Write down your investment thesis. What business do you want to buy and why? You need to lay out the case on why this investment opportunity should generate a compelling return. Keep it short. It has to fit on one page. Be clear and to the point.
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This process will force you to clarify your thinking. It will force you to focus on the essentials and eliminate noise. It will keep you on the right track. Can you answer simple questions:
- What does the business do?
- How does it make money?
- How is the balance sheet?
- Is management highly skilled with a history of treating shareholders as partners?
- Is the management growing the size of the moat?
- Does the business reinvest their free cash flow in a manner that continues to earn above-average returns?
- How do you blow up the business?
- Valuation: Why is it cheap? What is the market missing? What are the sellers thinking? Why does this opportunity exist? What’s my margin of safety? What’s the upside?
This shouldn’t be a complicated process. You don’t understand the business? Move on. You can’t figure out how it makes money? Move on. The balance sheet is weak. Move on. Management sucks. Move on. They don’t allocate capital appropriately? Move on. Is it too expensive? Move on. How are you going to sleep at night if you can’t clearly answer these simple questions?
This process filters out a lot of the noise and forces your focus on the essentials. It also prevents mistakes. The investment should fit your investment philosophy and strategy.
The thesis also comes in handy if you are considering selling. Are the initial reasons for buying no longer valid? Was it a mistake? Over-valuation? Or are you selling based on emotions? Again it forces you to think rationally. With a solid thesis, this way, your sell strategy is built into your buy decision.
Great businesses are not all that common, and finding them is hard. The opportunity needs to jump at you. It needs to be obvious. If you identified a great business at a reasonable price, invest and sit tight. This simple step will help you sleep better at night.
