Let’s start with the four essential stock filters:
Understanding: we need to be able to understand the business. That does not mean we need to know how to navigate the menu on a GoPro camera, it means we understand the underlying models surrounding the economy around outdoor cameras.
Moat: if someone was given a billion dollars to build a competitor to our business, would they succeed?
Management: if the economics is favourable and the moat solid, we do not require overly talented management not to screw the business up — we merely need management with tons of integrity.
Price: no matter how wonderful the business is, we require a price that makes sense. We will, however, prefer an outstanding business at a fair price over a mediocre business at a dirt-cheap price.
Understanding
I will support my analysis using the following notions:
No-brainers: are there any self-evident remarks about the company and the business it is in?
Numerical fluency: do the numbers make sense for a profitable business?
Reverse thinking: after thinking about the investment problem in one direction, can we consider the same problem thinking backwards?
Qualitative investment analysis is about understanding a business before taking out your calculator. This blog teaches you how to do it for common stocks.
