digital wallets, etc? Or is it a legacy moat?

  • Some other simple examples:

    • SQ: CashApp

    • Paypal: Venmo

    • FB: Commerce, VR

    • Google: GCP, YT, Waymo

    • Apple: Cars, AR/VR

    • Sea/Meli: Fintech

    • Wix: Payments

    • JD: spinoffs

• Is this a reinvestment moat? (similar to questions 1-3)?

  • For linear, valuation is much more important

  • For reinvestment moats type of business, valuation is less important

  • This is something to consider also when looking at small caps that show 18% growth but have sort of linear trajectory -> valuation is critical.

  • THINK IN OPTIONS

• Considering valuation, can it realistically outperform Big Tech (Amazon, Apple, Facebook, Google, Microsoft) over a period of ten years?

  • Needs to be a reason to own it

  • Even if you think performance will be similar to big tech, what’s the point?

  • It’s much easier to hold big tech so the risk/reward has to be clearly better than Big Tech

• Is there a clear product-market fit and why?

  • Write out your thesis on why this product/service is needed by the market and any evidence that supports a clear product/market fit

• What is the net margin at maturity and how confident are you of achieving it?

  • Understanding the economics of the business is crucial

  • What are the things that may keep it from achieving the net margin?

    • 1) Competition

    • 2) Profit/Loss statement

      • It's not just about gross margins - it's also about S&M spend. Is there leverage in S&M spend? (ECOSYSTEM CONTROL)

• Even if you like the business, should you own it now?

  • Just because you like a business does not mean you need to own it now

  • Take what the market gives you at any point in time

  • Aka add to current positions if it offers the best IRR and circle back to this stock at a later time when IRR is more favorable AND you will know more about it

• Is this business showing 20% IRR with conservative assumptions?

  • Never ever buy a business that is not <- you will not be able to hold it

  • Even if you miss some stocks, that's OK

  • This is a game of probabilities

• Is this a winner or a second-place business?

  • Own the winners even if overvalued a little

  • Remember, the second place might get better IRR for 2-3 years but will it be relevant in 10 years?

  • If you think this is a second place business: is it actually a second-place business or is it still early and could be a first place business?

  • Is this a special, unique, and differentiated asset?

  • You don't need to buy a business that is dime and dozen

  • How do we find out if this is a "special asset"?

    • Part of it is gut feel

    • Watch Youtube videos of the CEO

    • Read about mission, etc

    • What are customers saying about this business? What would customers do without the business?

• Where in the S-Curve is it?

  • Aka: Is this a "gorilla" stock in the tornado phase?

  • For a growth business, it is critical to understand where the business is in the S-curve.

• Is the end market growing or stable or in decline?

  • Not the product itself but the end-market

  • Businesses in markets that aren’t growing are market share battles, not greenfield opportunities — moats matter more here

• Will you allow this to grow into a very large position if it does?

  • Say this stock does a 10X, will you be OK having this as your largest position if it becomes so?

• Is this a growth business or a momentum stock?

  • Know the line!

• Getting "over the hump": What are the doubts?

  • List out 5 things that could go wrong. If you haven't thought of it, you are not "over the hump".

  • Who are the competitors? Is it crowded?