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:
Ie: Big Tech, SaaS, etc
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:
FB: Commerce, VR
Google: GCP, YT, Waymo
Apple: Cars, AR/VR
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?
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?
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Awesome criterias! Thank you for sharing
Great stuff, man. Lots of good questions in there.