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?

If you’re interested in reading more investing-related content just like this one, please consider subscribing!