10 Tips For Retail Investors To Improve Investing Analysis (To Boost Conviction, Lengthen Holdings Periods, And Make More Money)
10 Tips you can use today to help you analyze stocks quicker and more effectively.
If you want to improve your stock analysis, you should think about how you’ve found your best stocks and break down the steps it took to find them.
Or, if you don’t want to spend time doing that, let me show you how I do it! I’ve thought long and hard about all the buckets I use to first find my business, all the way up to my decision to buy it or put it on my watchlist. I use 10 buckets. But you can pick and choose which of these buckets you think would benefit you the most.
It’s hard for most investors to break down their investing systems because thinking about systems isn’t exactly the sexiest thing. But when you have a system in place that’s repeatable, you’ll find that you never have a shortage of wonderful businesses to choose from!
Let’s break it down!
The business first needs to come on my radar.
My 3 favorite places to find ideas:
Most people will hop on Twitter and find a random person discussing a business.
Sometimes they’ll find an idea interesting, sometimes not. But if you don’t know what it takes to find an interesting idea, then you’ll end up wasting a lot of time on the bird app looking at businesses that you’ll never end up buying.
So instead, use Twitter, Twitter DM’s and Substack to find great ideas to study further. Here is how I like going about it:
I’ll find someone who owns a stock I also own
I’ll throw them a follow or put them on a Twitter list
They’ll discuss other stocks, I’ll check those names out too
Some of them will have Substack accounts where they have long-form content
I’ll read about their ideas on Twitter and Substack, then head into the DM’s and ask them questions I have.
Now you have a repeatable system to continuously find ideas.
Quick Yes, Mostly No
Once I have a business on my radar, I run the business through Stratosphere.io to determine if specific metrics are hitting my hurdle rates.
Far too many investors will have an idea come up on their radar, then spend hours learning about the business, only to figure out it doesn’t really mesh with their financial goals. Maybe they spend time on a blue chip, then they really want a low cap with a high upside.
This is where Stratosphere.io comes into play.
They have an excellent service that easily shows you compound annual growth rates for whatever metric you want. I have specific metrics I like to use, all I want is a business that has 90% of my hurdle rates checked off. I’ll run this quick screen and if enough of the metrics meet my hurdle rates, I may proceed. 99%+ of those companies do not pass this step. It takes me less than 5 minutes to say no and move on.
I wrote an entire book on how you can use this process.
It’s completely free for you today. Get it here.
Once the business passes my benchmarks, I want to know if the business resonates with me in other ways, such as:
Being in an industry I use
Being in an industry I have expertise in
Be part of a topic I am highly interested in learning about
Be a business that is adjacent to my current circle of competence
I think most investors prefer owning businesses that sell products they already know, use and understand. But sometimes, they’ll own companies where they have zero ideas about their products and services.
When you lack an in-depth understanding of a business, you are unlikely to have much conviction in your stock idea. So take some time to read a company’s presentations or parts of their annual report to get a grasp of the inner workings of the business. If it’s something that interests you, proceed further. If you’re finding yourself falling asleep learning about it, it’s probably better to take a pass.
Sometimes you might find a business boring at one point in your life. But if you are constantly learning and increasing your circle of competence, you may find that things you once found boring, are now fascinating!
This can help unlock previous ideas that you may have previously eliminated.
Once I know I’m interested in the business, the real work starts.
Unfortunately, many investors will find a business that they are interested in, then hit the buy button. They’ll skip the next few buckets which are the ones that are the most important. I implore you not to do this if you like making money and dislike losing money.
Let’s get back to what you should be reading:
These resources will keep you very busy. They also will tell you most of what you need to know to understand the business.
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This part goes hand in hand with the reading section above.
But I think there are some nuances that make it its own category.
For instance, in the reading section, you are able to get a lot of qualitative information about the business you need. This is of vital importance. But there are still quantitative parts of the analysis that you should be doing to help you understand the business even better.
Things I like to focus on:
How have the business metrics changed? Are they getting better or worse?
What rates of return is the business doing? You can use ROIC, ROE, ROIIC here.
How is the business’s compensation package formed? Does it align management with shareholders?
What 3-5 KPIs are vital to the business’s success? Look at the evolution of these KPIs
Next, I like to compare the business with others in the same industry.
A major mistake I used to make was just looking at one company, seeing it was good, then not bothering to look at competitors. Doing this opens a bunch of potential problems:
Businesses in a particular industry can all be cheap. So if you find something that looks cheap, compare it to other businesses in the industry to make sure it’s cheap on a relative and absolute basis.
Margins: are the margins markedly better than comps? If they aren’t it could signal that it’s just in a very strong industry (at the moment)
Returns On Invested Capital: Is it high compared to comps, or is everyone in the industry riding short-term tailwinds?
I think you get the point.
If you have nothing to compare a business to, it’s hard to understand if it’s truly exceptional or not. So do your homework and find out if it crushes the competition or not.
I want to know the risk to the business.
This is an area that most retail investors spend 0 time on. And it’s a huge mistake. The biggest reason that investors have a hard time making money on their entire portfolio is that they lose too much money on certain investments.
You should be spending a lot of time thinking about all the different ways and the probability that your investment can go to “0.”
The simplest way to do this is to invert. As yourself:
What can ruin this company?
How much money would a competitor need to eat its market share?
What would need to happen in the next 5-10 years to derail their business model?
Then I’d ask myself what the probability of these things happening is. If the number makes me feel uncomfortable, or if I can’t answer that, then it’s a quick pass!
"The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt." - Bertrand Russell
My suggestion is to take the intelligent option.
Thinking about my businesses and my watchlist businesses takes up a lot of my investing time.
Much of this time is spent thinking about errors in my thinking. I try to identify the downside as well as I can in the previous section. But even after I own a business, I’m constantly trying to poke holes in my thinking. I like to ask myself where I may have gone wrong. Am I wearing rose-coloured glasses?
My goal with my portfolio is to have 8-10 of the best companies in the world that offer significant upside and minimal downside risk.
So my portfolio is almost like a biological ecosystem. I get to play god. Businesses that I deem to be weak get culled. Or if I find a business that I:
Think is stronger
Offers better upside
I’ll take the weaker one out and replace it with a better one.
Like Munger says “Any year that you don't destroy one of your best-loved ideas is probably a wasted year.”
Nirvana is when I can’t find negatives that would indicate any weakness!
This is a portion of the analytical process that is very dynamic.
I like to run through my checklist to make sure there are no grey areas. In my eyes, the reason a lot of investors fail is panic selling. Panic selling occurs when you are blinded-sided by the price dropping of a business and want to sell out of panic because you don’t understand the business well enough to have confidence that intrinsic value will continuously improve.
I use the checklist to remove this uncertainty as much as possible from the equation.
The checklist is never complete. As Mohnish Pabrai says the checklist is a “living, breathing document.” This means I can add, subtract, or alter any of my checklist items whenever I deem it necessary. As I gain experience and learn from others, I can find mistakes that I’ve made and that others have made. Using this info, I can add or modify current checklist items so I make sure that I don’t make the same mistake again!
If you don’t have a checklist the simplest way to get started is to do the following:
Look at the track records of your favorite 1-3 investors. Look at their worst investments. What was obvious that they missed? Answer that and you’ll drastically reduce your chances of making the same mistake.
Look at your own track record. Identify stocks that you’ve sold. Pinpoint the stocks you sold because you made a mistake in buying them in the first place. Break down the specific error you made.
If you use these two methods, you should be able to get at least 20 checklist items to start off with.
Then just keep researching others’ failures and drawing insights from your own. In not too much time you can get this list past 100 or so items. I prefer to keep my checklist simple, so I don’t want 500 different items. My sweet spot (for now) is 120-130. I think I have some room to expand it, but we shall see how it expands over time!
Lastly, after much of my research and thinking is done, I’ll evaluate the business.
I used to do the opposite. Evaluate first, then learn and think after. I think this was a mistake. Sure, researching businesses that you can buy soon gives you a quick dopamine hit. But I was finding that I was taking shortcuts and not doing thorough enough research using this method. I wanted to get my analysis done as quickly as possible so I could buy the shares at a decent price.
Now, I prefer to do the analysis first. I want to identify wonderful businesses.
They may not be priced well right now, but the market is a fickle beast. What everyone loves today, everyone may hate tomorrow. So my current strategy is to focus on the business. Once I know if the quality is up to par, I’ll just watch it.
Many great investors will take their time in investing in a great business:
“Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years,” Warren Buffett
A truly great business can be bought at a fair price. But this fact doesn’t give you the right to blindly buy anything. The price must make sense. If you think the growth can be maintained for many years, then you can justify paying a higher price than most “value investors” would ever consider.
But you must still look at the returns that holding the asset offers.
Only buy when it’s attractive. If not, just wait, it’s time will come! (If you want to learn more about finding the right price, then check out my free course Evaluation De-Mystifed.
Very good article Kyle! I think one the main things an investor should do is to have a clear framework when analyzing businesses and of course, you must adapt over time as you evolve as an investor, also important is to not be a pendulum hahaha, as always, thanks Kyle!
Nice piece Kyle! Many an investor (new or experienced) would be well served to adhere to this framework for finding the right investments for them. Of the 10 buckets what’s your favourite step? I particularly enjoy just thinking. Thinking of a companies future prospects. Their potential pitfalls. Would love to hear in a future article what your next 10 steps are after you’ve bought a business.