This week’s podcast is about my investment checklist. Which is really just 9 questions. Shown below.
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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy. And the topic for today, my nine investment questions. This is just my own checklist that I run through every single day and have for many, many years. It’s how I sort of take apart questions, take apart pricing. Is it a good deal? Is it a bad deal? And basically force myself to do something. in a standardized process and to force myself to come to a decision. And that’s kind of my thing. So I thought I would go through just sort of the basics of this and how I do it. And some of the language I use, which really took a long time to clarify and crystallize, you know, what exact language and questions I found really helped me. And those of you who’ve taken my class on sort of investment committee, private equity investment committee, this is the same nine questions I go through there. which a lot of private equity people use and a lot of people who are more into hands-on projects, fixing companies, turning them around, adding value, buying something. There’s basically a lot more levers to pull when you’re dealing with something that’s a private asset and you can actually do stuff with it as opposed to passively buy and hold where your toolkit is obviously much smaller. So a lot of this comes out of that, which I’ll probably gloss over that part. But yeah, that’s basically what I use for when I talk about private equity stuff. Now for those of you who are subscribers, I’ve sent you out some information in the last week about a couple companies that I think are important. Perfect Diary, which is Yatsen, publicly traded now. Baozun, which is a little bit like Shopify, but not really. And both of those companies are kind of… interesting mixed pictures. They’re not just obvious winners like, oh my god that company’s great. Because truthfully that never happens in life, very rarely. I mean usually you’re getting a mix, oh I really like this, oh but that bugs me. And you know that’s where I tend to get excited because okay if it’s a little bit muddy then maybe I’m going to be able to see something here other people can’t see or I’m going to be able to figure this out. If it’s just obviously great, yeah that is good but everyone sees it. So I kind of like these muddier mixed bag sort of situations and I think both Perfect Diary and Baosun have that. So I sent you out a decent amount on that last week. Tomorrow I’m going to send you out some stuff on Baidu, which I haven’t really talked about. I mean, I’ve sort of talked about search engines a bit, not a huge amount. Sogo and then Navr, which is, you know, South Korean search engine. Sogo is search engine within WeChat basically. And then Baidu is sort of the rest of China. And I kind of skip over this because it’s, it’s a different type of business. I mean, it’s a completely different animal. You know, it’s, there’s nothing else like it out there. Search engines are just this unique thing and they are very attractive in many ways. And I think Baidu gets glossed over a bit. And I’ve sort of been emailing back and forth with the people over at Baidu and media relations. I basically want to interview some people there. So I think we’re hopefully gonna set that up. We’re kind of going back and forth, we’ll see. But I wanted to sort of tee up some ByDo stuff and I’m probably gonna put out quite a few pieces on them in the next week or two. So that’s on the way. And for those of you who aren’t subscribers, feel free to go over to jefftowson.com. You can sign up there, 30 day free trial, see what you think, join the group. It’s, I think it’s a lot of fun. Anyways, and let’s see my standard qualifier on investment advice. Nothing in this podcast or in my writing or on my website is investment advice. The numbers and information from me or any guests may be incorrect. The views and opinions may be incorrect or no longer accurate or relevant. Overall, investment is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Now, I really like checklists. I’m a huge believer, not just in checklists, but in just sort of daily habits, frequent habits. And checklists are a type of that. I mean, it’s a way of standardizing a process and then you repeat it over and over. Like if I go to the gym, I have a list of things I do. I do eight on this, three on that, then I do four reps and I do whatever. And then over time, you sort of fine tune it, you stick with it and you know. Having that sort of structured process, I find to be very, very helpful. And I’m kind of a big believer in daily habits across the board because I think they sort of quietly add up over time. You know, you learn 20 words of Japanese or Chinese a day and you just stick at it and it’s kind of a pain and it’s annoying. And you know, some days you’re a little bit lazy and you don’t quite do it, but generally you stay on your habit and then you look around six months later and it’s like, wow. I speak like 2000 words of a language. I mean, this stuff, it adds up a lot faster than you think it does. Well, I do the same thing for taking apart companies, not just companies, but investments. Take apart the company, what’s the quality of the company? What do I like about it? Then I move to price and then to value, then what can go wrong? And then ultimately, yes or no, would you buy this at this price, yes or no? And it’s just a system and I just run it all the time. And I have it written down. I resist the urge to do it in my head. I resist the urge to gloss over and just sort of, I kind of know these types of companies. I’ve done a million of these types of companies. I can kind of tell it’s pretty good or it’s kind of bad. And every time I think that I go, no, no, no, stop that. Do your process. And I force myself to systematically go through it. And every time I do that, I catch something I would have missed. So I never let myself off the hook. I have to run it systematically for everything. I don’t care if I’ve looked at this type of company a hundred times, I still do it. And I find it really does add up. Now, one of my sort of favorite stories is, how does Buffett buy companies so quickly? He buys companies, it’s really shocking. Like… This company New Oriental, which is this I mentioned this before it’s a very weird e-commerce company located in Omaha that sells things like You know hundreds of little ducks you need for a company party, you know plastic rubber ducks or stars very weird e-commerce But he bought them and the the CEO there when I was visiting he kind of said, you know, we sent Buffett an email on a Friday and saying hey, we’d like to sell our company and Here’s our numbers and he basically called back on Monday and said I’ll take it I mean, that’s how fast he does. And he’s so good at this. One of his famous acquisitions was Nebraska Furniture Mart, which is the largest furniture store in Omaha, and now a large part of the US. And he bought that with ever, he never actually saw the financials. He just walked into the store, worked it out with the owner on one to two pieces of paper and bought it. And he never actually saw the financials. Now. How is he doing that? Well, because he, you know, people think, oh, it’s because he’s, you know, amazingly smart. Well, yeah, that is true. But anytime I see behavior like that, my immediate thing is like, nobody’s that smart. He’s got a system here and we just don’t see the system. What’s the system? Well, the system is he runs checklists. He, when he looks at a company, he has a, you know, they’re not gonna be the same for every type of company, but let’s say a retailer, he will have a series of questions that help him get to yes, no. hard. Those are kind of the three buckets. You run the questions. Question number one, does this company have a competitive advantage? Question number two, is they a long term floor on demand and purchasing? Question number, I’m making these up, but they’re pretty close to what I think he uses. Question number three, how well does it survive an adverse event? Question number four, does the management act like owners? Question five, he just runs the list. If he gets to question one, the answer is yes or no. And if the answer is yes, he goes on to question two. Okay, does it have a competitive advantage? Yes, it does. Question three, does the management asset go in? Or question four, if he keeps getting yeses, I think he keeps going down the list. And if he finally gets to question, I don’t know, 15, and the answer is yes, then he buys. Bam, done. If you make it through all the filters, you buy. If any of those filters get you a no, like question number three, does the management act like owners? No, he stops, kicks it out. Nope, done, next company, thank you. And he doesn’t go on. I think that’s what he’s doing. And he’s been running the same checklist in his mind for 50 years so he can do it. And people think, oh my God, he can read a company and give you a yes in an hour. I’ll buy it. or he’s famous, he can give you a no in about five to 10 minutes. I think it’s because he’s running these checklists over and over and over and he’s fine tuned them for various types of business within one specific investment strategy which he’s fine tuned and that’s why he can do it this way. And he can do it so well, he doesn’t even need to see your numbers sometimes like he did with the furniture store. I think he already kind of worked them out in his head. So anyways, that’s my working theory. I don’t know if that’s true. But, you know, and in addition to that, okay, yeah, he is really, really smart, so that helps. But I think it’s a system. So that’s kind of what I do, and that’s what a lot of investors do, is you have a series of checklists, and you just run your list of questions. Now, I force myself to write it down. That’s kind of my thing is, I tend to be a bit of a sloppy thinker if I’m reading. When I read something, everything kind of sounds good to me. And then it goes in one ear and out the other and an hour later, I’m like, what was I thinking? I have to write it down. So when I read an annual report, I write down 15 to 20 pages of notes when I read it. Then I stick it on my shelf and I leave it for a couple of days. And then I come back and I pick up my notes and I read my notes. And then I force myself to go through my nine questions and I write down the answers as well. And then I finish that, I put it back on the shelf. I’m literally putting it on the shelf. I’ll put a picture in the show notes. Literally on my shelf, there’s two stacks of paper that where these bunches of companies are sitting. Then I’ll come back to my second list days later and I’ll reread my notes just to check it. And then maybe I’ll add it into my checklist if I think I’ve discovered something new. But that’s kind of my process. I’ve been doing it forever. Anyway, so my nine questions, I’ll put. the nine questions in the show notes, it’s in one JPEG. So it’s just a graphic. Now this doesn’t apply, I mean, this is generic, right? So in theory, this applies to any type of company and any type of investment strategy, buy, sell, buy and hold, buy and fix. So in that sense, it’s generic and you want sort of specialized versions for different types of companies and different types of industries and different types of investment strategies. This is kind of an uber graphic. So that makes it less useful, but all of my sort of ways I think can fit under this. Okay, so if you look at the graphic, you’ll see that I’ve color coded it because I like PowerPoint. There’s basically one, two, three, four colors and I’ve broken up the nine questions into four colors and questions one, two, and really two point five. There’s another little small box there but… Questions one and two and 2.5 are in red. The red questions are all about assessing company quality. Now this could be a company or it could just be a specific asset, one building or one factory, but let’s just say company quality. This is what you’re buying. This is what you’re investing in. Is this apartment a good apartment? Is it a great apartment? Is it a garbage apartment? I mean, you gotta make the call. Is this company a great company? Is it stable? Is it predictable? Is it garbage? And I force myself to sort of answer those questions and by the time I get done with question two, 2.5, I have written down on a piece of paper, I think this is a great company with two or three major problems. I think this is a garbage company. I think this company was good, but it’s declining and it will not be good in the next. I force myself to just make the call. because there’s so many factors in any company. You can look at the government and the consumers and the competitive advantage in the management. There’s so many factors. At the end of the day, you gotta kinda make the call. I really like this company or eh, you know. That’s kinda the red one, and that applies to private companies or it applies to stocks or whatever. It could apply to just one asset. Then you go to questions three and four, which are in green, and those are valuation versus price. So, okay, what’s this company worth? What’s its economic value? And how does that compare to whatever its current price is? That gets you margin of safety. You know, it may be, hey, questions one or two tell me that this is a spectacularly good company. But then I get to three and four and say, yeah, but it’s actually overpriced. Okay. Similarly, questions one and two, hey, this is a really not a very good company. It’s probably dying. then I get to three and four. But yeah, it’s actually selling cheap for what it is, probably because people are very pessimistic about it and they don’t think it’s very good. So, you know, you can buy it cheap because nobody wants it. And there’s, you know, a guy like Buffett, he’s made money doing both of those strategies. I mean, his first nine years when he was doing his Buffett partnership, which I think was just him sitting in sort of the desk off his bedroom for nine years by himself. You know, he was mostly buying garbage companies. That was his thing. He wants garbage companies that nobody wants and he was picking them up so cheap. So yeah, it was only worth $2 million, but it was selling for one because nobody wanted it. So then you buy it for one, you capture that spread as much as you can and then you get rid of the thing because you don’t want to hold a bad company long-term. You know, that was his famous cigarette butt investing. For those of you who aren’t familiar, this is sort of classic Warren Buffett, Ben Graham thinking which is, you know, you walk down the street and there’s cigarette butts on the street because nobody wants them. And they’re not worth much, but if you pick up a cigarette butt on the street, it’s free and you can get one or two puffs out of the thing because it was free. So he was doing sort of, you know, cigarette or cigar butt or cigarette, but I think cigarette butt, cigarette butt investing, which is mentor and professor Ben Graham. That’s what he did. He was just quantitatively assessing companies. Yeah, it’s a garbage company, but it’s got, it’s selling for $2 million and it has 2.3 million in cash. So let’s just buy it and take the cash. That’s what he used to do. Now, people don’t do that as much anymore because most of those opportunities, there aren’t very many of them. There were a lot of them in the 30s and 40s, but that kind of went away. But he definitely did that strategy for a long time and then he… stopped doing that for the most part and started buying higher quality companies and then holding them longer term because higher quality companies would increase in economic value over time and that appears to be Charlie Munger’s influence who basically told him look the big money is in the sitting and waiting the big money is not in the buying and the selling you can buy cheap stuff and sell it all day long and make a little bit of money and a little bit of money there But the big money is to buy a big company that’s great and just sit on it for 10 years and it dramatically increases and you’ll make far more that way. So he called that sit on your ass investing, which is pretty much most of what Buffett’s been doing for the last 30 years is trying to find truly exceptional companies and then paying a not ridiculous price doesn’t have to be cheap. You know, his famous saying is, you know, it’s better to buy a great company at a good price rather than a good company at a great price. So he’s been doing that, but you can kind of see that’s three and, you know, three and four is about price versus value and why or why not it might be under or overpriced. Those are the green ones. If you look on the right side of the slide, you’ll see light blue, which is five, six, and seven. Questions? That’s kind of the land of private equity, people. That’s hands-on. That’s where, look, you bought this department store. Now you own it. It’s an asset. You can do things with it. What are you gonna do with it? You can add value. This is what my old boss, I kind of learned from him. The first project I did for him, the Saudi Prince, was he had built a hospital which had gone into the red quite quickly, and I was kind of the guy that came in from the US to look at it and figure out what to do with it and how can you fix it? People do this with apartments all the time. They don’t just buy a great apartment and wait, they buy mediocre apartments and fix them up. Or they buy broken down apartments and then they renovate them and then they sell them. So buy and fix up is a pretty powerful investment strategy. Now to do that, you’re gonna have to have some degree of control over a company, which is obviously difficult if you’re talking about big tech companies, which is most of what we talk about. But there’s nothing stopping you from buying an apartment building down the street. a restaurant, a factory, hands-on stuff. I really like hands-on stuff. That’s much more my personality. I like to buy and fix. It’s more like being a doctor than an analyst. Anyway, so five, six, and seven are various types of adding value to something you buy, and you have to kind of get the deal, so you have to win the deal, that’s that. And then eight and nine, which is the dark blue on the right, this is like, okay, you’ve done your analysis. You’ve looked at all the factors. You looked at the quality, you’ve looked at the price, and then you’ve looked at what you’re gonna do with it. Okay, what are they gonna be the outcomes? What are the potential outcomes from the deal you’ve just put together? What’s the best case? What’s the worst case? What’s the base case? And generally, I sort of recommend to people spend most of your time on the worst case. Don’t spend 30% of your time thinking about the base case and the best case and the worst case. spend 70% of your time thinking about the worst case. Because if you can eliminate a bad outcome, you’re probably gonna be fine either way. So this is one of my standard questions in classes. I always tell people, you know, figure what’s the worst case, what’s the worst case? Okay, so that’s kind of what lays out, nine questions in four groups. Okay, now. I’m gonna talk mostly about questions one and two, because that’s really what this podcast has always been about. I’m always talking about company quality, and specifically within company quality, I’m talking about the strategic aspects, the competitive aspects, because those are the things that sort of play out over two, three, four years. That’s kind of what this has always been about. I haven’t really ever talked about three and four, which is what’s the price and what’s the thing actually worth, because that gets you into valuation. And then I’ve never touched on five, six, and seven, just sort of what do you do with stuff when you buy it, you fix it, you be an activist investor, you do something at the board level, you restructure it, you LBO it, you do something operationally, you split it up, all that kind of stuff. Haven’t really talked about that at all, although that’s really the background I come out of. Okay, let’s talk about questions one and two, which is really about making the call on company quality. And, you know, kind of how I got to what I’m doing is within that, the question I always was most interested in was competition. Because I thought that impacts, that reflects the quality of the company more directly than anything. What is your competitive strength? What is your competitive defensibility? That really does kind of, it’s one of the major factors that determines the future of the company. And within competition, that was clearly being impacted more and more by digital. by data, by software. I mean, that was clearly just companies that used to be incredibly strong competitively, like newspapers used to be juggernauts, you know? And then software comes along and just wiped out their advantages very quickly. And then other new companies like Google come along and they are clearly new animals that we’ve never seen before. They’re digital creatures, but they have tremendous competitive strength. So that intersection of strategy meets digital. Competition meets digital. That’s kind of where I sit. That’s what I consider sort of my zone of expertise, or at least in my strike zone. Okay, so here’s the questions I’ve put down on the JPEG. I’ve broken it into two. Question one, question two. Question one is about the industry. It’s about the nature of this business without necessarily making the call on one specific company. It’s like, do I wanna be in the hotel business? Do I like hotels in Thailand as a business? Do I like, I don’t know, toy factories in China as a business? Without specifically saying company A, because you’ll find a lot of variability between different company types in terms of performance, characteristics, all that. But then also when you look at a specific type of company like a toy factory. When you look at one company, you’ll also see variability by company within a type. So you see sort of two spectrums of variability, what business and then what specific company within that business. So question one is about what business, question two is about what, I’m sorry, question one is like what type of industry and question two is what specific company within that business or industry. So I sort of split those apart. And the question I put for number one is, Is this part of the industry, is this business attractive and or predictable in the short and or long term? Now the language there is very specific. I’ve been playing with it for literally five years. Okay, is this business toy manufacturer, is this business attractive in the short or the long term? Well, a lot of businesses can be very attractive in the long term, but not today. That can actually be a very good place to buy because you can see what it’s gonna be and everyone else thinks it’s kinda eh today. That can be very good. Or is this business attractive today, but it won’t be in three to four years? That’s important to know as well. So that sort of short and long term thing. And the other thing I said, is this business predictable? in the short and or long term. Predictability is different than attractiveness. A bad business that’s very predictable could be a good investment. Look, this company sucks and it’s going down year after year, but it’s going down in a very predictable way. So I can actually figure out its cash flow over the next three to five years, and it looks like it’s selling at a discount to that very predictable cash flow as it declines. which is basically how Buffett bought Berkshire Hathaway. When he bought Berkshire Hathaway and took it over, and that became the name of his investment company, it was a textile manufacturer that made the linings of men’s suits. And it was in kind of in Massachusetts, and they had a big Swedish immigrant population. But it was clear that textiles were going out of the US. This was a dying business in the US. Textiles were going to Asia. That’s where you make fabric in the world. So he knew it was a dying business, but he knew it was dying in a very predictable way. And so he could project out, it’s gonna generate this much cash over the next five years before it dies. It’s selling for less than that today. I’ll buy it, I’ll take the cash and I’ll reinvest it into companies like American Express, which is what he did and Cease Candy and some others. So that’s question one. Is this business, is this part of the industry attractive and or predictable? in the short and or long term. Now, I sort of dodged a question here, which is everyone knows what predictable means. What does attractive mean? Well, attractive, you ask 10 investors what attractive means and you’ll get 10 different answers. I mean, what is a quality company? What is attractive? People will generally start to say things like, well, it’s got growth, it’s a growing business. Okay. It throws off a lot of cashflow. Okay, high return on invested capital, high operating profit after the cost of capital. It’s a cash generator, people might say that. Maybe it’s asset light. Yeah, it generates maybe not a ridiculous amount of cash, but it doesn’t require any capital as it goes on. That could be part. People have different definitions for what a quality company actually is. Generally, if you… If you look at tech companies, which is what we’re talking about, usually we’re talking about the Amazons and the Googles, these companies that dramatically increase in economic value over time. That’s generally what we’re talking about. But if you ask Buffett what a quality question is, he’s not gonna say that, because he’s not going for the companies that show 10X. He’s going for slower growth companies like Coca-Cola, but they’re very predictable. He’s going for consistent, predictable increases in economic value over time, because he’s not going for 100% returns, he’s going for 15 to 20%, because he’s compounding over time. His biggest concern is not how much it increases, but eliminating the possibility of a decrease. He’s compounding. So for him, a quality company is gonna be slower growth, slower rate of economic value increase. but much more predictable and guaranteed. We tend to talk about high growth but more volatile. And then, you know, one of his influences, Philip Fisher, who’s kind of his other influence outside of Ben Graham or so he says, you know, this is the guy that is investing in Motorola in the 1950s and 60s, and he held those for 30 years. He was looking for truly spectacular tech-based or at least science-based companies. So you gotta kind of have a. a sense for what you mean by that based on your investment strategy. A quality company is going to depend on what your investment strategy. Am I going for 10X? Am I just going for stable returns? Am I just going for companies that don’t even have to grow? I just want them to preserve wealth. I want to put money into a hotel that’s on way key key and it’s not going to go up in value because it’s a hotel and there’s not that many rooms but it’s never going to go down. Some people would say wealth preservation is the goal, not massive wealth increase or even Buffett-like consistent moderate wealth increase. Maybe it’s just preservation, not gonna lose. Okay, so I go through question one. I’m trying to get a sense for this and I basically have a bunch of sub-questions. If you look under the red box there, you’ll see a 1A, 1B, 1C, 1D. There’s actually quite a few of those I use, but I’ve just put a handful there. And these are all sort of sub-checklists that I’ve reverse engineered from various people over time. Definitely Buffett, Thomas Russo, Carl Icahn I think is really interesting, Charlie Munger. I have sort of famous investors that I study and I try and reverse engineer their checklist. But you can kind of see, look, 1A is the customer view. You’ve heard me talk about this a lot of times. I always want to think about the customer experience. What do they care about? What… That’s the custom review. At the end of the day, any business comes down to a customer walks into a store and sees the five different phones that are on the shelf and chooses number one most of the time. You know, that’s where the rubber hits the road and that’s why company A at the end of the day does better. Right, so I always like to know that sort of moment of decision for the customer and to think about that. One B, then that’s sort of laying out the industry layout. Five Forces, Michael Porter. who are the major players, who are the suppliers, who are the buyers, who are the competitors, who are the rivals, new entrants, things like that. I have a couple other ones within here like psychology. There’s something that Charlie Munger is famous for doing. He has written a paper called The Psychology of Misjudgment. I’ll put that link in the show notes. It’s a very famous paper. It’s like 20 years ago. But he basically said, you know, when you look at business, we tend to think with a very rational mind. You know, people are going to buy based on quality and value. you know, except for consumers, obviously, because they’re deeply irrational. But other people, B2B tends to be pretty rational. But you know, he calls it sort of two-track analysis. You do that sort of rational thinking as track one. And then track two, you think, okay, forget all that nonsense. At the end of the day, all of business is about people. There’s people who run companies, the management, there’s the sales staff, there are the suppliers, there are the investors, there are the customers. These are all human beings. And human beings often make decisions based on psychology and self-interest, not on economics. So within this sort of first question, I do one set of questions where I just basically map out who do I think the significant decision makers are in this entire business? The government regulators, the sales force, the management, the investors, the customers. And then I sort of check them. for various types of powerful psychology that I think might skew their thinking and have them behaving in ways that is not rational or not economically sound. And that’s Charlie Munger’s psychology of misjudgment. I’ll put the link down below. You know, social proof, agreeableness, influence by association, self-interest, commitment consistency bias. I mean there’s just a lot of sort of psychological things that go on in people’s brain that get them to behave in ways that are not rational. And you know, you look at businesses with that second track sometimes and you realize, you know, a lot of what’s going on in this business is not the rational economic stuff. I was just thinking about a lot of this business is being shaped by the psychology of the players on the field. Like one example would be, you know, the power of self-interest and the power of incentives. For anyone, You know, forget trying to convince people to do something by logic. If you want to see what people do, just look at their incentives. That usually determines what they do. And, you know, there’s a case in the last year with Wells Fargo in the United States, where the bank had a bunch of sales agents that were faking accounts, basically, and, you know, creating fake accounts. And it was a pretty decent sized scandal for them and they had to clean it up and apologize and all that. Well, why were they? faking the accounts? Well, because their bonuses and their jobs and their salary were heavily dependent on signing up new accounts. They were following their incentives. Even though it was obviously wrong and it was obviously not going to work in the long term and you know, Buffett’s a big investor in Wells Fargo and when they asked him what happened and his answer was, well, incentives work. You give people the wrong incentives and they will follow them even if it makes no sense. Now, the flip side to the incentives argument, there’s another, I think this is another Buffett one, where it was DHL or FedEx or something. It was one of these express delivery companies in the United States. And the key bottleneck in that process was all the packages come in at night, the planes all land, they unload them, but then they have to put them on the trucks. And then the trucks go out and they can be delivered. and then the trucks come back and they, I guess the bottleneck is loading the trucks. Getting everything off the planes that came in overnight onto the trucks and getting done. And I think it was Buffett, but maybe it was he wasn’t involved and he’s just telling the story. They came up with a system where they basically, they tried to pay people more if you load the trucks faster and I guess it kind of worked and didn’t work. And then they eventually just came up with the idea like, look, once the trucks are loaded, you can all go home. and you’ll get paid for the whole day. Like once the trucks are loaded, you’re done for the day, you get paid for the whole day. And the staff just came up with a thousand ways to load the trucks faster, because they all wanted to go home at 3 p.m. And it worked, and the bottleneck got really taken down and paid. So there’s a lot of that sort of psychology stuff. That’s within my question one, but when I look at question one, the main things I’m looking at, custom review, industry layout, five forces. psychology of the major players involved. And then there’s a Howard Marks question. Howard Marks is a really famous investor out of New York, Oak Tree Capital. One of his standard questions is, where are we? Where are we in the credit cycle? Where are we in the consumer cycle? Where are we in the investment cycle? And just sort of understand where we are within the overall macroeconomic cycle, and be aware of that. That’s pretty good. I’m not terribly good at that question, but yeah, that’s sort of how I think about question number one. Then I force myself, generally speaking, I like hotels on the beach. I think that’s a fairly attractive type of business for preserving wealth, but not necessarily growing it. And I think it’s fairly predictable in the long term, but not in the short term, i.e. COVID. Hotel rates go up and down, but in the long term, it is actually… Occupancy of beach hotels in Phuket is fairly predictable over five years. So attractive but not wealth creating in a major way. Predictable in the long term but not the short term. That would be my answer for question number one for beach hotels in Waikiki, generally speaking. All right then I go on to question number two and this is where all my research basically is where… I’m looking at the specific company and in particular, I’m looking at its competitive position relative to its current and future rivals. So for me, the specific language for question number two, is this specific firm or asset wealth preserving, wealth creating bad or too hard? Does it have a competitive advantage and is it sustainable? Okay, that’s pretty specific language. I think you kind of know my take on that second bit. Does it have a competitive, Advantage and is it sustainable? I’ve been talking about that forever But the first bit is is this specific firm or asset wealth preserving wealth creating bad or too hard? So at the end of the day, I’m putting this company or asset, but let’s call it a company into one of those four buckets Wealth preserving wealth creating bad too hard now The easiest one is too hard And you know, Buffett famously has a plaque on his desk that says too hard, which is basically telling him, reminding himself, look, you don’t make any extra money in investing by solving really hard questions versus solving really easy ones. You don’t get a bonus for that. So you’re better off solving the easiest question possible and making money there. So a lot of businesses just go into the too hard bucket. Yeah, it’s too complicated. Let’s do something easier. I can figure out Coca-Cola. You know, I can figure that one out. I can actually figure out like Alibaba and some of these companies. I think e-commerce is not that complicated. I think companies like YouTube and TikTok and attention-based businesses are much more difficult. But yeah, I put a lot of stuff into the too hard biotech. You know, I kind of know medicine to some degree, not like I used to, but I don’t do, you know, I know the chemistry and the biology, but I don’t do biotech. Why? It’s too hard. Most biotech doesn’t work. You got to do clinical trials. You got to figure out some secret to the human body, which is really super difficult, by the way. Most of them fail. Most of it, you can’t predict if it’s going to work anyways. You have to do the clinical trials. Then you got to, it’s just too hard. I’m gonna go figure out why people are buying shoes on coupons. I can figure out that question. So biotech too hard most stuff that have a big technology aspect. I tend to shy away from all do software. I’ll do things that are technical but not technological. I’ll do things that have lots of numbers and ones and zeros because I don’t think that’s too difficult. But when we start getting into the advanced engineering of autonomous vehicles. That’s too hard. It’s too hard. I usually shy away from that. And definitely if it has to do with science, I mean, I might go from software into some degree of engineering. That’s as far as I’ll go into the difficulty level. I won’t go on into science and biology and chemistry and biochemistry. Nope, too hard. So one, I shy away from that stuff. Okay, let’s say maybe it’s not. technologically hard, let’s say it’s just the situation is too hard. I have a problem with payments right now. I can’t figure out payments. There’s mobile pay and there’s Alipay and there’s PayPal and there’s Bitcoin and there’s blockchain this and there’s banks and it’s and it’s all changing so fast. Oh and by the way there’s regulations all over the place. Chinese regulations and financial services are really complicated and then you got to learn every country. It’s too hard I can’t figure it out. I’ll go figure out chocolate bars. I’ll go figure out Snickers. So you know that one it’s I probably could figure it out. It’s just too much work. I’m not gonna do it. So I put a lot of stuff just into the too hard bucket and move on and I kind of stay in my area. So too hard is an easy bucket. Maybe the data’s bad, maybe there’s not enough information, who knows? Bad is also fairly easy to define. For me, a bad company, bad is not the right word. I should say bad and unpredictable. A company without a significant competitive strength or defense ability, which is obviously my sort of thing. I put that into the bad and unpredictable category. It may go up. Hey, this company’s rocking and rolling. A perfect diary. Perfect diary is going up like crazy. This digital marketing guru meets selling makeup business of China. They’re, they’re, they’re booming. but they don’t have a big competitive strength. So that makes them very unpredictable for me over two to three years, which is kind of the timeframe I look at. So it could go up, but it might go down. Once you remove that competitive strength and production, I find the future to be very difficult to predict. It might go up, it might go down. There’s reasons to invest in bad companies, but generally I’m thinking short-term because I can’t predict its future beyond a certain point. But I characterize all that as sort of bad. Dying, maybe it’ll go up, maybe it’ll go down, but there’s just nothing sort of stabilizing the future picture. Okay, then we get to the first two buckets, which is wealth generating and wealth preserving. Now that to me is, it has some degree of competitive strength and defensibility. If it has some degree of competitive strength and defensibility, I feel like I can probably figure out its trajectory over two to three to four years, which is when strategy plays out. Anything could happen in one year, anything could happen in two months, but if it’s got some competitive strength, that longer trajectory becomes more predictable. And then one of two things is gonna happen. It’s either gonna be wealth preserving, like the hotel on the beach in Waikiki. The economics of the business don’t lend themselves to. creating significant wealth. But it’s protected by its competitive strength, so it’s probably a good place to preserve wealth, i.e. wealth preserving. Or the economics are attractive and it could grow and it could be an attractive market with a high growth rate or a big market or whatever. You know, that sort of Hamilton Helmer seven powers land. Okay, in that case, it could be wealth generating. It could be spectacularly wealth generating like a Tencent or it could be moderately wealth generating like the stuff Buffet likes like Coca Cola and Snickers or Mars. I don’t know if he buys Snickers, he bought Mars candy. So, but you know, the dividing line for that is competitive strength and defensibility, which is what I’ve put at the top of my pyramid. So I go through my various competitive questions, which are pretty much summarized in that pyramid. I’ll put the pyramid yet again in the show notes, but this is how I’m assessing competitive strength and defensibility. At the top, is it a winner-take-all or winner-take-most local dominance situation? That to me is top of the pyramid. There’s very few of those, but it’s awesome if you’ve got it. I’ve detailed that. You go down a little bit on the pyramid. Does there a competitive advantage versus rivals? How strong are you? Demand side, supply side. I’ve talked This is where I talk about switching costs, share of the consumer mind, government advantages, economies of scale, purchasing economies, all that, gone through before. That’s great. That’s pretty much second only to winner take all at the top. You go down one level from that, I have sort of barriers to entry and soft advantages. Barriers to entry is like, look, okay, maybe you don’t have dominance as a business, but it’s kind of hard to get into your business, so that tends to slow a lot of people down. So I separate barrier to entry from competitive advantage. I’ve put in a lot of stuff there, platform business models, pipeline business models. Then you move down to operational marathon, smile marathon, which is okay, you don’t have any structural advantages as a business, but maybe you just run faster than everybody else. You know, it’s like, hey, you’re not doing different activities than everyone, you’re doing the same activities as everyone, you’re just doing those activities better. That’s the marathon. And some businesses, that’s enough. Restaurants, that tends to be enough sometimes. Generally, it makes me nervous the lower you go down on the pyramid. My favorite scenario is when I can see a structural advantage coming from the top of the pyramid and then real operational speed down below. I like to see both. I like to see, hey, this company’s super fast. They execute and they operate very, very quickly and they’ve got some structural advantages as well. And that’s what I really like to see. And then at the bottom of the pyramid is tactics, which I haven’t really talked about. I brought that up with Perfect Diary the other day. It’s not really my area of expertise, but it’s interesting. That’s kind of how I assess it. I go through the pyramid and I make a call. Hey, this company, Coupang, out of South Korea looks to me like a competitive fortress. JD looks to me like a competitive fortress. I don’t know how you take on that company. Or Alibaba, or a lot of these. Alibaba’s more top of the pyramid. 10 cent. You know, there’s a lot of these companies where and this is kind of how you know when we started I started talking about Shopee and Garena and Sea Limited, you know a year ago That’s kind of why I started talking about because I was kind of following it but not that much and then I just sort of ran My numbers and I was like, oh my god Like the competitive strengths of this company are great like its strategies fantastic Like this looks like a powerhouse on the way That’s kind of what got my attention was the competitive picture, the business model from day one. Now everybody knows it and a lot of people knew it before me but you know whatever. Anyways if you look under question two you can see I’ve basically written that in bullet points very shortly. I said you know moat questions is 2a, smile marathon was 2c. I did sort of break out management you know this idea of like look okay you’re a you have a How good is the jockey? You know, there are questions I ask that are specific about management. What are the incentives of management? What is their proof and track record? What is their self-interest? Are they good at capital allocation? Which would be debt, spending money on M&A, things like that. Do they act like owners or not? And this is something I’ll talk about with Baidu, because this is actually my probably biggest concern with Baidu. is the management does not appear to act like people who are major shareholders. They make a lot of money with one side of the business, which is the search engine, and then they put it into a lot of other businesses going for growth that don’t seem to work out. And then they borrow a lot of money, and that doesn’t look like shareholder-focused behavior to me, generally speaking. And that’s kind of what I’m gonna talk about with ByDoo, is management behaviors, the… Not behavior, let’s say management incentives and management interest. Some men, like Elon Musk is like this. Elon Musk does not care about shareholders, as far as I can tell. He wants to go to Mars. He’s burning capital. He will burn capital forever, failing to get to Mars. And if shareholders make some money, that’s great. But this is not like the management of Coca-Cola that is trying to figure out how to continually give value to shareholders. that is clearly not his first, second, or third priority. And some businesses are that way. And I think Baidu is not Elon Musk-ish, but it’s definitely not Coca-Cola either. Anyways, I’ll talk about that. So there’s sort of management things, but at the end of this, you get to question two. Is it wealth preserving, wealth generating, bad or too hard? Does it have a competitive advantage, strength? I just make the call, and then I write it down in my notes. And often I will go back a year or two later and I’ll look at what I wrote down about a company and see if I’ve changed my mind. And sometimes I have. Sometimes I go back and I read what I wrote like three or four years ago about a company and I’m like, wow, that was really smart. I don’t even remember thinking that, but I wrote it so I must’ve been thinking it. That was pretty clever. It’s like I was clever then and I forgot about it. So yeah, that happens every now and then too. Anyways, that’s question number two. Okay, last bit and then we’ll finish up here. I do have a sort of a tagline here. You’ll see there’s a third red box which I call sort of question 2x or question 2.5 or whatever. This is just like a check on everything I just did. You know question one and question two a lot of factors, good, bad. I’m trying to sort of figure out a general position. Okay, that’s one type of analysis. What’s my general assessment, my general analysis of this industry and this company? This sort of check is basically inverting the question. Okay, I’m not gonna try and figure out how good this company is. I’m gonna try and figure out if I can crush this company. That’s Charlie Munger, invert the question. Don’t figure out what a good company is. Figure out a company that you can’t kill. And if you can’t kill it, well then it’s probably pretty good. So this is like, okay, let’s just forget everything. Question 2X, can this company fall 30%? What would make this company fall 30%? If I was a competitor, could I take this company down? What adverse event in the environment, in business, in regulation, whatever, I wanna try and prove that I can take this company down 30% and then just sort of run the list of what would do that. That’s kind of an inversion of basically the quality question. So hurricanes, recessions, scandals by management, fraud, a big new competitor jumps in who’s well-funded. And this is kind of like working out the worst case. And my favorite scenario is when I find a company like, hey, I kind of like this business, question one. Question two, this company looks really good. And then question two, I’ve been trying to kill this company in my mind. for 20 minutes and I can’t do it. That makes me feel even better. And Buffett kind of has famously said when he bought Coca-Cola, one of his questions was, if you gave me a hundred billion dollars or something like that, it was a huge number, like if you gave me a hundred billion dollars, I couldn’t take this company down, i.e. Coca-Cola. And I guess that was part of why. So he’s clearly inverting the question in his head. if you was a well-funded, well-run competitor, could I take them down 30%?” And he concluded, I couldn’t do it. So that’s a nice sort of way to invert the question, which is sort of the last thing I do when I think about quality. You’ll note at the end of my nine questions, I do the same thing at the end. After figuring out the company, the price, the value, the playbook. the multiple outcomes I think are likely. Then the very last question, number nine, is how could this lose money? Like, can I prove that this won’t lose money? That’s always my last thing to do. Okay, anyways, I think that’s enough for today. That’s most of the company quality stuff. I won’t get into valuation, I won’t get into the question five, six, and seven, which is kind of PE activist stuff. And question eight and question nine are, which you can see there, which are basically the dark blue are what are the risk and returns for this, not just company, but the investment play against that company. Like, okay, question one and two, it’s a garbage company. Question three and question four, but it’s seriously underpriced. So the play is buy it, try and get a catalyst to move it back up and then sell it quickly because you don’t wanna hold a bad company longterm. Then you could work out the risk and return three or four scenarios that you think. play out, what are the probability of each, what’s the potential of loss for each, that’s eight. And then question nine, this is the punch card test or the inversion test. The punch card test is another Buffett one where this probably doesn’t help anymore. But like when my mom and dad were dating in high school back in the 60s, there used to be dances in the US where you’d go to the dance and that’s where men and women would meet and say hello and they’d have a dance and that’s kind of was a I guess a special thing and you know you had a dance card where there was going to be nine songs played at the dance and you would reserve one for somebody so you’d say okay you know please reserve a dance for me tonight and you’d have a card with nine holes in it and you’d punch one of the holes okay I’m saving this dance dance number three for Susan it’s probably the guys asking so the win was I’m saving dance number four for Bob you’d sort of punch your dance card, and then when you had let, you’re out of the nine dances, okay, sorry, no more dances. And then you’d go to the dance and those would be the nine people you’d dance with, right? So that Buffett uses this as an analogy, but it’s probably not helpful if you’re not an octogenarian. You know, it says, if you could only buy nine companies your whole life, and that was it, would this be one of your nine? So that’s kind of always my last question. If I could only buy nine or 10 companies my entire life, would this company be one of them? And that kind of helps a lot actually. It’s surprisingly helpful because when you get a truly great company, you kind of know it, but that’s not often. Most of the time you’re getting a lot of gray. Well, it’s good and it’s bad and I like this. And it’s easy to slide from great to pretty good to well, it’s pretty good. Okay, it’s not pretty good, it’s good. It’s easy to kind of slide down and say, well, that’s good enough. And this sort of puts a floor on that where it’s like, when it’s like, okay, you accept it’s not great and it’s not even really pretty good, it’s just kind of pretty good, but it’s still okay. And I’ve been looking at it for weeks and it’s probably, and then you say, would it be one of your nine? No, it wouldn’t be one of my nine. Okay, then walk away. It forces you to walk away from kind of good and mediocre and forces you back up to the, okay, I’m only gonna do the best stuff and I’m gonna walk away from the rest. That’s the punch card test. You’ll see that written over there. Okay, that’s it for this week. I hope that’s helpful. And I would encourage you to do that, to write things out and be very, very sort of systematic in your approach. I find there’s so many benefits to doing this. One of them is obviously it forces you to be systematic. It forces you to repeat the same process over and over so you get better and better at it. I also find it’s a great way to just sort of capture knowledge over time because I’m always adjusting certain words and adding questions and adding factors. Over years and years, these checklists which I’ve talked about before kind of becomes like the spell book, the secret recipe guide where it captures all my knowledge over time and it’s dramatically more than I could ever hold in my brain. So it’s got sort of multiple functions. My standard. thing is like I only really have a couple assets that I’m building over time. Like one is my, my frameworks and checklists, which have been growing for years and years and years. And the other is my valuation models, which, you know, he just sort of build those over time too. And that’s, it’s kind of all I got like, and it takes a long time to build them. You know, it takes years and years to accumulate those for, you know, hundreds and hundreds of companies. But then you can, you know, when you do look at a company, you have all these resources you can bring to bear. So those are kind of, maybe a third asset would be your network if you’re doing private deals. That obviously is incredibly important. And then your reputation is part of that. So maybe reputation plus network would be maybe the third asset. Not sure if there’s any more than that. But anyways, that’s kind of how I think about it. As for me, it’s another pleasant, quiet, grounded week. in Bangkok. I’m beyond restless to get on the road and get rolling but absent a vaccination which I’m still waiting for it’s probably not worth doing yet so yeah it’s a strange mix of being very very restless but at the same time walking around and it’s like wow it’s really nice here. You know it’s it’s equally pleasant and So yeah, just floating around at Mega Bang Nah, zooming around on the scooter, meeting people downtown, reading books, watching videos. It’s been a really interesting experience, but I’m hoping this is the last week or two, and then I’m jumping on a plane. But I’ve said that before, so who knows? Anyways, that’s it for me. I hope everyone is doing well. Hope everyone’s staying safe. Hope this is helpful to you. If it’s not, or if you have any feedback on things you’d like to cover, please let me know. I’m real easy to reach online. Just send me a note on LinkedIn or email or something like that. I really do appreciate your feedback. But other than that, have a great week and I will talk to you next week. Bye bye.